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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO
SECTIONS 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
- - --- ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR
- - --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 1-15641
724 SOLUTIONS INC.
(Exact name of registrant as specified in its charter)
ONTARIO
(State or other jurisdiction of
incorporation and organization)
INAPPLICABLE
(I.R.S. Employer Identification No.)
4101 YONGE STREET, SUITE 702
TORONTO, ONTARIO M2P 1N6
(Address of principal executive offices, including zip code)
(416) 226-2900
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Shares,
no par value.
(Title of class)
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, based on the closing price of the Registrant's common shares on
February 28, 2001 of $14 3/16, as reported on the Nasdaq National Market, was
approximately $344.5 million. Common shares held by each executive officer and
director and by each person who owns 5% or more of the outstanding common shares
have been excluded from this computation, in that such persons may be deemed to
be affiliates of the Registrant. This determination of affiliate status is not
necessarily a conclusive determination for any other purpose.
As of February 28, 2001, the Registrant had outstanding 56,578,275 common
shares, no par value.
INDEX
724 SOLUTIONS INC.
ANNUAL REPORT ON FORM 10-K
PAGE
NO.
----
PART I
Item 1. Business................................................................................... 2
Item 2. Properties................................................................................. 37
Item 3. Legal Proceedings.......................................................................... 37
Item 4. Submission of Matters to a Vote of Security Holders........................................ 37
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...................... 38
Item 6. Selected Financial Data.................................................................... 44
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 46
Item 7A. Quantitative and Qualitative Disclosures about Market Risk................................. 60
Item 8. Financial Statements and Supplementary Data................................................ 60
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure....... 60
PART III
Item 10. Directors and Executive Officers of the Registrant......................................... 62
Item 11. Executive Compensation..................................................................... 62
Item 12. Security Ownership of Certain Beneficial Owners and Management............................. 62
Item 13. Certain Relationships and Related Transactions............................................. 62
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................... 63
Index to Consolidated Financial Statements................................................................. F-1
SIGNATURES
PART I
ITEM 1. BUSINESS
DESCRIPTION OF BUSINESS
OVERVIEW
AN INVESTMENT IN OUR COMMON SHARES INVOLVES SUBSTANTIAL RISKS AND
UNCERTAINTIES. WE ENCOURAGE YOU TO CAREFULLY REVIEW THE INFORMATION SET FORTH IN
THIS ITEM I UNDER THE CAPTIONS "RISK FACTORS" AND "INFORMATION REGARDING
FORWARD-LOOKING STATEMENTS" FOR A DESCRIPTION OF THESE RISKS AND UNCERTAINTIES.
We provide Internet infrastructure software solutions that enable our
customers to deliver services involving transactions such as online banking,
brokerage and mobile electronic commerce, or m-commerce. Using our 724 Solutions
platform, these services can be delivered across a wide range of
Internet-enabled wireless and consumer electronic devices. Our products
currently enable consumers to securely access these services through network
service providers using digital mobile phones, personal digital assistants,
two-way pagers and personal computers. Our customers are now in the initial
phases of offering m-commerce services based upon our products. With critical
security features built in, our products can be quickly implemented and
integrated with existing systems, and scaled or expanded to accommodate future
growth. Using our 724 Solutions platform and related products, our customers can
provide new levels of service in an easy to use, personalized manner. Our
customers may operate our software solutions within their own facilities, or we
can provide them with our hosting services.
Our product offering consists of two categories of components: a base
technology layer called the 724 Solutions platform, and a suite of features and
functions for consumers, called the 724 Solutions applications, which include
financial service applications and our LiveClips service, together with our
alerts, m-commerce and content applications, and which can be used together with
the underlying platform infrastructure.
In recent months, we have entered into new license agreements with
additional financial institutions, and have begun to provide hosting services to
our customers. We have also completed four acquisitions, including:
- YRLess Internet Corp., which has developed a carrier-grade
short messaging service gateway that we plan to use to enhance
our ability to quickly connect our services to carriers. The
YRLess gateway includes advanced features that are designed to
enhance its operation with different networks, including
functions that control the amount of messages that cross a
network, advanced security features and anti-spamming
features.
- Ezlogin.com, Inc., a developer of Internet infrastructure
tools for user-directed personalization that are now the basis
of our LiveClips product, which we introduced in September
2000. LiveClips is a comprehensive aggregation tool designed
to enable our customers to provide consumers with a
consolidated view of their online accounts and other Web-based
items of personal interest across a wide range of
Internet-enabled devices.
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- Spyonit.com, Inc., which has developed intelligent alerting
infrastructure software that monitors the Internet or other
data sources for items of interest, such as stock prices,
product sales and auction bids, and which notifies a consumer
when a particular condition selected by the consumer is met.
- TANTAU Software Inc., a global provider of software and
services that enable enterprises to conduct high-volume,
secure, m-commerce transactions while maintaining direct
access to their customers. TANTAU's Wireless Internet Platform
creates a link for a variety of wireless and wired devices,
including cellular telephones, personal digital assistants,
pagers and Web browsers, to interact with enterprise
applications and data sources. TANTAU's Wireless Internet
Platform allows enterprises to offer access to their Internet
e-commerce activities, such as banking, stock trading and
shopping, through mobile devices.
In the third quarter of 2000, we introduced an enhancement to our
product offering. This release focuses on providing our customers with more
flexibility in reaching consumers using devices that are gaining substantial
consumer adoption, such as Wireless Application Protocol (WAP) phones and
two-way pagers. In March 2001, we introduced a new version of our 724 Solutions
platform, which offers, among other new features, speech recognition technology
in 15 languages and a notification system that is designed to select the most
effective delivery channel for a user's device.
In September 2000, we introduced our LiveClips product, which is based
upon the technology acquired in our purchase of Ezlogin. LiveClips is a
comprehensive aggregation tool designed to enable our customers to provide
consumers with wired or wireless access to a full suite of online accounts and
other items of personal interest. LiveClips enables users to access a variety of
these accounts by using a single user ID and password to sign-in to a secure and
easy-to-access location.
Since our September 2000 acquisition of Spyonit, we have been offering
advanced notification services that enable our customers to provide consumers
with personalized intelligent alerts. Our alerts technology uses the
carrier-grade short messaging service gateway that we acquired in our
acquisition of YRLess to provide a more reliable way of delivering alerts and
notifications to end users.
Our headquarters are located in Toronto, Ontario and Austin, Texas, and
we have sales offices and other facilities in other locations in North America,
Europe and the Asia-Pacific Region. As of January 31, 2001, we had 710 employees
worldwide, including the employees of TANTAU.
INDUSTRY OVERVIEW
GROWTH OF THE INTERNET
The Internet has emerged as a global communications medium to deliver
and share information and conduct business electronically. The dramatic growth
in the number of Internet users has led to a proliferation of information and
services on the Internet, including financial services, e-mail, e-commerce, news
and lifestyle content. We believe that consumers are increasingly seeking
personalized and practical Internet applications that they can use in their
daily activities.
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GROWTH OF DIGITAL WIRELESS COMMUNICATIONS
Digital wireless communications have grown rapidly due to declining
consumer costs, expanding network coverage, the availability of extended service
features such as voice and text messaging and the proliferation of wireless
devices. These wireless devices include personal digital assistants such as
PalmPilot connected organizers, Handspring Visors, "Pocket PC" organizers;
digitalmobile phones such as the Neopoint 1000, Qualcomm 2700, Ericsson R320,
Nokia 7110 and Motorola Timeport; and two-way pagers, such as those developed by
Research In Motion and Motorola. Recent developments in wireless technology and
deployment of digital data networks have enabled the introduction of wireless
data applications such as financial services, mobile commerce, news and
lifestyle content.
CONVERGENCE OF WIRELESS COMMUNICATIONS AND THE INTERNET
The convergence of wireless communications and the Internet has created
new opportunities for the delivery of wireless data services. Cahners In-Stat
Group estimates that the number of wireless Internet subscribers worldwide will
grow from approximately 3.8 million at the end of 1999 to approximately 742
million at the end of 2004. We expect that the convergence of wireless
communications and the Internet will enable the delivery of wireless multimedia
applications, including voice, data, image and video. International wireless
technology groups, such as the Wireless Application Protocol Forum and the
Symbian Alliance, have created global standards for the transmission of wireless
applications, which we believe will help lead to increased penetration of the
market for wireless devices and services.
GROWTH OF E-COMMERCE
With the emergence of the Internet as a globally accessible, fully
interactive medium, many individuals and companies that have traditionally
conducted business in person, through the mail or over the telephone now
increasingly conduct business electronically. We expect that consumer use of
e-commerce will accelerate as more individuals gain access to the Internet, as
the cost of Internet access decreases, and as security concerns are alleviated.
In some parts of the world, particularly in a number of European and Asian
countries, e-commerce opportunities have been limited because credit cards,
which are currently the only secure form of online payment, are not widely used.
We expect these consumers to embrace e-commerce once a direct-payment system is
available. International Data Corporation (IDC) estimates that Internet users
worldwide purchased more than $131 billion in goods and services in 1999,
increasing to $2.6 trillion in 2004.
GROWTH OF SECURE MOBILE TRANSACTIONS
As the mobile Internet continues to grow and evolve, the focus of user
activity is expanding beyond basic content delivery applications. E-mail and
other forms of messaging that facilitate mobile person-to-person communications
have begun to drive accelerated adoption of wireless data devices and services.
We expect that the next major type of functionality this market will demand is
the ability to conduct secure mobile transactions, with a particular emphasis on
banking, brokerage and m-commerce. According to IDC, m-commerce in the U.S.
would generate $29 million in transactions in 2000 and grow to $20.8 billion in
transactions in 2004. ARC Group estimates that after personal information
management and entertainment, financial services was the most popular category
for wireless data users in 2000. With convenient access, mobile transactions can
be faster, less expensive and easier than
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transactions conducted through a broker, teller, ATM or bricks-and-mortar
storefront. In addition, the location-based capabilities made possible by
wireless networks and device technology facilitate the creation of a
personalized, context-sensitive user experience that is unique to the mobile
environment.
As in the online context, however, consumer concerns about the security
of their sensitive financial and payment information is a key hurdle to be
overcome for mass adoption of mobile transaction technology to occur.
Traditional financial institutions are well positioned to respond with
strategies that build on their unique trust relationship with consumers and the
strengths of their traditional channels and services to overcome these security
concerns. We believe that the increasing popularity of new Internet-enabled
devices will help generate greater demand for mobile financial services and
provide an opportunity for financial institutions to drive adoption of banking,
brokerage, m-commerce and other secure transaction services to their large and
attractive customer base.
To execute these strategies, large financial institutions will require
a solution that enables their existing systems, which we believe were generally
not designed to facilitate mobile transactions, to exchange information with
their consumers across a variety of Internet-enabled devices. This exchange
requires a complex bridging architecture that can interface with a variety of
access devices, communication protocols, operating systems, and network and
security technologies. The solution must also be secure in order to protect the
integrity and confidentiality of information, and fault-tolerant and scalable in
order to process an increasing number of transactions. The ideal solution must
also enable rapid deployment and the flexibility to add additional functions and
services.
BUSINESS STRATEGY
Our objective is to become the leading provider of Internet
infrastructure software that permits secure transactions using a broad range of
Internet-enabled devices. Our strategy is to:
EXPAND OUR REACH: Our initial focus has been to provide our products to
large financial institutions worldwide, particularly banks and brokerage firms.
We believe that large financial institutions have both the scale and global
consumer base to maximize the adoption of services based on our products.
Citigroup, Bank of America, Wells Fargo, Hanvit Bank, Bank of Montreal, Wachovia
Corporation, KeyCorp and Claritybank.com are in various stages of implementing
our solution. Through our acquistion of TANTAU, we established customer
relationships with several major financial institutions in Europe. We believe
that the trust relationship these institutions have with consumers, combined
with our secure payment infrastructure, will accelerate consumer adoption of
mobile transactions. Once we have established a significant presence in the
financial services sector, we expect to use many of the components of our
architecture in other markets such as insurance, sales force management and
logistics.
ACCELERATE WORLDWIDE ADOPTION OF OUR SOLUTION: In an effort to
encourage rapid deployment of our solution by financial institutions and other
customers, we are:
- Through our acquisition of TANTAU and our research and
development efforts, enhancing the scalability and strength of
our 724 Solutions platform;
- Establishing relationships worldwide with wireless and other
network service providers, device manufacturers and content
and technology providers;
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- Providing a compelling consumer experience through a
consistent, user-friendly interface on a variety of
Internet-enabled devices;
- Building worldwide hosting services for our customers, which
will help allow for quick delivery of services to consumers,
as well as a managed contact center service, which will help
ensure a rich initial consumer experience; and
- Reducing our customers' initial cost of using our solution by
charging a variable license fee based on the number of users
per month, subject to specific minimum fees.
EXPAND THE FUNCTIONALITY OF OUR PLATFORM: Our architecture is designed
to be extendable, enabling our customers to continue to offer additional online
services across a variety of protocols, operating systems, networks and devices
to maximize consumer reach. We expect to further expand our reach by supporting
additional devices and broadening our functionality by introducing new
applications, content and services. For example, we are integrating into our
solution public key infrastructure (PKI) technology, which facilitates the
management of the tools necessary to ensure authentication of user identity and
the non-repudiation of transactions. We believe that this security feature is
essential for the widespread adoption of e-commerce and m-commerce transactions.
Additionally, we work with developers of new technologies to, among other
things, gain early access to device, wireless and network advancements.
PURSUE SELECTIVE ACQUISITIONS TO EXPAND OUR CAPABILITIES: We intend to
continue to pursue acquisitions of companies and technologies that we believe
will allow us to quickly increase the scale and scope of our operations, such as
expanding our research and development team, expanding into new geographical
markets and industry sectors and providing new services.
724 SOLUTIONS - CUSTOMER BENEFITS
We believe that our products enable customers to maintain and deepen
consumer relationships and accelerate the adoption of Internet-based financial
services and other transactions. Our products can be rapidly implemented,
integrate easily with existing systems, address security issues, are scalable
and provide a robust platform for future growth. Key benefits of our products
include:
- SPEED TO MARKET: Our products, whether installed in a
customer's operations center or operated as a service through
our hosting group, can be rapidly deployed by a new customer,
branded and offered to consumers.
- EASE OF INTEGRATION WITH EXISTING SYSTEMS: Our 724 Solutions
platform and other products link to a customer's existing
systems, enabling customers to preserve their existing
investment, and to extend the productivity and functionality
of their existing infrastructure to new electronic channels.
- SECURITY: The security framework of our product offerings
address the stringent security standards of financial
institutions, creating an environment of trust for consumers
and allowing our customers to offer transactions and other
services with reduced fraud-related concerns.
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- SCALABILITY AND MANAGEABILITY: Our 724 Solutions platform and
other products are designed to add users efficiently and
effectively. We believe that our products can support
significant growth in users with little increase in
infrastructure. We believe that this feature of our product
offerings will be further enhanced by the integration of the
TANTAU platform into our own 724 Solutions offering, which has
a built-in set of tools to easily manage recovery, redundancy
and deployment.
- ABILITY TO EXPAND FUNCTIONALITY: Our 724 Solutions platform is
designed to facilitate the addition of new applications,
devices, content and services. It provides a robust basis for
the growth of electronic financial services and e-commerce.
- MAINTAIN AND DEEPEN CONSUMER RELATIONSHIPS: Our product
offerings allow financial institutions and other customers to
connect directly with consumers wherever they can obtain wired
or wireless Internet access. Our products also allow consumers
to set up their own personal preferences and alerts for a
personalized, easy-to-use experience. The information
contained in the personalization and notification databases
provides our customers with a competitive advantage in
building consumer loyalty through the delivery of value-added
services.
We believe that our products benefit our customers and the companies
with which we have relationships by enabling the delivery of differentiated
wireless and wireline financial services, and other types of m-commerce
transactions. These services help increase consumer loyalty and drive wireless
airtime usage, consumer electronic device sales, and the purchase of other
products and services.
OUR PRODUCTS
Our products enable the delivery of secure and personalized electronic
information, services, transactions and payments using a broad range of
mass-market wired and wireless Internet-enabled devices. This technology is
extendable across a variety of protocols, operating systems and networks,
enabling our customers to deliver personalized transactions, services and
information to consumers over a wide range of communications networks.
Our product offering consists of two categories of components: a base
technology layer called the 724 Solutions platform, and a suite of features and
functions for consumers, the 724 Solutions applications, which can be used
together with the underlying platform infrastructure.
724 SOLUTIONS PLATFORM
The 724 Solutions platform enables connectivity to the back-end systems
of financial institutions, merchants, content providers and other types of
enterprises. The 724 Solutions platform facilitates communications with various
wireless and wireline networks and devices, manages a user's session and network
security, provides system administration tools, and provides a broad set of
application services in support of the 724 Solutions applications. In January
2001, we began to integrate the technologies of TANTAU's Wireless Internet
Platform into the 724 Solutions platform.
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NETWORK AND DEVICE GATEWAY. The network gateway transforms enterprise
data into formats suitable for use in a wide variety of wired and wireless
networks, including Code Division Multiple Access (CDMA), Global System for
Mobile Communication (GSM), Time Division Multiple Access (TDMA), Cellular
Digital Packet Data (CDPD), Mobitex and Internet Protocol. Almost all digital
mobile systems worldwide use one of these major types of wireless access formats
for voice and data communications. This gateway enables our customers to quickly
deploy their services through multiple network service providers, and allows for
new protocols to be supported without changes to their existing architecture.
The device gateway supports the presentation of our applications on
multiple devices. It recognizes the type of device a consumer is using and
optimizes the format of the information for the characteristics of that
particular device type. Our software automatically formats information delivered
to a device using style sheets programmed in Extensible Markup Language (XML) or
Extensible Style Language (XSL), which are widely used languages in Internet
communications. This approach enables our customers to deliver services over
many types of access devices, and allows new devices to be supported without
changes to our architecture. The network and device gateway ensures consumers
receive a consistent and user-friendly experience regardless of the device used.
PERSONALIZATION. Our solution enables consumers to customize their
services through a single set-up procedure. Once completed, a consumer's
preferences are stored in a unique profile on the network rather than on a
specific device. Thereafter, a consumer may use any Internet-enabled device to
access his or her account to retrieve information and conduct transactions
without repeating the set-up procedure. Changes in preferences made by a
consumer on one device will automatically be reflected on all other devices used
by that consumer.
TARGETED MARKETING SERVICES. Using data generated from personalized
profiles, our customers have the ability to gain a better understanding of their
consumers' needs and interests. Our targeted marketing services can be used to
allow the distribution of information directly to their consumers with
personalized messages or services based on their preferences.
SESSION MANAGEMENT. Our session management system ensures continuity of
a transaction over the network. For example, if a user is disconnected during a
transaction but is able to reconnect within a prescribed period of time, the
user can complete the transaction without repeating the login process or
previous entries.
ADMINISTRATION. The administration function allows our products to be
managed within a customer's existing computer infrastructure. Through this
function, platform administrators can start and stop individual servers, add or
remove resources - such as hardware - from the platform without disrupting
service, monitor performance and perform system back-up procedures. These
administration capabilities can be integrated with popular systems management
tools, allowing our products to be monitored as part of a customer's overall
computing environment. We provide a feed into a data warehouse of all
transactions recorded by the system.
TRANSACTION AND CONTENT GATEWAY. The 724 Solutions platform interfaces
with our customers' existing systems of through the transaction and content
gateway. This connection is typically made using Open Financial Exchange (OFX),
an industry standard specification for the exchange of financial data between
financial institutions and consumers through the Internet, or through an
Extensible Markup
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Language (XML) interface. If a customer does not support OFX or XML, however,
the 724 Solutions platform's link toolkit can facilitate message mapping to
different data sources and/or systems, with minimal impact on our customers' IT
infrastructures.
SECURITY. Our security framework is based on a strict methodology of
threat evaluation, risk analysis and policy creation, designed to address
authentication, authorization, privacy, integrity and non-repudiation. A
conventional user ID/password mechanism provides user identification and
authentication. Our software incorporates standard cryptography protocols that
ensure the confidentiality of communications between servers, including Secure
Socket Layer (SSL) and Transport Layer Security (TLS), enhanced with Elliptical
Curve Cryptography (ECC) cypher-suites from Certicom Corp., to ensure the
privacy of transactions and communications. These security technologies require
minimal computing power for encrypting and decrypting messages, making them
well-suited for secure communications to wireless handheld devices. We are
currently working to incorporate Public Key Infrastructure (PKI) technology into
our applications to provide additional support for strong user authentication
and non-repudiation. In February 2001, we introduced our PKI gateway product,
the wireless industry's first broadly interoperable PKI management solution
based on open standards. Use of PKI technology, which supports digital
signatures, is expected to grow as a means of creating a secure e-commerce and
m-commerce environment over the Internet or virtual private networks. This
security framework addresses financial institutions' rigorous security
requirements, creating an environment of trust for consumers and allowing
merchants to offer e-commerce and m-commerce services with reduced fraud-related
concerns.
VOICE RECOGNITION. In March 2001, we introduced voice recognition
technologies that enable authentication through the sound of a user's voice,
with 15 international languages available.
724 SOLUTIONS APPLICATIONS
FINANCIAL SERVICES APPLICATIONS. Our financial services applications
enable our customers to offer consumers the ability to execute a variety of
banking and brokerage inquiries and transactions, using a wide range of
Internet-enabled devices. Our banking functionality includes account information
and statements, credit card statements and advances, intra-bank transfers, bill
payment and post-dated payments, commercial cash management, positive pay
exceptions and multi-currency transfers. We also expect to offer bill
presentment during 2001 based upon technology developed through our relationship
with CheckFree Corp. Our brokerage and security functionality includes order
placement and confirmation, balances, positions and open orders, holdings and
transaction records, investment statements, trading data and charting, detailed
stock quotes and watch lists.
LIVECLIPS. Our LiveClips product, based on the technology obtained
through our Ezlogin acquisition, enables our customers to offer consumers
services with which they can create personalized summaries of information
gathered from different websites. This information can include financial data
gathered from the websites of financial institutions, as well as almost any
other type of Web-based informational content. LiveClips delivers this
customized information by automatically logging-in to different sites using
credentials such as passwords made available by the consumer during the
registration process. Once logged-in to the service, LiveClips is able to,
through a series of software programs, automatically retrieve and display key
pieces of data, such as a consumer's bank account balance, in a personalized
display that can be accessed from a PC or different types of wireless
Internet-enabled devices.
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We believe that customers may use our LiveClips product to establish
personalized services for consumers that offer enhanced value by aggregating
information from multiple websites and making them available in a single secure
and convenient location. Value-added services such as financial advice may also
be offered based upon analysis of the aggregated data.
MsMoney.com, a women's financial portal, has licensed LiveClips in
order to offer its customers a consolidated view of their Web-based accounts
through its MyMsMoney online financial management service. Hanvit Bank and
KeyCorp have also announced plans to offer services based on LiveClips. New
Zealand based Parker's Edge, a provider of financial portal solutions, has
entered into a distributor agreement with us in which they will provide
aggregation services related to our LiveClips product to its clients in Asia,
Australia and New Zealand.
ALERTS TECHNOLOGY. Our alerts technology, which is being enhanced
through the addition of the technology obtained in the Spyonit acquisition,
allows users to be alerted on a wide variety of wired and wireless
Internet-enabled devices when specific events occur. Messages may be delivered
through e-mail, mobile phone text messages, pagers and Internet instant
messaging services. Users may set triggers as to different types of information
or events of interest through a menu of alert options that can be accessed using
a personal computer. The architecture supports a wide variety of alert types
including those that are based upon the information on a website, such as sport
scores, stock prices or merchandise prices, or proprietary data such as
financial information feeds. Our alerts technology provides tools for creating
many different types of alerts and alert options which can be used by our
customers to build a more personalized experience for consumers, particularly
for consumers who prefer to be notified of an event, rather than checking for
information on an ongoing basis.
Since our acquisition of Spyonit, Hanvit Bank and KeyCorp have
announced plans to offer the service to consumers. Our alerts technology uses
the carrier-grade short messaging service gateway that we acquired in our
acquisition of YRLess to provide a more reliable way of delivering alerts and
notifications to end users.
M-COMMERCE APPLICATIONS. We are developing technologies that will
enable financial institutions and other customers to offer consumers and
merchants the ability to conveniently and securely engage in mobile commerce.
These applications will complement our LiveClips and alerts products by
providing a secure means to transact in response to the purchasing information
provided by these personalized tools. In addition, we believe that the PKI
technology we are developing will enable us to add strong authentication
capabilities as an enhancement to the current encryption-based security
solution.
Our initial focus in m-commerce will be on developing shopping
applications, establishing the ability to connect to the key participants in a
commerce transaction, and facilitating secure payments between these parties.
Our shopping applications will provide consumers with different types of tools
for identifying and selecting the desired product or service. For example,
consumers will have the ability to make an immediate purchase in response to an
alert about event tickets going on sale. Our open connectivity initiative will
build on our ability to connect to financial institutions' systems by
establishing interfaces from merchant systems and gateways to the digital wallet
services that enable online payments, such as the wallet gateway we are
currently developing with Brodia. In their position as trusted m-commerce
intermediaries facilitating secure mobile transactions, our customers will be
better able to strengthen relationships with their clients and gain access to
additional revenue streams.
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CONTENT APPLICATIONS. Our content applications enable our customers to
offer consumers lifestyle content such as news, weather, horoscopes and lottery
results sourced from a variety of content providers. This content complements
our other applications and helps to create a more personalized and compelling
experience for the consumer.
HOSTING SERVICES
In order to enable our customers to implement our platform rapidly, we
provide secure hosting services. These services enable our customers to operate
the software upon which our 724 Solutions platform and applications are based,
using equipment maintained and supported by us or by one or more third parties.
Some of our existing and potential customers are also seeking that we host other
third-party applications, in addition to having us remotely manage, administer
and support their services that are based upon our platform and which are
operated in their own data centers.
We seek to provide these services on a worldwide basis, using
facilities based in Europe, Asia-Pacific and North America. We already have two
facilities established in North America. Our hosting services are designed to be
implemented using a co-location model, which involves our obtaining network
connections to servers that are housed together by a provider in one or more
related facilities. We believe that this model allows us to offer consistent and
standardized service across multiple continents utilizing the services of any
major provider of hosting services.
We have chosen Exodus Communications, a leader in providing complex
Internet data center facilities and managed services, as the initial provider of
hosting services for our application operations. We may also obtain the services
of additional providers. We have established a North American application
management center that became operational in June 2000. This center is comprised
of experienced professionals who manage our hosting services. From the center,
we remotely manage, monitor and support all hosted operations of our
applications, regardless of their location. Most of the services delivered by
our current customers are hosted through this service.
Our customers may also elect to host services based upon our solution
in their own facilities or through a third party. Through the experience that we
have acquired in making the services based upon our platform operational, we
also offer these customers consulting services relating to the implementation of
data center operations.
In the summer of 2000, in connection with the roll-out of our hosting
services, we established our network operations center in Toronto. The center is
designed to monitor and manage our applications that run on the computer systems
which are located at, and managed by, the companies that provide us with hosting
services. Through these arrangements, we believe that we are able to obtain
reliable services such as physical security, power and communications from
providers such as Exodus, while using our own personnel to manage our
proprietary advanced applications which run on these hosted computer systems.
CUSTOMERS
Mobile access to the Internet is having a significant effect on the
delivery of financial services to consumers, and enables consumers to effect
transactions in new ways. As a group, we believe that online consumers generally
represent an affluent and important market segment. These consumers are
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increasingly using new methods, including wireless technologies, to access the
Internet. The convergence of the Internet and digital wireless technologies
presents new opportunities for financial institutions and other companies that
seek to use the Internet to reach consumers. Using our products to enable secure
mobile transactions, we believe that financial institutions and other companies
can differentiate their services to retain and strengthen their existing
customer relationships and attract new customers.
In 2000, we derived approximately 79%, 19% and 2% of our net revenues
from customers in the U.S., Canada and other regions, respectively. In 1999, we
derived approximately 93% and 7% of our net revenues from customers in Canada
and the U.S., respectively.
We currently market our product and services to large financial
institutions such as banks and brokerages. Citigroup, Bank of America, Wells
Fargo, Hanvit Bank, Bank of Montreal, Wachovia Corporation, KeyCorp and
Claritybank.com are in different phases of integrating our products. In
addition, through our acquisition of TANTAU, we have established relationships
with new customers, including Chase Manhattan Bank, Commerzbank, Credit Suisse
Group, MeritaNordbanken, the New Zealand Stock Exchange, Rabobank International
and SE Banken. We also believe that, in the future, a substantial portion of our
customer base will consist of large enterprises in other industries.
CITIGROUP
In August 1999, Citigroup announced its intention to implement our
solution worldwide under the leadership of its e-Citi division. In December
1999, we entered into a master technology license agreement with Citicorp
Strategic Technology Corporation, a subsidiary of Citigroup, which will enable
us to license our technology to Citigroup's subsidiaries. In January 2001, we
entered into an agreement under the master technology license agreement with
Salomon Smith Barney Inc., Cititrade and the Citibank credit card division that
will enable them to provide mobile delivery of financial services to their North
American customers. In addition, under these agreements, we will provide hosting
services, call center services, and other implementation services to these
affiliates in connection with the technology licensed to them. To date, we have
also entered into an agreement under the master technology license agreement
with a Citigroup affiliate in Singapore relating to several Asian countries, and
with Salomon Smith Barney in Australia. We also expect to enter into one or more
additional agreements with these and other Citigroup affiliates that will enable
us to deliver our solution to their customers.
BANK OF AMERICA
In the third quarter of 2000, Bank of America launched its first
wireless banking and brokerage offering in the United States. Based on our 724
Solutions platform and applications, the Bank of America wireless service allows
consumers to conduct a variety of secure, real-time banking transactions and
access financial markets and investment information on a range of mobile phones
and Palm handheld devices and organizers. The initial roll-out of this service
is available to Bank of America Private Bank clients in Dallas and Fort Worth,
Texas, Baltimore, Maryland and Washington, D.C. Bank of America has announced
that it plans to roll out its wireless service to its customers in other U.S.
markets over the next 12 to 18 months.
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WELLS FARGO
In September 1999, Wells Fargo entered into a licensing agreement to
enable it to begin to deliver online banking services via wireless devices to
its customers during 2000. Wells Fargo introduced these services in a trial to
1,000 consumers in the summer of 2000 and launched these services to its U.S.
online retail and small business banking cutomers in February 2001.
HANVIT BANK
In November 2000, we announced a new customer relationship with Hanvit
Bank, a leading financial institution in South Korea. Hanvit has announced that
it plans to use our products to provide wireless banking and investment
services, as well as aggregation and alerts. We believe that Hanvit is the first
Korean financial institution to announce plans to offer aggregation and
personalized alerts services to its customers.
BANK OF MONTREAL
In May 1999, our technology enabled Bank of Montreal to become the
first financial institution in North America to launch an integrated wireless
banking and brokerage application in a market trial with approximately 350
users. As of September 30, 2000, there were 6,000 subscribers to the
fully-launched service, which is now available in French and English in major
centers across Canada over four carriers. This service, named Veev, supports the
delivery of banking, brokerage and lifestyle applications through wireless
phones, RIM two-way pagers and PalmPilot connected organizers. In October 2000,
Bank of Montreal began a customer trial of our LiveClips aggregation product.
LiveClips is designed to enable the Veev service to offer customers wireless,
single sign-on access to a consolidated view of financial account information
from multiple websites.
In March 2000, Harris Bank, a U.S. subsidiary of Bank of Montreal
located in Chicago, Illinois, commenced a trial of the Veev service to its
customers. In July 2000, Harris Bank's wireless banking and investment services
offering, Harris Wireless, was broadly launched to all Harris Bank customers in
the U.S.
WACHOVIA CORPORATION
Wachovia has licensed our technology and subscribed to our hosting
services, to extend its real-time, 24-hour electronic banking and financial
services to a broad range of popular wireless and consumer electronic devices.
We have worked with Wachovia to develop and deploy separate retail and
commercial wireless financial services offerings, each specially designed to
meet the needs of Wachovia's retail and corporate customers.
Wachovia has also licensed our technology for retail brokerage services.
In November 2000, Wachovia launched its wireless commercial financial
services offering, making it one of the first U.S. banks to offer wireless cash
management services. The offering enables Wachovia's treasury clients to
securely and conveniently view, pay, issue or return positive pay exceptions, to
retrieve an intraday position report to view summary information and summary
debits and credits, and to view, approve or cancel payments through wireless
access of Wachovia's Internet-based cash management product, Wachovia Connection
Plus.
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KEYCORP
In September 2000, we entered into a pilot agreement with KeyCorp which
will enable KeyCorp to introduce interactive wireless banking services to its
Internet banking customers. KeyCorp's wireless banking services, based on our
technology, will allow customers to access real-time account information,
transfer funds between accounts, pay bills and access stock-market information
on a variety of Internet-enabled wireless devices, such as digital mobile
phones, pagers and personal digital assistants.
In November 2000, we entered into a licensing and consulting services
agreement with KeyCorp relating to our LiveClips and alerts technology.
LiveClips will enable KeyCorp to offer consumers secure, single sign-on access
to all of their Internet-based accounts and content in one consolidated view.
BBVA BANCOMER
In July 2000, we announced an agreement with BBVA Bancomer, under which
BBVA Bancomer may use our products to enable mobile wireless banking for its
customers throughout Mexico and Spanish-speaking communities in the U.S. Our 724
Solutions platform and applications would enable BBVA Bancomer customers to use
a wide range of Internet-enabled devices such as mobile phones, personal digital
assistants and pagers to gain access to their real-time financial information,
including account information and statements, transaction details, intra-bank
transfers and bill payments, along with value-added content such as news,
weather and financial market updates. This service can be offered in both
Spanish and English.
CLARITYBANK.COM
Claritybank.com is an exclusively online bank established in 2000 to
provide real-time, next-generation financial services to businesses and
consumers. Claritybank.com is one of the first national banks to offer wireless
service to its entire customer base. In February 2000, we entered into an
agreement to license our solution to Claritybank.com. In November 2000,
Claritybank.com launched its first offering of wireless banking services to its
entire customer base. Claritybank.com is the first Internet-only financial
institution to deploy our technology, and one of the first national banks to
deliver wireless services to its customer base across the U.S.
Since our September 2000 acquisition of Spyonit, we have been offering
advanced notification services that enable our customers to provide consumers
with personalized intelligent alerts. Since this acquisition of Spyonit, Hanvit
Bank and KeyCorp have announced plans to offer the service to consumers. Our
alerts technology uses the carrier-grade short messaging service gateway that we
acquired in our acquisition of YRLess to provide a more reliable way of
delivering alerts and notifications to end users.
TANTAU CUSTOMERS
TANTAU launched its Wireless Internet Platform on February 7, 2000,
with initial commercial shipments beginning on February 18, 2000. Prior to our
acquisition of TANTAU in January 2001, several major international financial
institutions became customers of TANTAU, including the following:
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J.P. MORGAN CHASE & CO. In November 2000, The Chase Manhattan Bank,
which has since merged with J.P. Morgan & Co., announced its intent to use
TANTAU's Wireless Internet Platform as a key component of its wireless banking
infrastructure. The planned services will enable commercial and retail customers
to conduct financial transactions over wireless devices. Chase has announced
plans to begin rolling out wireless Internet capabilities in 2001. Features of
the system are expected to include account access, e-mail, Web access and
location-based services such as an ATM finder. LabMorgan, the e-finance unit of
J.P. Morgan Chase, is responsible for deploying the platform.
CREDIT SUISSE GROUP. Credit Suisse's YOUTRADE service is an online
brokerage service for customers in Switzerland, enabling direct and secure
access to major stock exchanges. In October 2000, Credit Suisse announced its
plans to use TANTAU's technology in connection with YOUTRADE. Using TANTAU's
services, YOUTRADE customers will be able to conduct transactions on the
Frankfurt, New York and Zurich stock exchanges using WAP-enabled devices.
MERITANORDBANKEN. MeritaNordbanken is a leading international financial
institution based in Scandinavia. More than 1.5 million customers have used its
advanced Internet banking services, which are based upon the TANTAU
infrastructure, since they were first introduced in 1996. In addition, in March
2000, MeritaNordbanken commenced a trial of TANTAU's Wireless Internet Platform
in order to offer wireless banking services to its customers. These services
include conducting balance inquiries, paying bills, transferring money and
conducting stock trades.
NEW ZEALAND STOCK EXCHANGE. In March 2000, the New Zealand Stock
Exchange launched a demonstration of its wireless securities trading system
developed by TANTAU, Hewlett-Packard and Computershare. This system is based
upon TANTAU's Wireless Internet Platform, and is designed to enable the secure
transfer of data between wireless devices and Computershare's back-end trading
applications and data sources. The service will enable customers to trade and
transfer securities over the exchange directly, without the need for brokerage
services, and is currently subject to a market trial in New Zealand.
Additional financial services institutions that have licensed TANTAU's
Wireless Internet Platform include Commerzbank, Rabobank International and SE
Banken. In addition, we have licensed the TANTAU platform to Webhelp, a
leading developer of real-time online communications solutions, in order to
enable Webhelp to incorporate the platform into its offerings.
TECHNOLOGY
Our open-architecture platform communicates with our customers' systems
primarily using an industry standard called Open Financial Exchange (OFX). Our
services support connectivity with a variety of protocols, including Internet
protocol. Our services run on the Windows NT and the Sun Solaris operating
systems. We believe that our open architecture allows us to rapidly integrate a
wide range of new technologies, in order to enhance the functionality and
reliability of our solution.
Our architecture complies with Common Object Request Broker
Architecture (CORBA), a standard for application software design used widely in
the software industry. We also use other widely accepted standards in developing
our product, including:
- encryption technologies such as Certicom's Elliptical Curve
Cryptography (ECC) and Secure Socket Layer (SSL), and RC4, a
technology that permits the encryption of large amounts of
data;
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- Hypertext Transfer Protocol (HTTP), the primary data protocol
used for Internet communications;
- Simple Mail Transport Protocol (SMTP), Short Messaging Service
(SMS) and WAP Push, which are standards for sending messages
using different types of systems; and
- HP OpenView, which enables management of our platform through
Hewlett-Packard's enterprise system management environment;
We are a member of the Wireless Application Protocol Forum, an industry
association that has developed a leading standard for wireless information and
telephony services on digital mobile phones and other digital wireless devices.
Members of this organization include network service providers, device
manufacturers, leading infrastructure providers and software developers.
Our programs are written in C++ and Java, widely accepted standard
programming languages for developing object-oriented applications. We also make
extensive use of Extensible Markup Language (XML), which was completed by the
World Wide Web Consortium in 1998, and Extensible Style Language (XSL) in our
software applications.
RESEARCH AND DEVELOPMENT
As of February 16, 2001, after giving effect to our acquisition of
TANTAU, our research and development department consisted of 299 employees.
These units are responsible for assessing new technologies, new release
schedules, product architecture, security, performance engineering, product
requirements, quality assurance and product support.
In August 1999, we established an advanced technology center as part of
our Research and Development group. Our advanced technology center is primarily
a research center focused on rapidly developing innovative technologies from the
concept stage to the prototype stage. The advanced technology center's main
objectives are to gain early access to emerging technologies, improve our
products and services, expedite deployment to our customers and create mutually
beneficial relationships with customers, network service providers and device
manufacturers.
In July 1999, we established a performance engineering group. The
objective of this group is to establish benchmarks for our technology, to
recommend and validate reference architectures and to provide feedback to the
architecture and product groups. We invest heavily in performance engineering to
ensure that our products will be scalable for large numbers of users and
transaction volumes.
SALES, MARKETING AND CUSTOMER SUPPORT
As of February 16, 2001, we employed 79 people in sales in North
America, Europe and Asia-Pacific. In addition, we employed 48 people in our
marketing department. Our sales employees generally receive incentive
compensation based on individual sales volume.
We offer our customers consulting services to assist in the
installation and deployment of our products, as well as ongoing product support.
Services offered during installation include training,
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configuration, and connectivity to existing systems. We believe that our
customer support and consulting services result in improved customer
satisfaction and loyalty, a shorter sales process, faster implementation and an
increase in the sales of our product.
Our personnel typically work directly with our customers' in-house
personnel to implement our solution. We bring together and coordinate the
technology and resources needed to deliver a single solution to customers who do
not wish to use their in-house resources to implement our products.
Prior to our January 2001 acquisition of TANTAU, both our company and
TANTAU began to establish relationships with resellers, including several
original equipment manufacturers (OEMs) with which TANTAU has established
relationships. We expect that we will generate a substantial portion of our
revenues in future periods through our relationships with these third parties.
In December 2000, we entered into an agreement with Bank of Montreal that
authorizes the bank to act as a service bureau, including sublicensing and
hosting, in relation to our products. TANTAU has entered into an OEM agreement
with Compaq Computer under which Compaq agreed to resell the Wireless Internet
Platform to its customers in the telecommunications and financial services
markets. TANTAU has also targeted systems integrators, such as Siemens Business
Services, Compaq Computer and HP Consulting, and independent software vendors,
to serve as resellers of the Wireless Internet Platform within the financial
services marketplace.
STRATEGIC RELATIONSHIPS
We are establishing worldwide relationships with wireless and other
network service providers, content portals, device manufacturers, technology
companies and content providers to facilitate the adoption of our customers' 724
Solutions enabled products and services. We anticipate that some of these
relationships will lead to formal arrangements in which we will incorporate new
technologies into our platform, or in which we will adapt our solution to
support new types of devices. Through strategic relationships, we seek to gain
technological leadership, worldwide access and positioning and an early
awareness of emerging Internet technologies. We believe that our participation
in the development of these technologies at an early stage provides us with a
competitive advantage to bring new products and services to our customers.
We are working with network service providers, such as AT&T Wireless,
Bell Mobility and Sprint; data center service providers, such as Exodus
Communications and Singapore Telecom; device manufacturers, such as Palm
Computing, Ericsson, Motorola, Neopoint, Nokia, Qualcomm and Research In Motion;
software and technology companies, such as Sonera SmartTrust, Neomar, Edge
Matrix, Baltimore Technologies, Certicom Corp., Sun Microsystems, CheckFree and
Brodia; financial services firms, such as MasterCard; channel/distribution
companies, such as Corillian Corporation, Parker's Edge, CrossMar, Inc. and
Politzer & HANEY; system integrators, such as Deloitte & Touche; strategy
consultants, such as McKinsey & Co.; and content providers, such as Maptuit,
Bridge, Reuters and Sina.com. We believe that our solution benefits each of
these types of companies, as greater demand for digital wireless financial
services helps increase consumer loyalty and drive wireless airtime usage,
consumer electronic device sales and the consumption of other products and
services.
Additionally, through our acquisition of TANTAU, we believe that we
will gain access to TANTAU's relationships with leading technology and
distribution companies, including computer and
17
telecommunication equipment manufacturers such as Nokia, Compaq and
Hewlett-Packard, financial service providers, and Internet technology
developers.
COMPETITION
The market for our products and services is becoming increasingly
competitive. The widespread adoption of open standards may make it easier for
new market entrants and existing competitors to introduce products that compete
against ours. We believe that we will compete primarily on the basis of the
quality, functionality and ease of integration of our products, as well as on
the basis of price. As a provider of a comprehensive Internet solution to
financial institutions, we assess potential competitors based primarily on their
management, functionality and range of services, the security and scalability of
their architecture, their customer base and geographic focus and their
capitalization and other resources.
Our current and potential competitors include:
- FINANCIAL INSTITUTIONS WITH IN-HOUSE SOLUTIONS: Financial
institutions that develop their own in-house solution with
internal expertise and outsourced service providers and
products are a primary source of competition. These include
Celestial Securities Limited's wireless trading service in
Hong Kong; the wireless trading capability developed by
Fidelity using Research In Motion's two-way pagers; the
wireless trading service offered by DLJ Direct (a subsidiary
of Credit Suisse First Boston) in the U.S.; and the wireless
brokerage service provided by the online broker Fimatex in
France.
- SOFTWARE VENDORS FOCUSED ON FINANCIAL INSTITUTIONS AND OTHER
LARGE COMPANIES: Competitors include Aether Systems and
w-Technologies. In addition, various companies active in the
Internet banking and brokerage businesses with a primary focus
on back-end processing, middleware or front-end personal
computer platforms for retail Internet banking are potential
competitors. These include companies such as S1 Corporation,
CosmosBay, Brokat, TIBCO Software and Sanchez Computer
Associates.
- NETWORK SERVICE PROVIDERS: Sprint and BellSouth in the U.S.
and NTT DoCoMo in Japan are leaders in wireless data services.
NTT DoCoMo provides consumers with basic wireless banking
services from over 50 banks as part of its i-Mode service.
Other network service providers with advanced wireless data
service initiatives include US West, Bell Atlantic, AT&T
Wireless Data Services, Nextel, VodafoneAirtouch and
Voicestream in the U.S., Vodafone, British Telecom, Cellnet,
Orange and One 2 One in the U.K., Deutsche Telecom in
continental Europe, J-Phone, DDI and IDO in Japan, SingTel,
MobileOne and StarHub in Singapore, and Telstra, Optus and
Vodafone in Australia.
- DEVICE MANUFACTURERS: Ericsson, Nokia, Motorola and other
large wireless device manufacturers are attempting to sell
their technology to financial institutions and other
enterprises in our primary markets. These manufacturers may
market to these potential customers their own technology and
the technology of our competitors in a manner that may reduce
our sales.
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- SOFTWARE VENDORS, SERVICES VENDORS AND PORTALS: Companies that
provide browsers for digital mobile phones and the
infrastructure to link devices to network service providers
and the Internet, such as Openwave and Microsoft, are
positioning themselves to provide wireless data services.
Companies offering wireless data services such as e-mail,
calendar access, aggregation of content, and a mobile
e-commerce platform include InfoSpace.com, mobilefinance.com,
Wireless Knowledge (a joint venture between Qualcomm and
Microsoft), Research In Motion, Go America, EmailPager,
Logica, CMG and portals, such as America Online, Yahoo! and
Excite@Home. Software companies primarily focused on
commercial wireless applications are also potential
competitors, including Qualcomm Wireless Business Systems,
Broadbeam, Dynamic Mobile Data and Mobimagic Co., a newly
formed joint venture between Microsoft and NTT Mobile.
INTELLECTUAL PROPERTY
We protect our proprietary technology through a combination of
contractual confidentiality provisions, trade secrets, and patent, copyright and
trademark laws. We have applied for registration of several trademarks,
including "724 Solutions," "724 Solutions & Arrows Design," "724 Solutions
Financial Services Platform," "Tellmewhen," "Tellmewhen.com," "Secureofx,"
"Poet," "E-Anywhere," "724 Solutions & Design," "Your Customer is in Motion,"
"PartnerExpress," "Liveclips," "Clip and Paste," "EZLogin," "JumpPage,"
"Login.com," "Surfroom," "Dimecuando" and "Dimecuando.com." To protect our
trademarks throughout the world, we have applied for registration of some or all
of our trademarks in Europe, Canada, the United States, the United Kingdom,
Japan, Australia and Mexico. Besides "724 Solutions," which has been registered
in the U.K., none of these trademarks has yet been issued.
We have also applied for patents for applications relating to our
mobile commerce technology, our 724 Solutions platform and our LiveClips
product. We have applied for patent protection in Canada, the United States,
Taiwan, Malaysia, the Philippines and through the Patent Cooperation Treaty,
which is an international patent application designating multiple countries. To
date, none of these patents has been issued. To date, TANTAU has received four
patents with respect to the technologies relating to its Wireless Internet
Platform. There are also a number of patent applications pending in respect of
the TANTAU Wireless Internet Platform in the U.S., European Community and Japan.
There can be no assurance that the confidentiality provisions in our
contracts will be adequate to prevent the infringement or misappropriation of
our copyrights, pending patents, trademarks and other proprietary rights. There
can be no assurance that independent third parties will not develop competing
technologies, or reverse engineer our trade secrets, software or other
technology. Moreover, the laws of some foreign countries may not protect our
proprietary rights to the same extent as do the laws of Canada and the United
States. Therefore, the measures taken by us may not adequately protect our
proprietary rights.
We rely heavily on technology and other intellectual property licensed
to us by third parties. For example, we have entered into license agreements
with Certicom Corp. and Consensus for use of their encryption technology. In
addition, we use certain third-party software that may not be available to us on
commercially reasonable terms or prices or at all in the future. Moreover, some
of our third-party license agreements are non-exclusive and, therefore, our
competitors may have access to some of the same technology.
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To date, we have not been notified that our product infringes on the
proprietary rights of third parties, but third parties could claim infringement
by us with respect to our existing or future products. Any claim of this kind,
whether or not it has merit, could result in costly litigation, divert
management's attention, cause delays in product installation, or cause us to
enter into royalty or licensing agreements on terms that may not be acceptable
to us.
On December 28, 2000, Tellme Networks, Inc., a developer of
Internet-related telecommunications services, filed suit in the United States
District Court, Northern District of California, against us claiming that our
use of our "TellMeWhen" mark relating to our notification services in the U.S.
will infringe that company's rights. We believe that we have meritorious
defenses to this claim, and we have filed a counterclaim seeking the
cancellation of their trademark.
EMPLOYEES
As of January 31, 2001, we had 710 employees, including the employees
of TANTAU.
RISK FACTORS
RISK FACTORS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES IN THE FUTURE.
We have not been profitable since our inception. We incurred losses of
$155,000 for the period between July 28, 1997 (inception) and December 31, 1997,
$2.7 million for the year ended December 31, 1998, $13.8 million for the year
ended December 31, 1999, and $63.3 million for the year ended December 31, 2000.
As of December 31, 2000, we had an accumulated deficit of $79.9 million. We
expect to continue to incur losses in the near future and possibly longer.
We anticipate that our expenses will increase substantially in the
foreseeable future as we continue to expand our hosting service, increase our
research and development, sales and marketing and general and administrative
expenses, and integrate the operations of TANTAU, Spyonit, Ezlogin and YRLess
into our business. These efforts may prove more expensive than we currently
anticipate. We cannot predict if we will ever achieve profitability and, if we
do, we may not be able to sustain or increase our profitability.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT MAY BE DIFFICULT FOR
YOU TO EVALUATE OUR BUSINESS AND ITS FUTURE PROSPECTS.
The evaluation of our business is difficult because of our limited
operating history. We were founded in July 1997, and services based on our
technology were first launched on a trial basis in May 1999 with our initial
licensee, Bank of Montreal. The four companies that we have acquired also had
short operating histories prior to these acquisitions, and we have operated as a
single company for a very short period of time. Because we are in an early stage
of development, our prospects are difficult to predict and may change rapidly.
We may encounter difficulties as a young company in a new and rapidly evolving
market, including our dependence on a small number of products with only limited
market
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acceptance to date and the need to manage expanding operations. Our business
strategy may not be successful, and we may not successfully address these risks.
OUR RAPID GROWTH MAY STRAIN OUR RESOURCES AND HINDER OUR ABILITY TO
IMPLEMENT OUR BUSINESS STRATEGY.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. The four acquisitions
that we have completed have further magnified this growth. Our ability to
achieve and maintain profitability will depend on our ability to manage our
growth effectively, to implement and expand operational and customer support
systems and to hire qualified personnel worldwide. We may not be able to augment
or improve existing systems and controls or implement new systems and controls
to respond adequately to any future growth. In addition, future growth may
result in increased responsibilities for our management personnel, which may
limit their ability to effectively manage our business.
IF WE DO NOT SUCCESSFULLY DELIVER OUR HOSTING SERVICES, WE MAY NOT BE
ABLE TO RETAIN OUR EXISTING CUSTOMERS OR ATTRACT NEW CUSTOMERS.
Some of our existing customers require, and some potential customers
will require, that we host and manage the server infrastructure and software
platform as part of the implementation of our software. Our customers have
increased their demand for our hosting services since we initially began to
offer them in the second quarter of 2000, and we must ensure that we maintain
the capability to satisfy this demand. In addition, because we expect our
customer base to demand these services in a wide variety of international
locations, we must locate quality providers in countries in which they are in
limited supply. If we cannot effectively deliver these hosting services, we may
lose existing customers and may not attract new customers.
We are currently working in conjunction with Exodus Communications to
provide our hosting services, and we may work with additional providers in the
future to deliver these services. If any natural disasters, computer breakdowns
or other circumstances occur that affect the computer systems in our network
operations center or the computer systems of Exodus Communications or any other
potential providers that we use to provide these services, our ability to
deliver our hosting services may be substantially impaired. In addition, if
Exodus or any other provider of these services refuses to, or becomes unable to
deliver these services in an effective manner, we will need to obtain services
from a new provider on an expedited basis. If any of these circumstances cause
us to fail to deliver our hosting services, we may lose customers, and our
reputation is likely to suffer.
WE HAVE A LENGTHY AND COMPLEX SALES CYCLE FOR SEVERAL OF OUR PRODUCTS,
WHICH COULD CAUSE THE DELAY OR LOSS OF REVENUE AND INCREASE OUR
EXPENSES.
Our sales efforts target large financial institutions and other
enterprises worldwide, which requires us to expend significant resources
educating prospective customers about the uses and benefits of our products.
Because the purchase of our products is a significant decision for these
prospective customers, they may take a long time to evaluate them. Our sales
cycle has typically ranged from four to six months, but can be longer due to
significant delays over which we have little or no control. As a result of the
long sales cycle, it may take us a substantial amount of time to generate
revenue from our sales efforts.
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OUR PRODUCTS HAVE ACHIEVED LIMITED MARKET ACCEPTANCE TO DATE, AND IF
THEY FAIL TO ACHIEVE BROADER MARKET ACCEPTANCE OUR BUSINESS WILL NOT
GROW.
Our products are among a number of competing products that are
currently available in a new and rapidly evolving market. Other companies may
introduce other software products that will compete with ours. Customers may not
prefer our products to competing technologies. If customers do not accept our
products as the preferred solution, we may not attract new customers and our
business will not grow.
OUR FUTURE REVENUE DEPENDS ON CONSUMERS USING THE SERVICES THAT ARE
BASED ON OUR PRODUCTS, AND IF OUR CUSTOMERS DO NOT SUCCESSFULLY MARKET
THESE SERVICES, OUR REVENUE WILL NOT GROW.
We expect that revenue under most of our license agreements will depend
on the number of monthly subscribers to these services. As a result, our revenue
growth will be limited if the number of subscribers does not increase. To
stimulate consumer adoption of these services, our customers must implement our
products quickly. However, our customers may delay implementation because of
factors that are not within our control, including budgetary constraints,
limited resources committed to the implementation process and limited internal
technical support.
Consumer adoption of these services also requires our customers to
market these services. However, our customers currently have no obligation to
launch a marketing campaign of any kind, may choose not to do so, or may not do
so effectively. Some of our customers have only provided these services on a
test basis to a limited number of consumers. Some of our customers may choose
not to expand their use of these services if they do not perceive a sufficiently
high rate of adoption among their consumers. As a result, we cannot ensure that
a large number of consumers will use these services in the future.
WE CURRENTLY DEPEND ON THE SALE OF A LIMITED NUMBER OF PRODUCTS TO
GENERATE MOST OF OUR REVENUE AND IF WE ARE UNABLE TO SELL THESE
PRODUCTS WE MAY NEVER BECOME PROFITABLE.
We expect sales of our 724 Solutions platform and applications and the
TANTAU platform to constitute most of our revenue for the foreseeable future. If
customers do not purchase our existing offerings, we do not currently offer any
other products or services that would enable us to become profitable.
IF WE ARE NOT ABLE TO ESTABLISH RELATIONSHIPS WITH RESELLERS OR
ADEQUATELY ENCOURAGE RESELLERS TO SELL OUR PRODUCTS, OUR REVENUE MAY
NOT GROW.
Historically, we have not made a major portion of our sales through
resellers. However, we anticipate that in future periods a substantial portion
of our sales will be made through resellers, particularly as a result of the new
products that we are selling through our acquisitions of Ezlogin and Spyonit and
the relationships with resellers that we have obtained through our recent
acquisition of TANTAU. If we are not able to establish relationships with
resellers or adequately encourage resellers to sell our products, our revenues
may not grow. We have a limited number of relationships with resellers and only
limited experience working with resellers. These resellers may not market our
products in a manner that will maximize our sales. In addition, we anticipate
that most of our resellers will be
22
permitted to sell the products and services of our competitors, and may
determine not to continue to serve as resellers of our products.
WE CURRENTLY RELY ON SALES TO A LIMITED NUMBER OF FINANCIAL
INSTITUTIONS, AND IF WE FAIL TO RETAIN THESE CUSTOMERS OR TO ADD NEW
CUSTOMERS OUR REVENUE MAY BE SUBSTANTIALLY REDUCED AND OUR PRODUCTS MAY
NOT ACHIEVE MARKET ACCEPTANCE.
We currently derive a significant portion of our revenue from the sale
of our solution to a limited number of financial institutions. Between our
inception and December 31, 2000, sales to our four largest financial institution
customers, Bank of Montreal, Wells Fargo, Bank of America and Citigroup, have
accounted for the majority of our total revenue. Between our inception and
December 31, 2000, sales to our four largest financial institution customers,
Bank of Montreal, Wells Fargo, Bank of America and Citibank, have accounted for
more than 90% of our total revenue, and each of them accounted for more than 10%
of our revenue in the year ended December 31, 2000.
We expect that a relatively small number of customers will continue to
account for a significant portion of our revenue for the foreseeable future. If
any of our customers discontinue their relationship for any reason, do not renew
their agreements or seek to reduce or renegotiate their purchase and payment
obligations, our revenue may be substantially reduced. In addition, there are a
limited number of large financial institutions in our target market and we
believe this number may decline in the future as a result of consolidation in
the financial services industry worldwide. If our sales efforts to these
potential customers are not successful, our products may not achieve market
acceptance and our revenue will not grow.
In addition, as the market for mobile financial services evolves, our
customers may change their plans as to the services that they will provide using
our products. For example, in December 2000, one of our customers, BBVA
Bancomer, indicated that they sought to reevaluate their planned use of our
technology and that they may not roll out services based upon our products.
Although Bancomer agreed to explore opportunities to work together with us, we
may not derive substantial revenues under our agreement with them or under our
agreement with any other customer that may decide in the future to reevaluate
how it approaches the market for mobile Internet financial services, other than
any applicable minimum contract payment.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE, WHICH COULD CAUSE OUR
STOCK PRICE TO FLUCTUATE OR DECLINE.
Our operating results may fluctuate significantly in the future from
quarter to quarter. If our quarterly revenues and operating results fail to meet
or exceed the expectations of securities analysts and investors, the market
price of our common shares could fall substantially. Our operating results vary
depending on a number of factors, many of which are outside our control,
including:
- - - demand for our products and services;
- - - the timing of sales of our products and services;
- - - the announcement and introduction of competing offerings;
- - - changes in our pricing policies or those of our competitors;
- - - whether our products and services are sold directly or through
indirect sales channels;
- - - costs related to acquisitions of technology or businesses;
23
- - - customer budget cycles and changes in these cycles; and
- - - deferrals of customer orders in anticipation of enhancements to our
technology or new offerings.
In addition to these factors, in the future, we expect to recognize
the fixed portion of the license fees under the variable fee contracts that
we will enter into towards the beginning of the license period. As a result,
a delay in recognizing revenue, even from just one account, could have a
significant negative impact on our quarterly operating results. Our results
of operations in any individual quarter should not necessarily be viewed as
an indication of our performance in any future quarters.
IF THE DIGITAL WIRELESS AND OTHER NETWORK SERVICE PROVIDERS THAT ENABLE
OUR CUSTOMERS TO DELIVER TO CONSUMERS SERVICES BASED ON OUR PRODUCTS
FAIL TO SUPPORT OUR SERVICE, OUR REVENUE FROM EXISTING CUSTOMERS WILL
DECLINE AND WE MAY NOT ATTRACT NEW CUSTOMERS.
We rely on wireless and other network service providers to introduce
and support our products, and services based on our products, in a timely and
effective manner. We have no control over the pace at which they will do so. If
these providers are slow to support the services that use our solution, our
existing customers may not be able to effectively offer these services and
potential customers may be reluctant to purchase our products. In addition,
wireless and other network service providers face implementation and support
challenges in introducing services delivered to Internet-enabled devices, which
may slow their rate of adoption or implementation of our solution. Moreover, the
continued expansion of digital wireless services, especially in North America,
is critical to our success. The pace of this expansion may not increase for a
variety of reasons, including, for example, if the U.S. government does not
allocate a sufficiently broad portion of the available spectrum to render these
services attractive.
IF WE DO NOT RESPOND ADEQUATELY TO EVOLVING TECHNOLOGY STANDARDS, SALES
OF OUR PRODUCTS MAY DECLINE.
Our future success will depend on our ability to address the
increasingly sophisticated needs of our customers by supporting existing and
emerging technologies, including technologies related to communications and the
Internet generally and the financial services industry in particular. Wireless
Internet access is a rapidly evolving market and is characterized by an
increasing number of market entrants that have introduced or developed, or are
in the process of introducing or developing, products that facilitate the
delivery of Internet-based services through wireless devices. In addition, our
competitors may develop alternative products that gain broader market acceptance
than ours. As a result, the life cycle of our products is difficult to estimate.
We may need to develop and introduce new products and enhancements to our
existing products on a timely basis to keep pace with technological
developments, evolving industry standards, changing customer requirements and
competitive technologies that may render our products obsolete. These research
and development efforts may require us to expend significant capital and other
resources. In addition, as a result of the complexities inherent in our
products, major enhancements or improvements will require long development and
testing periods. If we fail to develop products and services in a timely
fashion, or if we do not enhance our products to meet evolving customer needs
and industry standards, including security technology, we may not remain
competitive or sell our solution.
24
ANY DISRUPTION OF THE SERVICES SUPPORTED BY OUR PRODUCTS DUE TO
ACCIDENTAL OR INTENTIONAL SECURITY BREACHES MAY DAMAGE OUR REPUTATION,
REDUCE OUR REVENUE, EXPOSE US TO COSTLY LITIGATION AND REQUIRE CAPITAL
INVESTMENTS IN ALTERNATIVE SECURITY TECHNOLOGY.
Despite our efforts to maximize the security of the transactions
effected using our platform, we may not be able to stop unauthorized attempts to
gain access to or disrupt transactions between our customers and the consumers
of their services. Specifically, computer viruses, break-ins and other
disruptions could lead to interruptions, delays, loss of data or the inability
to accept and confirm the receipt of information or instructions regarding
transactions. Any of these events could substantially damage our reputation. We
rely on encryption and authentication technology licensed from third parties to
provide key components of the security and authentication necessary to achieve
secure transmission of confidential information. We cannot ensure that this
technology, future advances in this technology or other developments will be
able to prevent security breaches.
WE MAY NEED TO EXPEND FURTHER CAPITAL AND OTHER RESOURCES TO PROTECT
AGAINST THE THREAT OF SECURITY BREACHES OR TO ALLEVIATE PROBLEMS CAUSED
BY THESE BREACHES.
Because our activities involve the storage and transmission of
proprietary information such as credit card numbers and bank account numbers, if
a third-party were able to steal a user's proprietary information, we could be
subject to claims, litigation or other potential liabilities that could cause
our expenses to increase substantially. In addition to purposeful security
breaches, the inadvertent transmission of computer viruses could expose us to
costly litigation or a significant loss of revenue. Although our customer
agreements contain provisions which limit our liability relating to security,
our customers or their consumers may seek to hold us liable for any losses
suffered as a result of unauthorized access to their communications. Any
litigation of this kind, regardless of its outcome, could be extremely costly
and could significantly divert the attention of our management. We may not have
adequate insurance or resources to cover these losses.
OUR ACQUISITIONS OF TECHNOLOGIES OR COMPANIES COULD DISRUPT OUR
BUSINESS AND DILUTE YOUR HOLDINGS IN OUR COMPANY.
We have completed three acquisitions in 2000, completed our acquisition
of TANTAU in January 2001, and may effect new acquisitions of technologies or
companies in the future. Entering into an acquisition entails many risks, any of
which could materially harm our business, including:
- diversion of management's attention from other business
concerns;
- failure to effectively assimilate the acquired company into
our business, including its technology, personnel and
customers;
- the loss of key customers or employees from either our current
business or the acquired business; and
- assumption of significant liabilities of the acquired company.
In addition, holdings of existing shareholders will be diluted if
equity securities are issued in connection with any acquisition. If we incur
debt in order to effect any acquisitions, we will incur debt
25
service costs, and we expect that we would enter into agreements that will
restrict our operations in some respects and our ability to declare dividends to
the holders of our common shares. If we incur indebtedness, our shareholders
will also rank junior to the holders of the indebtedness in connection with any
liquidation of our company.
We may not be able to effectively integrate our acquisitions of TANTAU,
Spyonit, Ezlogin and YRLess into our current operations. In particular, as our
largest proposed acquisition to date, our acquisition of TANTAU will pose
several significant challenges to our company. TANTAU has added approximately
175 employees to our organization, and we are integrating several officers of
TANTAU into our senior management team who have not previously worked with our
existing management. The successful integration of our company and TANTAU
requires, among other things, integration of our finance, human resources and
sales and marketing groups, and coordination of our development efforts. The
integration of our operations with TANTAU may be complicated by the fact that,
like ours, TANTAU's business and personnel is spread over several continents.
ANY FAILURE TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS COULD
LIMIT OUR POTENTIAL REVENUE GROWTH.
We plan to substantially expand our activities outside the U.S. and
Canada. Our plans to expand internationally may be adversely affected by a
number of risks, including:
- difficulties in adapting our product and services for foreign
markets;
- challenges in staffing and managing foreign operations;
- difficulties in establishing relationships with local
partners;
- restrictions on the export of encryption and other
technologies;
- recessionary environments in foreign economies, particularly
in Asian countries and in the financial services sector; and
- longer payment cycles and increased difficulties in collecting
amounts owed to us.
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN
CURRENCY EXCHANGE LOSSES.
Our expanding operations outside the U.S. and Canada may be conducted
in currencies other than the U.S. dollar. Fluctuations in the value of foreign
currencies relative to the U.S. dollar, including the value of the Canadian
dollar, could cause currency exchange losses, as our principal offices and staff
in Toronto generate Canadian dollar denominated expenses. We cannot predict the
effect of exchange rate fluctuations upon our future operating results.
WE WILL NEED TO RECRUIT, TRAIN AND RETAIN KEY MANAGEMENT AND OTHER
QUALIFIED PERSONNEL TO SUCCESSFULLY GROW OUR BUSINESS.
Our future success will depend in large part on the ability to recruit
and retain experienced research and development, sales and marketing, customer
service and management personnel. In
26
particular, our future success depends in part on the continued services of our
current executive officers. If we do not attract and retain such personnel, we
may not be able to grow our business. Competition for qualified personnel is
intense in the industry. In the past, we have experienced difficulty in
recruiting qualified personnel, especially technical and sales personnel. We are
in a new market and there are a limited number of people with the appropriate
combination of skills needed to provide the services that our customers demand
in each of our target markets. We expect competition for qualified personnel to
remain intense, and we may not succeed in attracting or retaining sufficient
personnel. In addition, new employees generally require substantial training,
which requires significant resources and management attention. We must also
offer attractive compensation packages to our personnel, whether that
compensation consists of cash, equity awards, or other forms of compensation.
Even if we invest significant resources to recruit, train and retain qualified
personnel, we may not be successful in our efforts.
OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS THAT COULD DAMAGE OUR
REPUTATION.
The software that we develop is complex and must satisfy the stringent
technical requirements of our customers. We must develop our products quickly to
keep pace with the rapidly changing industry in which we operate. Software
products that are as complex as ours are likely to contain undetected errors or
defects, especially when first introduced or when new versions are released. In
addition, our software may not properly operate when integrated with the systems
of some customers or when used to deliver services to a large number of a
customer's subscribers.
While we continually test our products for errors and work with
customers to identify and correct bugs, errors in our product may be found in
the future. Our software may not be free from errors or defects even after it
has been tested, which could result in the rejection of our products and damage
to our reputation, as well as lost revenue, diverted development resources and
increased support costs.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN
SIGNIFICANT COSTS TO US.
We may be subject to claims for damages related to any errors in our
product. A major product liability claim could materially adversely affect our
business because of the costs of defending against these types of lawsuits,
diversion of key employees' time and attention from the business and potential
damage to our reputation. Our license agreements with our customers contain
provisions designed to limit exposure to potential product liability claims.
Limitation of liability provisions contained in our license agreements may not
be effective under the laws of some jurisdictions if local laws treat them as
unenforceable. We could be required to pay substantial amounts of damages in
settlement or upon the determination of any of these types of claims.
IF WE DO NOT SUCCESSFULLY INTEGRATE PUBLIC KEY INFRASTRUCTURE INTO OUR
PRODUCTS, WE MAY BE COMPETITIVELY DISADVANTAGED AND OUR BUSINESS MAY
NOT GROW.
We expect that the use of public key infrastructure (PKI), an emerging
technology which facilitates user identity authentication and non-repudiation of
transactions, will be used by financial institutions' customers and by
competitors. If we do not succeed in integrating PKI into our products, they may
not be attractive to potential customers because of their security concerns. If
PKI becomes a widely used standard and our products do not use that standard, we
may be at a competitive disadvantage.
27
Although we are working with Certicom Corporation to design and implement
technologies through which we are integrating PKI into our products, and
introduced our PKI gateway in February 2001, these efforts may not be
successful.
BECAUSE SEVERAL OF OUR CURRENT CUSTOMERS ARE SHAREHOLDERS IN OUR
COMPANY, IF ONE OF THESE CUSTOMERS CEASES TO LICENSE OUR TECHNOLOGY AND
ALSO SELLS ITS SHARES IN OUR COMPANY, OUR CREDIBILITY MAY SUFFER AND
THE MARKET PRICE OF OUR SHARES MAY DECLINE.
Several of our current customers, including Bank of Montreal, Bank of
America, Citigroup and Wells Fargo, or their affiliates, are shareholders in our
company. If any of these customers ceases to license our technology, our
credibility in the market may suffer, which may impede our ability to attract
new customers. In addition, if a customer that switches to a competing
technology also sells its shares in us, our credibility may further suffer and
the market price of our shares will likely decline.
OUR PRODUCTS CONTAIN ENCRYPTION TECHNOLOGY WHOSE EXPORT IS RESTRICTED
BY LAW, WHICH MAY SLOW OUR GROWTH OR RESULT IN SIGNIFICANT COSTS.
The U.S. and Canadian governments generally limit the export of
encryption technology, which our products incorporate. A variety of
cryptographic products generally require export approvals from certain U.S.
government agencies in the case of exports from the U.S., and from Canadian
government agencies in the case of exports from Canada, although there are
currently no restrictions on exports of these products from Canada into the U.S.
If any export approval that we receive is revoked or modified, if our software
is unlawfully exported or if the U.S. or the Canadian government adopts new
legislation or regulations restricting export of software and encryption
technology, we may not be able to distribute our products to potential
customers, which will cause a decline in sales. We may need to incur significant
costs and divert resources in order to develop replacement technologies or may
need to adopt inferior substitute technologies to satisfy these export
restrictions. These replacement or substitute technologies may not be the
preferred security technologies of our customers, in which case our business may
not grow. In addition, we may suffer similar consequences if the laws of any
other country limit the ability of third parties to sell encryption technologies
to us.
IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE
FORCED TO DISCONTINUE PRODUCT DEVELOPMENT, REDUCE OUR SALES AND
MARKETING EFFORTS OR FOREGO ATTRACTIVE BUSINESS OPPORTUNITIES.
We may not have sufficient capital to fund our operations and
additional capital may not be available on acceptable terms, if at all. Any of
these outcomes could adversely impact our ability to respond to competitive
pressures or could prevent us from conducting all or a portion of our planned
operations. The speed at which we utilize our available capital is likely to
increase substantially as we integrate our acquisitions into our business,
expand our hosting services and expand our operations internationally. We expect
that the cash we receive through our operations and our cash on hand will be
sufficient to meet our working capital and capital expenditure needs for the
next 12 months. After that, we may need to raise additional funds, and
additional financing may not be available on acceptable terms, if at all. We
also may require additional capital to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
If we issue additional equity securities to raise funds, the ownership
percentage of existing shareholders will be reduced. If we incur debt, the debt
will rank senior to our common shares, we will incur debt service costs and we
will likely have to
28
enter into agreements that will restrict our operations in some respects and our
ability to declare dividends to the holders of our common shares.
RISK FACTORS RELATED TO OUR INDUSTRY
OUR BUSINESS WILL NOT GROW IF THE USE OF WIRELESS DATA SERVICES DOES
NOT CONTINUE TO GROW.
The markets for wireless data services and related products are still
emerging and continued growth in demand for, and acceptance of, these services
remains uncertain. Our products depend on the acceptance of wireless data
services and Internet-enabled devices in the commercial and financial markets.
Current barriers to market acceptance of these services include cost,
reliability, platform and distribution channel constraints, safety,
functionality and ease of use. We cannot be certain that these barriers will be
overcome. Since the market for our products is new and evolving, it is difficult
to predict the size of this market or its future growth rate, if any. Our future
financial performance will depend in large part upon the continued demand for
online financial services through wireless application devices. We cannot ensure
that a sufficient volume of subscribers will demand financial services or will
seek financial services provided through the Internet on wireless access
devices. If the market for wireless online financial services grows more slowly
than we currently anticipate, our revenue may not grow.
IF FINANCIAL INSTITUTIONS AND OTHER POTENTIAL CUSTOMERS DO NOT CONSIDER
THE INTERNET TO BE A VIABLE COMMERCIAL MEDIUM, OUR CUSTOMER BASE MAY
NOT GROW.
Our success depends upon the extent to which large enterprises,
particularly financial institutions, accept the Internet as a viable means to
deliver their services. The adoption of the Internet for commerce and
communication, particularly by those financial institutions and other companies
that have historically relied upon traditional means, generally requires them to
understand and accept a new way of conducting business and exchanging
information. Financial institutions and other companies may be reluctant or slow
to adopt a new, Internet-based strategy because of increased pressure on costs
and the complexity and risk involved in developing a solution based on emerging
technologies. Reluctance by financial institutions and other potential customers
to use the Internet to deliver their services may prevent us from growing.
LACK OF CONSUMER CONFIDENCE IN THE SECURITY OF INTERNET-ENABLED
TRANSACTIONS COULD LIMIT ADOPTION OF OUR SOLUTION, WHICH COULD PREVENT
US FROM BECOMING PROFITABLE.
Consumers will not seek to effect transactions using the Internet and
wireless applications if they are not confident that financial transactions over
the Internet can be undertaken securely and confidentially. Although there is
security technology currently available for Internet-enabled transactions, many
Internet users do not use the Internet for commercial transactions because of
continued security concerns. These concerns may be heightened by well-publicized
security breaches of any Internet-related service, which could deter consumers
from adopting the services provided by our solution. If consumers do not gain
confidence in the security for Internet-enabled transactions that the current
technologies provide, our revenue will not increase.
29
WE FACE COMPETITION FROM EXISTING AND NEW COMPETITORS AND FROM NEW
PRODUCTS WHICH COULD CAUSE US TO LOSE MARKET SHARE AND CAUSE OUR
REVENUE TO DECLINE.
The widespread adoption of open industry standards, such as Wireless
Application Protocol (WAP) specifications, may make it easier for new market
entrants and existing competitors to introduce products that compete with ours.
In addition, competitors may develop or market products and services that are
superior or more cost-effective than ours, which could decrease demand for our
products and cause our revenue to decline. Currently, our competitors include:
- financial institutions that develop their own in-house
solutions;
- software vendors focused on financial institutions and other
companies in our target markets;
- wireless and other network service providers that provide
their customers with wireless financial services; and
- software and services vendors and portals that provide the
infrastructure to link devices to carriers and the Internet
and to enable other wireless applications.
We may also face competition in the future from established companies
that have not previously entered the market for wireless data services and
Internet-related services. Barriers to entry in the software market are
relatively low and it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In
addition, many of our competitors and potential competitors have greater
resources, which may enable them to penetrate the market more quickly.
CHANGES IN GOVERNMENT REGULATIONS MAY RESULT IN INCREASED EXPENSES,
TAXES OR LICENSING FEES WHICH COULD DECREASE THE DEMAND FOR OUR PRODUCT
AND NEGATIVELY IMPACT OUR RESULTS.
We are not currently subject to direct regulation by any governmental
agency, other than regulations applicable to businesses generally and laws and
regulations directly applicable to access to, or commerce on, the Internet.
However, a number of legislative and regulatory proposals under consideration by
federal, state, provincial, local and foreign governmental organizations may
lead to laws or regulations concerning various aspects of the Internet,
including but not limited to, online content, user privacy, taxation, access
charges and liability for third-party activities. Additionally, it is uncertain
how existing laws governing issues such as property ownership, copyright, trade
secrets, libel and personal privacy will be applied to the Internet. The
adoption of new laws or the broader application of existing laws may expose us
to significant liabilities and additional operational requirements and may
decrease the growth in the use of the Internet, which could, in turn, both
decrease the demand for our products and increase the cost of doing business.
30
RISKS RELATING TO INTELLECTUAL PROPERTY
WE RELY ON THIRD-PARTY SOFTWARE, TECHNOLOGY AND CONTENT, THE LOSS OF
WHICH COULD FORCE US TO USE INFERIOR SUBSTITUTE TECHNOLOGY OR TO CEASE
OFFERING OUR PRODUCTS.
We must now, and may in the future, license or otherwise obtain access
to the intellectual property of third parties. For example, we have entered into
license agreements with Certicom Corporation and Consensus for use of their
encryption technology. We have also entered into license agreements with
third-party content providers. In addition, we use, and will use in the future,
some third-party software that may not be available in the future on
commercially reasonable terms, or at all. For example, we could lose our ability
to use this software if the rights of our suppliers to license it were
challenged by individuals or companies that asserted ownership of these rights.
The loss of, or inability to maintain or obtain, any required intellectual
property could require us to use substitute technology, which could be more
expensive or of lower quality or performance, or force us to cease offering our
products. Moreover, some of our license agreements from third parties are
non-exclusive and, as a result, our competitors may have access to some of the
technologies used by us.
IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED, WE MAY LOSE
OUR COMPETITIVE ADVANTAGE.
We depend on our ability to develop and maintain the proprietary
aspects of our technology. We seek to protect our software, documentation and
other written materials under trade secret and copyright laws, as well as
confidentiality provisions in contracts with our customers, all of which afford
limited protection. We also seek to protect our proprietary technology under
patent laws. We have applied for patents, although none have been issued to
date, other than the patents that we acquired in connection with our acquisition
of TANTAU. We have also applied for several trademark registrations for many of
our trademarks in the U.S., Canada, the United Kingdom, Japan and Australia. To
date, we have received only one registered trademark in the U.K.
Despite the measures we have taken to protect our intellectual
property, we cannot ensure that these steps will be adequate, that we will be
able to secure patent or trademark registrations for any of our patent
applications in Canada, the U.S. or other countries, or that third parties will
not breach the confidentiality provisions in our contracts or infringe or
misappropriate our copyrights, pending patents, trademarks and other proprietary
rights. Similarly, we cannot ensure that our employees will comply with the
confidentiality agreements that they have entered into with us, and
misappropriate our technology for the benefit of a third party. If a third party
or any employee breaches the confidentiality provisions in our contracts or
misappropriates or infringes on our intellectual property, we may not have
adequate remedies. In addition, third parties may independently discover or
invent competing technologies or reverse engineer our trade secrets, software or
other technology. Moreover, the laws of some foreign countries may not protect
our proprietary rights to the same extent as do the laws of the U.S. and Canada.
Therefore, the measures we are taking to protect our proprietary rights may not
be adequate.
THIRD PARTIES MAY CLAIM THAT OUR PRODUCTS INFRINGE ON THEIR
INTELLECTUAL PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSES FOR
LITIGATION OR FOR DEVELOPING OR LICENSING NEW TECHNOLOGY.
Although we are not currently aware of any material claims asserted by
third parties that we infringed on their intellectual property, in the future,
third parties may assert a claim that our current or
31
future products infringe on their intellectual property. We cannot predict
whether third parties will assert these types of claims against us or against
the licensors of technology licensed to us, or whether those claims will harm
our business. If we are forced to defend against these types of claims, whether
they are with or without any merit or whether they are resolved in favor of or
against us or our licensors, we may face costly litigation and diversion of
management's attention and resources. As a result of these disputes, we may have
to develop costly non-infringing technology, or enter into licensing agreements.
These agreements, if necessary, may not be available on acceptable terms, or at
all, which could prevent us from selling our products, increase our expenses or
make our products less attractive to customers.
RISKS RELATING TO THE OWNERSHIP AND TRADING OF OUR COMMON SHARES
A LIMITED NUMBER OF SHAREHOLDERS OWN A MAJORITY OF OUR COMMON SHARES
AND MAY ACT, OR PREVENT CERTAIN TYPES OF CORPORATE ACTIONS, TO THE
DETRIMENT OF OTHER SHAREHOLDERS.
After giving effect to our acquisition of TANTAU, our seven principal
shareholders, including entities affiliated with members of the management team,
held more than 50% of our outstanding common shares. Accordingly, these
shareholders may, if they act together, exercise significant influence over all
matters requiring shareholder approval, including the election of a majority of
the directors and the determination of significant corporate actions. This
concentration could also have the effect of delaying or preventing a change in
control that could be otherwise beneficial to shareholders. Even if ownership
interest of these shareholders is reduced to less than 50%, they will still be
able to exercise substantial influence in connection with any shareholder vote
in the foreseeable future.
THE MARKET PRICE OF OUR COMMON SHARES IS VOLATILE, WHICH MAY RESULT IN
LITIGATION THAT COULD BE COSTLY AND DIVERT OUR RESOURCES.
Stock markets have recently experienced extreme price and volume
fluctuations, particularly for the shares of technology companies. Since our
initial public offering, the market value of our common shares has fluctuated
significantly. The closing price of our common shares on the Nasdaq National
Market has ranged from $240 during the second quarter of 2000 to $9 1/4 during
the first quarter of 2001. These fluctuations are often unrelated to the
operating performance of particular companies, including ours. The broad market
fluctuations may adversely affect the market price of our common shares. This
may adversely affect our ability to use our common shares as consideration in
acquisition transactions. In addition, when the market price of a company's
stock drops significantly, shareholders often commence securities class action
lawsuits against that company, regardless of the merit of their claims. A
lawsuit against us could cause us to incur substantial costs and could divert
the time and attention of management and other resources, regardless of the
outcome of the lawsuit.
IF WE DO NOT SUCCESSFULLY INTEGRATE TANTAU, OR IF THE MERGER'S BENEFITS
DO NOT MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE
MARKET PRICE OF OUR COMMON SHARES MAY DECLINE.
The market price of our common shares may decline as a result of our
January 2001 merger with TANTAU if:
- the integration of our company and TANTAU is inefficient or
unsuccessful;
32
- we do not achieve the perceived benefits of the merger as
rapidly as, or to the extent anticipated by us or by financial
or industry analysts; or
- the effect of the merger on our financial results is not
consistent with our expectations or the expectations of
financial or industry analysts.
We can provide no assurances that we will effectively integrate our
operations with those of TANTAU, or whether our combined results of operations
and our combined business efforts will be sufficiently positive to meet the
expectations of the financial community.
OUR ABILITY TO ISSUE PREFERRED SHARES COULD MAKE IT MORE DIFFICULT FOR
A THIRD PARTY TO ACQUIRE US, TO THE DETRIMENT OF HOLDERS OF COMMON
SHARES.
Our ability to issue preferred shares could make it more difficult for
a third party to acquire us, to the detriment of holders of common shares.
Provisions in our articles of incorporation may make it difficult for a third
party to acquire control of us, even if a change in control would be beneficial
to our shareholders. Our articles authorize our board to issue, at its
discretion, an unlimited number of preferred shares. Without shareholder
approval, but subject to regulatory approval in certain circumstances, the board
has the authority to attach special rights, including voting or dividend rights,
to the preferred shares. Preferred shareholders who possess these rights could
make it more difficult for a third party to acquire us.
YOUR TAX LIABILITY MAY INCREASE IF WE ARE TREATED AS A PASSIVE FOREIGN
INVESTMENT COMPANY.
If at any time we qualify as a passive foreign investment company under
U.S. tax laws, investors may be subject to adverse tax consequences. We could be
a passive foreign investment company if 75% or more of our gross income in any
year is considered passive income for U.S. tax purposes. For this purpose,
passive income generally includes interest, dividends, some types of rents and
royalties, and gains from the sale of assets that produce these types of income.
In addition, we could be classified as a passive foreign investment company if
the average percentage of our assets during any year that produced passive
income, or that were held to produce passive income, is at least 50%. If we are
classified as a passive foreign investment company, and if shareholders sell any
of their common shares or receive some types of distributions from us, they may
have to pay taxes that are higher than if we were not considered a passive
foreign investment company. It is impossible to predict how much shareholders'
taxes would increase, if at all.
Based on the nature of our revenue and our anticipated corporate
structure, we may be treated as a passive foreign investment company. To
determine whether we are a passive foreign investment company, we will be
required each year to examine our revenue and expenses and the value of our
assets. The tests are complex and require, among other things, that we determine
how much of our income from our license agreements each year will be passive
income. Moreover, the manner in which the tests apply to our business is not
certain.
Each holder of our common shares is urged to consult his, her or its
own tax advisor to discuss the potential consequences to such investor if at any
time we qualify as a passive foreign investment company.
33
FUTURE SALES OF COMMON SHARES BY OUR EXISTING SHAREHOLDERS COULD CAUSE
OUR SHARE PRICE TO FALL.
If our shareholders sell substantial amounts of our common shares in
the public market, the market price of the common shares could fall. The
perception among investors that these sales will occur could also produce this
effect. In connection with our merger with TANTAU, we filed a registration
statement on Form F-4 which, subject to limitations under the U.S. securities
laws and the resale restriction agreements entered into by most of the
securityholders of TANTAU, made the common shares that we issued in the offering
available for resale in the U.S. In July 2000, we filed a registration statement
on Form S-8 relating to the issuance and sale of more than 6.5 million of our
common shares that are issuable under our stock option plans, including the
option plan of Ezlogin, which we acquired in June 2000. In February 2001, we
filed an additional registration statement relating to more than 3.5 million
options that we assumed in the acquisition that may be exercised to purchase our
common shares by directors, officers, employees and consultants of TANTAU.
We have entered into a registration rights agreement with shareholders
that currently own a majority of our common shares. Under this agreement, we are
obligated, under a number of circumstances, including upon the demand of some of
the shareholders that are parties to the agreement, to register a substantial
number of our common shares so that they may be freely sold on the Nasdaq
National Market and The Toronto Stock Exchange. The common shares subject to
this agreement include the common shares held by all of our 5% shareholders, as
well as more than 10 million of the common shares that we issued in connection
with our acquisition of TANTAU. If these rights are exercised, a substantial
number of shares could be sold in the public markets, which is likely to
adversely affect our stock price.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Statements in this annual report about our future results, levels of
activity, performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those listed under " -- Risk Factors" or
described elsewhere in this annual report. These statements include, but are not
limited to, the statements regarding:
- the expected growth in the number of wireless subscribers and
demand for wireless services;
- the expected growth in the number of wireless Internet
subscribers;
- our plans to integrate our operations with those of the
companies that we have acquired;
- our plans to market our combined services to our existing
customers;
- our plans to increase our customer base;
- our plans to form additional strategic relationships;
34
- our plans to work with the companies with which TANTAU has had
strategic relationships;
- our plans to offer enhanced products and services;
- our plans to market our products and services to new industry
sectors; and
- our plans to improve our future financial performance.
In some cases, you can identify forward-looking statements by our use
of words such as "may," "will," "should," "could," "expects," "plans,"
"intends," "anticipates," "believes," "estimates," "predicts," "potential" or
"continue" or the negative or other variations of these words, or other
comparable words or phrases.
In addition, several of the statements set forth under the caption
"Item 7 -- Management's Discussion and Analysis of Financial Condition and
Results of Operations" are of a forward-looking nature. These statements
include, but are not limited to, the statements regarding:
- the future revenues that we expect to derive from TANTAU's
products and services, our hosting service, revenue sharing
arrangements and commissions on m-commerce transactions;
- the increased product revenue and consulting revenue that we
expect to receive in the future;
- the consequences of our shift from a fixed-fee to a variable
fee license model;
- our expectations that our cost of net revenue as a percentage
of revenues will decrease and that our gross margins will
increase;
- our expectations regarding our future net losses, our future
research and development, sales and marketing and general and
administrative expenses; and our future capital expenditures;
- our expectations regarding our future capital requirements;
and
- our expectations regarding the impact of recent accounting
pronouncements upon our future financial statements.
Among the factors that could cause our actual results or events to
differ are the risks that are set forth in this document under the caption " --
Risk Factors," in particular:
- unanticipated trends and conditions in our industry;
- risks associated with our ability to compete in a variety of
international markets;
- the risk that we will not have sufficient capital to expand
our operations;
35
- any unanticipated costs arising from our acquisition of the
companies that we have acquired;
- any delay, inability or difficulty encountered in increasing
our revenues from our existing and future contracts;
- any adverse response of our customers, TANTAU's customers or
our respective employees to our acquisition of TANTAU;
- risks associated with our ability to efficiently integrate
acquired businesses;
- any inability to effectively develop and manage our combined
international operations; and
- risks associated with our ability to implement cost savings
and combined operational strategies.
Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee future results,
levels of activity, performance or achievements or other future events. We are
under no duty to update any of our forward-looking statements after the date of
this report, other than as required by law. You should not place undue reliance
on forward-looking statements.
36
ITEM 2. PROPERTIES
Our principal offices are located in Toronto, Ontario and Austin,
Texas. We also have rented offices in New York, New York; San Francisco,
California; Cupertino, California; Concord, California; Chicago, Illinois;
London, U.K.; Paris, France; Sydney, Australia; Tokyo, Japan; Hong Kong and
Barbados. We believe that we will need to obtain additional facilities as we
expand our international operations, and increase the size of our organization.
Due to our acquisition of TANTAU, we have recently expanded our offices
to include those used by TANTAU prior to the merger. TANTAU also leases offices
in Reston, Virginia; San Francisco, California; Cupertino, California; Overland
Park, Kansas; West Orange, New Jersey; Charlotte, North Carolina; Sugar Land,
Texas; St. Albans, U.K.; Friedrichsdorf, Germany; Lenzburg, Switzerland; Espoo,
Finland; Sydney, Australia; and Tokyo, Japan.
ITEM 3. LEGAL PROCEEDINGS.
We are not presently a party to any material legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
37
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
MARKET PRICES OF 724 SOLUTIONS' COMMON SHARES
Our common shares are listed on the Nasdaq National Market under the
symbol "SVNX" and on The Toronto Stock Exchange under the symbol "SVN." The
following table sets forth the high and low closing sales prices per share of
our common shares as reported on the Nasdaq National Market and The Toronto
Stock Exchange for each of the quarters during the fiscal year ending December
31, 2000.
NASDAQ NATIONAL NASDAQ NATIONAL TORONTO STOCK TORONTO STOCK
YEAR ENDED DECEMBER 31, 2000 MARKET: HIGH MARKET: LOW EXCHANGE: HIGH EXCHANGE: LOW
- - ---------------------------- --------------- --------------- --------------- --------------
First Quarter (from January 28, 2000)..... US$240.00 US$59 3/4 Cdn.$345.00 Cdn.$86.00
Second Quarter............................ US$125 3/8 US$30.00 Cdn.$181.50 Cdn.$45.50
Third Quarter............................. US$55 3/8 US$28 1/4 Cdn.$82.50 Cdn.$42.00
Fourth Quarter............................ US$48 3/4 US$15 13/16 Cdn.$73.00 Cdn.$25.25
RECORD HOLDERS
As of February 28, 2001, there were 289 registered holders of our
common shares, approximately 185 of which had addresses in the U.S. These record
holders owned 36,065,253, or approximately 64%, of our issued and outstanding
common shares.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common shares.
We currently intend to retain any future earnings to fund the development and
growth of our business and we do not anticipate paying any cash dividends in the
foreseeable future. Similarly, TANTAU has never declared a dividend on its
capital stock.
MATERIAL UNITED STATES FEDERAL AND CANADIAN INCOME TAX CONSEQUENCES
GENERAL
The following discussion of material U.S. federal income tax
consequences and Canadian federal income tax consequences of ownership of 724
Solutions' common shares is included for general information purposes only and
does not purport to be a complete description of all potential tax consequences.
The discussion does not address any potential tax effects to non-U.S. Holders
(as defined below) nor do they address all potential tax effects that may be
relevant to U.S. Holders subject to special U.S. federal income or Canadian tax
treatment, including:
- persons who own (actually or constructively) 5% or more of
either the total voting power or total value of all capital
stock of 724 Solutions;
38
- persons subject to the alternative minimum tax;
- persons who are or have been residents of Canada or engaged in
a trade or business in Canada through a permanent
establishment;
- persons who hold their shares as part of a hedge, straddle or
conversion transaction;
- persons whose functional currency is not the U.S. dollar;
- insurance companies;
- financial institutions;
- dealers in securities;
- traders that mark to market;
- tax-exempt organizations; and
- retirement plans.
The following discussion does not address the effect of applicable
state, provincial, local or foreign (other than Canadian) tax laws.
A "U.S. Holder" means a holder of shares of 724 Solutions who is (i) a
citizen or resident of the U.S., (ii) a corporation or other entity taxable as a
corporation created in or organized under the laws of the U.S. or any political
subdivision thereof, (iii) an estate the income of which is subject to U.S.
federal income tax regardless of its source or (iv) in general, a trust if a
U.S. court can exercise primary supervision over the administration of such
trust, and one or more U.S. persons have the authority to control all of the
substantial decisions of such trust. A "non-U.S. Holder" means a holder of
shares who is not a "U.S. Holder."
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
This summary of material U.S. federal income tax consequences is based
on the Internal Revenue Code, Treasury regulations, administrative rulings and
practice and judicial precedent, each as in effect at the date of this annual
report, all of which are subject to change. Any such change, which may or may
not be retroactive, could alter the tax consequences discussed herein. No
rulings have been or are expected to be sought from the Internal Revenue Service
concerning the tax consequences of holding common shares of 724 Solutions, and
this tax discussion as to the material U.S. federal income tax consequences will
not be binding on the Internal Revenue Service or any court. This discussion
relies on assumptions, including assumptions regarding the absence of changes in
existing facts.
TAXATION OF DIVIDENDS. Subject to the discussion below under "Passive
Foreign Investment Company Considerations," for U.S. federal income tax
purposes, the U.S. dollar value of any distribution made out of 724 Solutions'
current or accumulated earnings and profits as determined for
39
U.S. federal tax income purposes will be included in gross income by a U.S.
Holder and will be treated as foreign source dividend income (except that if
more than 50% of 724 Solutions' stock is owned by U.S. persons, a portion of any
dividends may be treated as U.S. source for purposes of calculating such
Holder's U.S. foreign tax credit). The U.S. dollar value of any distribution
received in Canadian dollars will be based on the spot exchange rate for the
date of receipt.
If dividends paid by 724 Solutions were to exceed 724 Solutions'
current and accumulated earnings and profits as determined for U.S. federal
income tax purposes, any excess would be treated as a non-taxable return of
capital to the extent of the U.S. Holder's adjusted basis in the common shares
of 724 Solutions, and thereafter as a capital gain.
A U.S. Holder will be required to include in income the Canadian
withholding tax paid with respect to dividends and may claim a foreign tax
credit or a deduction with respect to such tax, subject to applicable
limitations.
TAXATION OF GAINS. Upon the sale or disposition of a common share of
724 Solutions, you will recognize gain or loss for U.S. federal income tax
purposes in an amount equal to the difference between the U.S. dollar value of
the amount realized and your adjusted tax basis in the share. Subject to the
discussion below under the heading "Passive Foreign Investment Company
Considerations," such gain or loss will generally be treated as U.S. source
capital gain or loss. If you are an individual, any such capital gain will
generally be subject to U.S. federal income tax at preferential rates if
specified minimum holding periods are met.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS. 724 Solutions does
not believe it will be a passive foreign investment company (a "PFIC") for the
current taxable year. In the future, the determination of 724 Solutions' PFIC
status will depend on, among other things, a valuation of 724 Solutions' assets,
including goodwill and other intangible assets. No assurance can be given that
724 Solutions will not be attributed PFIC status in future years.
724 Solutions will be classified as a PFIC in a particular taxable year
if either 75% or more of its gross income for the taxable year is passive
income, or during the taxable year, the average percentage of the value of 724
Solutions' assets that produce or are held for the production of passive income
is at least 50%. The U.S. Internal Revenue Service has indicated that cash
balances, even if held as working capital, are considered to be assets that
produce passive income.
If 724 Solutions were classified as a PFIC, any gain recognized by a
U.S. Holder upon the sale of common shares of 724 Solutions, or the receipt of
certain distributions, would generally be treated as ordinary income. In this
case, this income would be allocated over the period that the U.S. Holder held
724 Solutions shares and an interest charge would be imposed on the amount of
deferred tax on such income allocated to prior taxable years. If 724 Solutions
were determined to be a PFIC, however, a U.S. Holder could elect to treat his or
her shares as an interest in a qualified electing fund (a "QEF Election"), in
which case the U.S. Holder would be required to include in income annually his
or her proportionate share of 724 Solutions' income and net capital gain in
years in which 724 Solutions was a PFIC, regardless of whether such income or
gain was actually distribued, but any gain subsequently recognized upon the sale
by such U.S. Holder of the shares would generally be taxed as capital gain.
Alternatively, a U.S. Holder could make an election (a "Mark-to-Market
Election"), pursuant to which the U.S. Holder would be required to include as
ordinary income annually the excess of the fair market value of the
40
724 Solutions shares over the U.S. Holder's basis therein. If a U.S. Holder
makes a Mark-to-Market Election, then any gain recognized upon the sale by such
U.S. Holder of his or her common shares of 724 Solutions generally would be
taxed as ordinary income in the year of sale.
You should consult with your own tax advisors regarding your
eligibility for, and the manner and advisability of making, the QEF Election or
Mark-to-Market Election if 724 Solutions is treated as a PFIC.
U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING. A holder of 724
Solutions common shares may, under certain circumstances, be subject to certain
information reporting requirements and backup withholding tax at the rate of 31%
with respect to dividends paid on the 724 Solutions common shares, or the
proceeds of sale of the 724 Solutions common shares, unless such holder (i) is a
corporation or comes within certain other exempt categories, and when required,
demonstrates this fact or (ii) provides a correct taxpayer identification number
("T.I.N."), certifies that such holder is not subject to backup withholding and
otherwise complies with applicable requirements of the backup withholding rules.
A holder of 724 Solutions common shares who does not provide a correct T.I.N.
may be subject to penalties imposed by the U.S. Internal Revenue Service. Any
amount withheld under backup withholding rules generally will be creditable
against the holder's U.S. federal income tax liability and a holder may obtain a
refund of any excess amounts withheld under the backup withholding rules by
filing the appropriate claim for a refund with the IRS.
THIS TAX DISCUSSION DOES NOT PURPORT TO CONTAIN A COMPLETE ANALYSIS OR
DISCUSSION OF ALL POTENTIAL TAX CONSIDERATIONS RELEVANT TO THE OWNERSHIP OF 724
SOLUTIONS COMMON SHARES. THUS, 724 SOLUTIONS' SHAREHOLDERS ARE URGED TO CONSULT
THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE
OWNERSHIP OF 724 SOLUTIONS COMMON SHARES, INCLUDING TAX RETURN REPORTING
REQUIREMENTS, THE APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND
OTHER APPLICABLE TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX
LAWS. STOCKHOLDERS THAT ARE NOT U.S. HOLDERS SHOULD CONSULT THEIR TAX ADVISOR
REGARDING, AMONG OTHER THINGS, THE CONSEQUENCES OF INVESTING IN 724 SOLUTIONS'
COMMON SHARES UNDER THE FOREIGN INVESTMENT IN REAL PROPERTY TAX ACT, INCLUDING
ANY REPORTING REQUIREMENTS THAT MAY APPLY.
MATERIAL CANADIAN INCOME TAX CONSEQUENCES
The following discussion is applicable only to U.S. Holders who are
treated as residents of the U.S. under the provisions of the Convention between
Canada and the United States of America with Respect to Taxes on Income and
Capital Gains, who will hold their 724 Solutions common shares as capital
property and who will deal at arm's length with 724 Solutions. The discussion is
intended only as a general guide to the position under Canadian tax law and will
not apply to certain classes of investors, such as "financial institutions" as
defined in Section 142.2 of the Canadian Income Tax Act. If you are in any doubt
as to your tax position, you should consult with your tax advisor.
CANADIAN TAXATION OF CAPITAL GAINS. A U.S. Holder will not be subject
to Canadian income taxation on the disposal of 724 Solutions common shares,
provided the value of the 724 Solutions shares at the time of disposal is not
derived principally from real property located in Canada. 724 Solutions does not
believe the value of its common shares currently is derived principally from
real property located in Canada and believes that it is unlikely for the
foreseeable future that the value of its common shares will be derived
principally from real property located in Canada.
41
CANADIAN TAXATION OF DIVIDENDS. Under the Convention between Canada and
the United States of America with Respect to Taxes on Income and Capital Gains,
dividends paid by 724 Solutions to U.S. Holders will be subject to Canadian
withholding tax at the rate of 15% (except that dividends paid to a corporate
shareholder who owns at least 10% of the voting shares of 724 Solutions will be
subject to Canadian withholding tax at the rate of 5%).
THE FOREGOING SUMMARY OF MATERIAL U.S. AND CANADIAN TAX CONSEQUENCES IS
BASED ON THE CONVENTION BETWEEN CANADA AND THE UNITED STATES OF AMERICA WITH
RESPECT TO TAXES ON INCOME AND CAPITAL GAINS, U.S. LAW, CANADIAN LAW, AND
REGULATIONS, ADMINISTRATIVE RULINGS AND PRACTICES OF THE U.S. AND CANADA, ALL AS
THEY EXIST AS OF THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS. THIS SUMMARY
DOES NOT DISCUSS ALL ASPECTS THAT MAY BE RELEVANT TO ANY PARTICULAR INVESTORS IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. INVESTORS ARE URGED TO CONSULT THEIR
OWN TAX ADVISORS WITH RESPECT TO THEIR OWN PARTICULAR CIRCUMSTANCES AND WITH
RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF OWNERSHIP OF 724 SOLUTIONS COMMON
SHARES, INCLUDING THE APPLICABILITY AND EFFECT OF STATE, PROVINCIAL, LOCAL AND
FOREIGN TAX LAWS, ESTATE TAX LAWS AND PROPOSED CHANGES IN APPLICABLE LAWS.
RECENT SALES OF UNREGISTERED SECURITIES
Since our inception, we have issued our securities in the following
unregistered offerings:
1. At inception, July 28, 1997, we issued 200 common shares for
an aggregate subscription price of $1,000.
2. Between inception of our corporation and December 31, 1997, we
issued 3,999,800 common shares for an aggregate subscription
price of $1.4 million.
3. Between January 1, 1998 and December 31, 1998, we issued
3,428,570 common shares for an aggregate subscription price of
$4.56 million.
4. Between January 1, 1998 and December 31, 1998, we issued
4,000,000 common shares for an aggregate subscription price of
approximately $1.3 million upon the exercise of stock options
held by our investors.
5. In June 1999, we issued 541,790 common shares for an aggregate
subscription price of $2.0 million.
6. In August 1999, we issued 950,000 common shares for an
aggregate subscription price of $3.6 million.
7. In August 1999, we issued 6,400,000 common shares for an
aggregate subscription price of $24.5 million.
8. In October 1999, we issued 5,450,000 common shares for an
aggregate subscription price of $20.8 million, 2,658,210
common shares for an aggregate subscription price of $10.2
million, and 1,973,856 common shares for an aggregate
subscription price of $10.0 million.
42
9. In June 2000, in connection with our acquisition of Ezlogin,
we issued 1,003,594 common shares to the former shareholders
of Ezlogin, and assumed employee stock options to purchase our
common shares.
10. In September 2000, in connection with our acquisition of
Spyonit, we issued 1,041,616 common shares to the former
shareholders of Spyonit.
11. In the fiscal year ended December 31, 2000, we issued an
aggregate of 765,339 common shares upon the exercise of stock
options for an aggregate price of $627,000.
12. In March 2001, we issued 1,016,986 of our common shares to
Webhelp Inc., a developer of online communication
solutions, in exchange for rights to Webhelp's Web
Application Event Framework technology and shares of
Webhelp's preferred stock.
Each of these issuances occurred in connection with transactions not
subject to the registration requirements of the Securities Act of 1933, as
amended, including pursuant to the provisions of Regulation D and Regulation S
thereunder. Prior to our initial public offering in the first quarter of 2000,
our common shares were issued primarily to our founder, Gregory Wolfond and
entities under his control, our initial financial institution customers and
several financial investors.
USE OF PROCEEDS FROM INITIAL PUBLIC OFFERING
In February 2000, we completed our initial public offering, pursuant to
a Registration Statement on Form F-1 (File No. 333-90143), which was declared
effective by the Securities and Exchange Commission on January 27, 2000, on
which date the offering commenced. All of the common shares registered pursuant
to the registration statement were sold by us.
The managing underwriters of the U.S. syndicate were Credit Suisse
First Boston Corporation, FleetBoston Robertson Stephens Inc. and Thomas Weisel
Partners LLC. The managing underwriters of the Canadian syndicate were Nesbitt
Burns Inc., RBC Dominion Securities Inc. and Credit Suisse First Boston
Securities Canada Inc.
6,900,000 of our common shares were registered in the offering. The
aggregate price of these shares was $179.4 million. We incurred expenses of
approximately $2 million in connection with the offering, together with
underwriting commissions of $12.6 million. Our expenses in the offering
consisted of payments to parties other than its directors, officers, their
associates or holders of 10% of our common shares, except that Nesbitt Burns
Inc. is an affiliate of Bank of Montreal, of which Lloyd Darlington, one of our
directors, served as Chief Technology Officer and General Manager. The aggregate
net proceeds of the offering were $166.9 million.
We have invested a portion of the net proceeds from the offering in
short-term, interest-bearing investment grade securities, and we have deposited
a portion of these proceeds in our accounts with financial institutions. Between
the time of the offering and December 31, 2000, we used a portion of these
proceeds, together with our cash on hand prior to the offering and the cash that
we generated from our operations, for general corporate purposes, including the
development of our hosting service and research and development expenses, as
well as the cash portion of the purchase price for our acquisitions of YRLess
and Spyonit.
43
ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated statement of operations data for the years
ended December 31, 2000, 1999 and 1998 and the balance sheet data as of December
31, 2000 and 1999 have been derived from our audited financial statements, which
are included elsewhere in this report. The selected statement of operations data
for the period from July 28, 1997 (inception) to December 31, 1997 and the
balance sheet data as of December 31, 1998 and 1997 have been derived from other
audited financial statements not included in this report. These operating
results are not necessarily indicative of results for any future period. You
should not rely on them to predict our future performance. The selected
consolidated financial data should be read in conjunction with the Consolidated
Financial Statements and the Notes thereto and other financial information
beginning on page F-1 in this report, as well as the information set forth under
"Item 7-Management's Discussion and Analysis of Financial Condition and Results
of Operations."
JULY 28, 1997
YEARS ENDED DECEMBER 31, (INCEPTION) TO
2000 1999 1998 DECEMBER 31, 1997
----------------------------------------------------- --------------------
(In thousands of U.S. dollars, except shares and
per share amounts)
Consolidated Statements of Operations Data:
Revenue:
Product: $ 14,191 $ 1,697 $ 1,678 $ -
Less stock-based compensation related to
software development (248) (1,644) (1,395) -
Service 7,303 1,169 208 -
---------- --------- ------- ---------
Net revenue $ 21,246 $ 1,222 $ 491 $ -
Operating expenses (1):
Cost of net revenue 13,213 1,858 82 0
Research and development 32,624 7,255 2194 44
Sales and marketing 13,015 2,598 405 39
General and administrative 15,398 3,634 528 82
Depreciation 3,946 752 88 -
Amortization of intangible assets 18,843 - - -
---------- --------- ------- ---------
Total operating expenses $ 97,039 $ 16,097 $ 3,297 $ 165
---------- --------- ------- ---------
Loss from operations (75,793) (14,875) (2,806) (165)
Interest income 11,582 1,044 107 10
Equity in loss of affiliate (943) - - -
Dilution gain 1,890 - - -
44
---------- --------- ------- ---------
Loss for the year $ (63,264) $(13,831) $ (2,699) $ (155)
---------- --------- ------- ---------
Basic and diluted loss per share $ (1.71) $ (0.82) $ (0.47) $ (0.06)
Weighted-average number of shares used in 36,963 16,887 5,784 2,752
computing basic and diluted loss per share (in
thousands)
(1) Included in the operating expenses are
stock-based compensation expenses in the
following amounts $ 6,415 $ 165 $ 181 $ -
---------- --------- ------- ---------
---------- --------- ------- ---------
AS OF DECEMBER 31,
2000 1999 1998 1997
----------------------------------------------------------------------------------
Consolidated Balance Sheet Data:
Cash and cash equivalents $ 73,898 $ 65,287 $ 2,976 $ 1,299
Short-term investments 92,726 - - --
Working capital 149,782 58,805 2,333 1,267
Intangible and other assets 102,759 1,100 - --
Total assets 287,316 73,242 3,892 1,321
Total shareholders' equity 262,263 62,168 3,193 1,288
45
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion and analysis should be read together with our
audited consolidated financial statements and the accompanying notes appearing
elsewhere in this report. All financial information is presented in U.S. dollars
unless otherwise noted.
As described in Part I - Business - Information Regarding
Forward-Looking Statements, some of the statements set forth in this section are
forward-looking statements relating to our future results of operations. Our
actual results may vary from the results anticipated by these statements. For a
description of the risks that may cause our future performance to differ
adversely from those described below, please read carefully the information set
forth under Part I - Business - Risk Factors.
OVERVIEW
We were established in July 1997 to conceive, design and distribute
Internet infrastructure software solutions that enable financial institutions to
deliver financial information and services using a broad range of
Internet-enabled devices. For the period from July 1997 to May 1999, we were in
a development phase, conducting research and developing our products. In May
1999, we launched our initial product, for use in connection with financial
services, on a trial basis with a limited number of customers of the Bank of
Montreal. During the trial, these customers were able to access banking and
brokerage services and lifestyle content, including news, stock quotes, weather,
lottery results and horoscopes, through Internet-enabled devices, specifically
Palm Pilot connected organizers and mobile phones. This trial was completed in
September 1999. During the period from May 1999 through December 1999, we filled
key management positions in our sales and marketing departments, attracted Bank
of America, Citigroup and Sonera Corporation as investors, entered into license
agreements with Bank of America, Wells Fargo and Citigroup, and continued to
develop our product. Our headcount has grown to 481 employees as of December 31,
2000. After giving effect to our January 2001 acquisition of TANTAU Software
Inc., we had 710 employees as of January 31, 2001.
RECENT ACQUISITIONS
YRLESS. In March 2000, we acquired Internet messaging gateway developer
YRLess Internet Corporation of Oakville, Ontario. YRLess developed the YMG-2000,
a scaleable, platform-independent carrier-grade short messaging service gateway
for wireless carriers. Prior to the acquisition, YRLess had licensed its
technology to network operators Bell Mobility and Telus Mobility. We plan to use
this gateway to enhance our ability to quickly connect to carriers. In this
transaction, we paid total cash consideration of approximately $1.3 million,
including acquisition costs of approximately $34,000. In addition, we are
committed to pay approximately $4.4 million over three years, commencing March
2001. Of the $4.4 million commitment, $2.6 million is contingent on the former
shareholders of YRLess remaining as our employees. This amount vests over three
years as services are being performed by these former shareholders. This amount
is required to be paid in our common shares based upon their market value at the
time of issuance, unless we agree otherwise with one or more of the former
shareholders, or under other limited circumstances. We intend to settle this
obligation in shares.
EZLOGIN. In June 2000, we completed our acquisition of Ezlogin, a
leading provider of Internet software infrastructure tools for user directed
personalization. Using the technologies that we acquired in
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this transaction, we introduced LiveClips, a comprehensive aggregation tool
designed to enable our customers to provide consumers with a consolidated view
of their online accounts and other items of personal interest. LiveClips also
enables consumers to select other Internet content for display on their
personalized Web pages. In this transaction, we issued 1,003,594 of our common
shares at the closing. In addition, we assumed the options that were outstanding
under Ezlogin's stock option plan, and, at the closing, these options were
converted into options to purchase 91,796 of our common shares.
SPYONIT. In September 2000, we completed our acquisition of
Chicago-based Spyonit. Spyonit's intelligent alerting infrastructure software
monitors the Internet for items of interest such as stock prices, product sales
or auction bids. When appropriate content is detected, the Spyonit system
delivers smart notifications to the user through a variety of Internet-access
devices. Spyonit allows us to broaden the range of alert services that the 724
Solutions platform supports, complements our LiveClips aggregation tool, and
adds an attractive standalone offering to our product portfolio. In this
transaction, the purchase price of approximately $40.0 million was satisfied by
the issuance of 1,041,616 of our common shares and $2.0 million in cash. As part
of the terms of the purchase, up to 137,062 of the total common shares issued
are subject to repurchase at a nominal value if the vendors do not remain our
employees through September 2003.
TANTAU SOFTWARE. In January 2001, we completed our acquisition of
Austin-based TANTAU Software. TANTAU develops and designs software and related
services that enable enterprises to conduct high-volume, secure, m-commerce
transactions. We believe that TANTAU's infrastructure will complement our 724
Solutions applications. By integrating TANTAU's platform with our 724 Solutions
platform and applications, we believe that we will be able to offer enhanced
services to our existing and future customers that require a strong
enterprise-wide solution. As consideration for the acquisition, we issued an
aggregate of 17,091,679 of our common shares and assumed options originally
issued by TANTAU, which, as of the closing date, became exercisable to purchase
an additional 3,539,245 of our common shares. The calculated acquisition price
is estimated to be approximately $407.7 million, including acquisition costs of
$9.4 million. In addition, we will be recognizing approximately $53.3 million in
deferred stock-based compensation relating to the assumption of TANTAU's stock
option plan. The acquisition will be accounted for by the purchase method.
For additional information regarding our accounting for these
acquisitions, please see Notes 3 and 14 to our consolidated financial
statements.
SOURCES OF REVENUE
Our primary sources of revenue are revenues generated under our license
agreements and services revenue with respect to our 724 Solutions platform.
Historically, our services revenue has consisted primarily of implementation,
customer service and maintenance fees. In the future, we expect our services
revenue to also include amounts derived from revenue sharing arrangements and
commissions on m-commerce transactions.
We have recently commenced providing hosting services to our customers;
revenues from these services are included in our services revenue. We expect to
increase our hosting revenue once customers have commenced signing up
subscribers to use services based on our products and the services have begun to
operate from our data center. As our hosting services expand, we believe that
the portion of our revenues derived from hosting and maintenance services will
increase in future periods.
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LICENSE FEES
Our two initial license agreements were with Bank of Montreal and Bank
of America, and used a fixed fee license model. Under this model, a customer
pays us a fixed annual license fee in whole or part upon execution of the
license agreement, and/or periodically thereafter during the term of the
agreement. The use of this model helped provide the initial cash flow that was
necessary to fund our development and start-up costs. Our initial fixed fee
license contracts contained provisions that required us to deliver to our
customers all of the technology that we made generally available to our
customers during the term of the agreement. As such, these fees have been
recognized using the subscription accounting method commencing with the delivery
of the first product in the contract.
After raising additional capital in August 1999 through the issuance of
common shares, we had the financial resources to forego this fixed fee license
model in favor of a variable fee license model. Our agreements with several of
our customers, including Citigroup, Wells Fargo, Wachovia and Claritybank.com,
utilize this model. The variable fee license model is based on a per user fee.
We expect that the transition of our revenue model from fixed fee to variable
fee will have two significant consequences: first, we will no longer receive the
primary portion of our license fees as initial payments under our customer
agreements; and second, we expect our revenue stream will vary with the number
of our customers' end users. We expect that these variable fees will be subject
to a minimum quarterly payment, and expect to provide incentive discounts to our
customers based on the number of their customers using our platform. To date, we
have not received revenues from the user fees in excess of any minimum payments.
However, over time, we expect these fees to become a significant portion of our
revenue once our customers roll out services based upon our platform to a
substantial number of consumers.
Under the variable fee license model, we recognize revenue when we have
executed an agreement with a customer, when delivery and acceptance have
occurred, and when the collection of the related receivable is deemed probable.
Revenue from the minimum payments is recognized on a monthly basis. Revenue
associated with user fees in excess of any minimum payments will be recognized
on a quarterly basis when the amount is determined.
We expect that in our future contracts that use the variable fee
license model, the customer will pay us a license fee consisting of an up front
payment upon execution of the contract and an ongoing variable fee based on the
number of users. The monthly user fees may be subject to minimum quarterly
payments. We will allocate revenue to the software based on vendor specific
objective evidence of fair value. The portion of revenue that will be allocated
to the software will be recognized as revenue when delivery and acceptance have
occurred and when the collection of any related receivable is deemed probable.
As a result, we anticipate that the initial payments under these contracts will
tend to be recognized by revenue either in the quarter in which the contract is
executed or shortly thereafter. Revenue from the minimum payments will be
recognized on a monthly basis. Revenue associated with user fees in excess of
any minimum payments will be recognized on a quarterly basis when the amount is
determined.
In fiscal 2000, we entered into a number of reseller agreements. While
each arrangement can be different, the reseller generally pays either a
non-refundable licensing fee for our software and/or a royalty fee based on the
related number of users. We recognize revenue associated with a non-refundable
license fee upon the execution of the contract when delivery and acceptance have
occurred, no significant
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performance requirements are remaining, and when the collection of the related
receivable is deemed probable. Additional license fees based on the number of
users, are recognized monthly.
IMPLEMENTATION AND CUSTOMER SERVICE FEES
Revenue from implementation and customer services includes fees for
implementation of our product offerings, consulting and training services. We
currently rely, and expect to continue to rely, upon a combination of our own
resources and third-party consulting organizations to deliver these services to
our customers. Customers are charged a fee based on time and expenses. Revenue
from implementation and customer service fees is recognized as the services are
performed.
MAINTENANCE FEES
We receive revenue from maintaining and servicing our products for
customers. The maintenance fee is typically equal to a specified percentage of
the customer's license fee. If associated with the fixed fee license model, the
maintenance revenues received will be deferred and recognized on a straight-line
basis over the contract period. When associated with the variable fee license
model, any minimum payments will be recognized on a monthly basis. Maintenance
revenue in excess of any minimum payments will be recognized on a quarterly
basis when the amount is determined.
HOSTING FEES
Some of our existing customers require us, and we expect that many of
our potential customers would require us, to host and manage the server
infrastructure and software platform as part of the implementation of our
products. In fiscal 2000, we commenced providing this service to our customers.
We typically charge a customer a one-time setup fee plus a per monthly flat fee
or a monthly fee based on the number of users. The set-up fees are recognized
ratably over the term of the hosting arrangement.
REVENUE DERIVED FROM TANTAU SOFTWARE
We expect to derive additional license and professional services
revenue from our purchase of TANTAU in January 2001. TANTAU's software license
revenue is generated principally from the licensing of its products, including
the Wireless Internet Platform, directly to enterprises and indirectly through
value-added resellers and original equipment manufacturers. Now that we have
acquired TANTAU, we anticipate that some customers will seek to purchase the
TANTAU platform as a stand-alone product, while other customers will purchase
the integrated 724 Solutions/TANTAU product offerings.
TANTAU uses a per seat model, in which the licensee pays a one-time
license fee for a fixed number of installed copies in exchange for a license
with a perpetual term. The licensed software is sold in increments as the user
expands its use, and we recognize revenue under these contracts when the
software is shipped.
TANTAU licenses its products to end users primarily under perpetual
licenses. TANTAU's standard perpetual license agreement includes post-contract
customer support for a specified period of time. Thereafter, post-contract
customer support can be renewed annually for an additional fee. TANTAU uses the
post-contract customer support renewal rate as evidence of the fair value of
this service. Since post-contract customer support is the only undelivered
element in these arrangements,
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revenue is recognized using the residual method. The fair value of post-contract
customer support is recognized over the term of the support obligation and the
remaining portion of the arrangement fee is recognized after the execution of a
license agreement and the delivery of the product to the customer, provided that
there are no uncertainties surrounding the product acceptance, fees are fixed
and determinable, collectibility is probable, and TANTAU has no remaining
obligations other than the delivery of the support.
TANTAU enters into arrangements with original equipment manufacturers
(OEMs) and resellers. Under these arrangements, TANTAU grants the OEM or
reseller rights to sell products which incorporate TANTAU's products for a
specified period of time. TANTAU's primary obligation to the OEM or reseller is
to deliver a product master and any bug fixes under warranty provisions in order
to maintain the product master in accordance with published specifications. In
some arrangements, TANTAU receives prepaid, non-refundable minimum license fees
from the OEM or reseller. Because TANTAU's primary obligations to an OEM or
reseller are fulfilled upon delivery of the product master, TANTAU recognizes
the prepaid, non-refundable minimum license fees as revenue as the fees become
due and payable or upon delivery of the product master, whichever is later.
TANTAU's professional services revenue consists primarily of fees for
training, consulting, software maintenance and support. TANTAU currently relies,
and expects to continue to rely, on a combination of its internal professional
services organization and third-party consulting firms to provide training and
consulting services to its customers. Fees for these services are charged on a
time-and-materials basis and are recognized as the services are performed.
Maintenance fees are derived under annual maintenance agreements with customers,
which enable customers to receive service and support from TANTAU as well as
product updates. Maintenance fees typically are set as a specified percentage of
the customer's license fee and paid in advance for the maintenance period.
Revenues under maintenance agreements are deferred and recognized on a
straight-line basis over the contract period.
RESULTS OF OPERATIONS
Our consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. These principles conform in
all material respects with U.S. generally accepted accounting principles, except
as disclosed in note 14 to our consolidated financial statements. We completed
our acquisition of TANTAU in January 2001. As a result, the results described
here for our prior fiscal years do not include the results of operations of
TANTAU and its subsidiaries.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Our revenue, before the offset of stock-based compensation, increased
to $21.5 million for the year ended December 31, 2000 from $2.9 million in
December 31, 1999.
PRODUCT REVENUE
Our product revenue, before the offset of stock-based compensation,
increased to $14.2 million in 2000 compared to $1.7 million in 1999.
Substantially all of the increase resulted from the delivery of our 724
Solutions platform in accordance with the terms in our customer contracts
entered into in 1999. We expect that our product revenue will increase as we
sell our products to new customers and our current customers, including the
customers that we added in 2000, begin to deliver services based upon
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our products to end users. The mix of our product revenue will change as we
benefit from the sales of TANTAU's software.
SERVICE REVENUE
Our service revenue increased to $7.3 million from $1.2 million for the
twelve months ended December 31, 2000 and 1999, respectively. Most of the
increase resulted from our customers seeking additional services to help them
deploy our 724 Solutions platform and applications and other products. In
addition, we received revenue for consulting work related to the implementation
and customization of our LiveClips product, which we have made available as a
result of our June 2000 acquisition of Ezlogin.
As product revenue grows, we expect that services revenue from
consulting will increase as our customers seek additional services to help them
deploy our applications. We also anticipate that services revenue will increase
as more of our customers subscribe for our hosting service.
STOCK-BASED COMPENSATION RELATED TO SOFTWARE DEVELOPMENT REVENUE
Under our subscription agreement with Bank of Montreal (BMO) dated
April 30, 1998, we granted an option to BMO to subscribe for 2,428,570 common
shares for Cdn. $1.0 million. This option was only exercisable in the event that
BMO extended its technology license agreement for a second year and paid the
second year's license fee. In October 1998, following BMO's extension of the
license agreement, BMO exercised the option. On the date of exercise, the fair
value of the 2,428,570 common shares was determined to be Cdn. $6.1 million,
resulting in a stock-based compensation charge related to software development
revenue of Cdn. $5.1 million, or U.S. $3.3 million. This stock-based
compensation was attributed to our software development revenue over the term of
the agreement in proportion to the revenue recognized in the first and second
years. Stock-based compensation related to software development revenue
decreased to $248,000 for the twelve months ended December 31, 2000 from $1.6
million for the twelve months ended December 31, 1999. The decrease resulted
from the fact that the second year of this agreement ended in the first quarter
of fiscal 2000. This deferred stock-based compensation charge has now been fully
expensed.
OPERATING EXPENSES
COST OF NET REVENUE
Cost of net revenue consists primarily of personnel costs associated
with customer support, training, implementation, consulting and hosting
services, as well as amounts paid to third-party consulting firms for those
services and an allocation of expenses for our facilities and administration. It
also includes software licensing expenses paid for integration of third-party
software into our products.
Cost of net revenue was $13.2 million for the year ended December 31,
2000 compared to $1.9 million for the year ended December 31, 1999. Most of the
increase was due to salary and consulting costs as we significantly increased
our implementation and customer services personnel and third-party consulting
firms to support our customers' deployment of our 724 Solutions platform, and as
we incurred startup and implementation costs required to establish our hosting
infrastructure. Included in cost of net revenues is also a non-cash charge of
$653,000 and $19,000 for stock-based compensation for 2000 and 1999,
respectively.
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While we expect cost of net revenue to increase in the near future as
we expand our customer services and hosting service personnel and establish
hosting centers worldwide, we expect that our cost of net revenue as a
percentage of revenues will decrease and our gross margin will increase. We are
seeking to utilize the personnel and infrastructure that we have built in 1999
and 2000, and the experience we have gained in enabling customers to deploy our
products, to reduce the per customer costs that we incur in driving the adoption
and implementation of our platform. In addition, we believe that the acquisition
of TANTAU will help us increase our gross margins, as TANTAU mainly sells
licenses which generally have relatively high margins.
RESEARCH AND DEVELOPMENT
Research and development expenses include the compensation of software
development teams working on the continuing enhancement of our products as well
as our quality assurance and testing activities. These expenses also include
independent contractors and consultants, software licensing expenses, and
allocated operating expenses.
Research and development expenses increased to $32.6 million for the
year ended December 31, 2000 compared to $7.3 million for the same period in
1999. The increase from the prior year was attributed to the expansion of the
functionality of our platform and costs associated with integrating Ezlogin and
Spyonit and other acquired technology, as well as the continued development of
our LiveClips and alerts products and the inclusion of a non-cash, stock-based
compensation charge of $3.7 million in the twelve months ended December 31,
2000. We anticipate that our research and development expenses will increase in
the future as we continue to expand the functionality of our platform and
enhance the technologies that we purchased in connection with our acquisitions
of YRLess, Ezlogin, Spyonit and TANTAU. We expect that our research and
development expenses will decrease as a percentage of revenue in fiscal 2001 as
we begin to leverage the technology that was previously developed and as we
further benefit from our previous acquisitions.
SALES AND MARKETING
Sales and marketing expenses include compensation of sales and
marketing personnel, public relations and advertising, trade shows, marketing
materials and allocated operating expenses.
Sales and marketing expenses were $13.0 million in 2000 compared to
$2.6 million in 1999. These costs increased primarily because in fiscal 2000 we
hired additional sales personnel to manage our relationships with our major
customers and to expand our business both in North America and worldwide. In
addition, in 2000, we opened sales offices in Tokyo and Sydney to establish our
presence in the Asia Pacific region and incurred fees associated with marketing
programs designed to build brand awareness. We anticipate that our sales and
marketing expenses will increase as we continue to attract customers worldwide,
expand our reach to other market segments and increase our efforts to sell our
expanding suite of products. However, as a result of our acquisition of TANTAU,
which has built a sales and marketing infrastructure in Europe, a portion of the
amounts that we would have otherwise expended to build our presence in Europe
may be allocated to other geographic markets or to other corporate purposes.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses include salaries and benefits for
corporate personnel and other general and administrative expenses such as
professional fees, facilities, travel and professional consulting costs. Our
corporate staff includes several of our executive officers and our business
development, financial planning and control, legal, human resources and
corporate administration staff.
Our general and administrative expenses increased to $15.4 million in
2000 from $3.6 million in 1999. The increase in general and administrative
expenses reflected our continued investment in increased staffing and related
expenses for the enhancement of the international infrastructure necessary to
support our growing business. The remainder of the increase was due to a
non-cash charge for stock-based compensation of $1.5 million and integration and
professional fees related to our acquisitions and corporate development
activities. We expect that our general and administrative expenses will increase
marginally due to the growth of our company and the acquisition of TANTAU.
However, as percentage of revenue, we expect these expenses to decrease as we
utilize the infrastructure that we built in 2000.
DEPRECIATION AND AMORTIZATION
Depreciation expense increased to $3.9 million in 2000 compared to
$752,000 in 1999. The increase reflects the capital spending in computer
hardware, office furniture and leasehold improvements at our Canadian facilities
to support the increase in the number of personnel. Additional software
development tools used for research and development and computer hardware
purchased for our hosting facilities accounted for the remainder of the
increase.
Amortization expense increased to $18.8 million in 2000 from nil in
1999. The increase was due to the goodwill and acquired intangibles relating to
the Ezlogin acquisition completed in June 2000 and the Spyonit acquisition
completed in September 2000. We are amortizing goodwill related to the Ezlogin
and Spyonit acquisitions over 24 months and 60 months, respectively. We have
hired an independent third party appraiser to assist in the determination of the
value of the goodwill and the other intangibles that we acquired in connection
with our acquisition of TANTAU. Upon completion of this appraisal, we will
determine the amount of the amortization charges that we will need to record as
a result of this acquisition, and the period of time over which we will do so.
STOCK BASED COMPENSATION RELATED TO STOCK OPTIONS
Stock-based compensation has been allocated to the operating expense
line items based on the nature of the services provided by the grantee.
Stock-based compensation was $6.4 million for the twelve months ended December
31, 2000 compared to $165,000 for the twelve months ended December 31, 1999.
Stock-based compensation mainly represents the difference between the exercise
prices of options granted to acquire our common shares and the deemed fair
market value, for financial reporting purposes, of our common shares on their
respective grant dates. This stock-based compensation is being amortized on a
straight-line basis over the vesting periods of these options, which is
generally three years. The increases are largely attributed to the amortization
of deferred stock-based compensation related to options that were granted
between October 1, 1999 and March 31, 2000. Stock-based compensation also
includes accrued stock consideration related to the YRLess acquisition. See
"Recent Acquisitions" and Note 3(a) of our consolidated financial statements.
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A large percentage of our outstanding options have exercise prices that
are significantly higher than the current prices at which our common shares
trade on the Nasdaq National Market and The Toronto Stock Exchange. Although we
have not yet determined how we will address this issue, members of our
management team are currently considering a variety of strategies. These
strategies include issuing additional options, lowering the exercise prices of
our outstanding options, issuing additional options to personnel who agree to
rescind all or a portion of their options, and/or paying additional cash
compensation to our personnel. We may undertake a combination of these
strategies, or develop new plans for compensating our personnel. Some of these
strategies could require us to record very large cash or non-cash compensation
expenses. However, because we have not yet determined the strategy or strategies
that we will pursue, we cannot estimate at this time the precise impact that
these actions will have on our financial condition and results of operations.
INTEREST INCOME
Interest income increased to $11.6 million for the year ended December
31, 2000 from $1.0 million for the twelve months ended December 31, 1999.
Interest was derived from cash and cash equivalent balances and short-term
investments, representing primarily the unused portion of the proceeds from our
issuances of common shares, including, in particular, the proceeds from our
initial public offering in the first quarter of 2000.
EQUITY IN LOSSES OF AFFILIATE
Our relative ownership in Maptuit decreased from 33.4% in March 2000 to
24.9% in December 2000. This decrease is due to the additional financing that
Maptuit arranged with other investors. Our investment in Maptuit is accounted
for using the equity method. In fiscal 2000, we recognized a net gain of
$947,000, including a dilution gain of $1.9 million, as a result of Maptuit's
additional financing, offset by our share of Maptuit's fiscal 2000 losses of
$943,000.
NET LOSS
We recorded a net loss of $63.3 million for the year ended December 31,
2000 compared to a net loss of $13.8 million for the year ended December 31,
1999. Our loss increased as we invested heavily in building our infrastructure.
In particular, our research and development expenses and our sales and marketing
expenses increased to meet required product delivery schedules and to gain
market share. In 2001, we expect our net loss to continue to increase as we
expand our hosting services and continue to invest in developing our products.
Net loss will also increase due to the non-cash charges relating to amortization
of intangibles arising from our acquisition of Ezlogin and Spyonit, which we
purchased in 2000, and TANTAU, which we purchased in 2001.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
Our revenue, before the offset of stock-based compensation, increased
to $2.9 million for the year ended December 31, 1999 from $1.9 million for the
year ended December 31, 1998.
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PRODUCT REVENUE
Our software development revenue, before the offset of stock-based
compensation, remained approximately the same at $1.7 million for the years
ended December 31, 1999 and 1998. All software development revenue realized in
1999 and 1998 related to our contract with Bank of Montreal.
SERVICE REVENUE
Our service revenue increased to $1.2 million for the year ended
December 31, 1999 from $208,000 for the year ended December 31, 1998. This
increase resulted from our entry into additional contracts for consulting and
software design services for implementations at Bank of Montreal, Bank of
America and Wells Fargo.
STOCK-BASED COMPENSATION RELATED TO SOFTWARE DEVELOPMENT REVENUE
Stock-based compensation related to software development revenue
increased to $1.6 million for the year ended December 31, 1999 from $1.4 million
for the year ended December 31, 1998, as we recognized a greater portion of the
revenue associated with Bank of Montreal's license agreement in 1999 than in
1998.
OPERATING EXPENSES
COST OF NET REVENUE
Our cost of net revenue increased to $1.9 million for the year ended
December 31, 1999 from $82,000 for the year ended December 31, 1998. This
increase was primarily related to the addition of implementation and customer
service personnel to support additional customers in 1999. The increase in cost
of services revenue also reflects amounts paid to third party consultants and
software providers.
RESEARCH AND DEVELOPMENT
Research and development expenses increased to $7.3 million for the
year ended December 31, 1999 from $2.2 million for the year ended December 31,
1998. This increase largely reflects the addition of personnel to our research
and development department, primarily to support the second release of our
software.
SALES AND MARKETING
Sales and marketing expenses increased to $2.6 million for the year
ended December 31, 1999 from $405,000 for the year ended December 31, 1998. This
increase is primarily attributable to the hiring of additional sales and
marketing personnel, together with increased travel and related expenses. This
increase reflects the opening of sales offices in San Francisco and London in
1999.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses increased to $3.6 million for
the year ended December 31, 1999 from $528,000 for the year ended December 31,
1998, which reflects the increase in our corporate staff.
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DEPRECIATION AND AMORTIZATION
Total depreciation and amortization expense (excluding amortization of
deferred stock-based compensation) increased to $752,000 for the year ended
December 31, 1999 from $88,000 for the year ended December 31, 1998, reflecting
the capital spending in computer workstations and software development tools
used for research and development purposes.
AMORTIZATION OF DEFERRED EMPLOYEE STOCK-BASED COMPENSATION
In 1999, we accrued a $5.8 million deferred stock compensation charge
related to employee stock options granted prior to our initial public offering.
Amortization of employee stock-based compensation was $165,000 for the year
ended December 31, 1999 compared to $181,000 for the year ended December 31,
1998, and has been included in the operating expense line items in which it
relates. In 1998, we recognized $414,000 for deferred stock based compensation
related to options that were granted to purchase 1,227,000 common shares under
our stock option plans at a weighted average exercise price of $0.34 per share.
INTEREST INCOME
Interest income, which increased to $1.0 million for the year ended
December 31, 1999 from $107,000 for the year ended December 31, 1998, was
derived from cash and cash equivalent balances, representing primarily the
unused portion of the proceeds from our issuances of common shares.
NET LOSS
We recorded a net loss of $13.8 million for the year ended December 31,
1999 compared to $2.7 million for the year ended December 31, 1998. The loss per
share, calculated using the weighted average number of shares outstanding, was
$0.82 for the year ended December 31, 1999 compared to a loss per share of $0.47
for the year ended December 31, 1998. Our losses increased as we invested
heavily in building our infrastructure. Research and development, along with
sales and marketing activities, increased to meet the required delivery
schedules for our products and to establish customer relationships.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated
statements of operations data for each of the twelve most recent quarters ended
December 31, 2000. The information has been derived from our unaudited
consolidated financial statements that, in management's opinion, have been
prepared on a basis consistent with the audited consolidated financial
statements contained elsewhere in this annual report and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of information presented. These operating results are not
necessarily indicative of results for any future period. You should not rely on
them to predict our future performance.
56
QUARTER ENDED
-------------
2000 TOTAL YEAR
---- ----------
MAR. 31 JUN. 30 SEPT. 30 DEC 31 2000
------- ------- -------- ------ ----
(In thousands of U.S. dollars, except for shares and per share
amounts)
Revenue:
Product..................................... $2,762 $2,591 $3,482 $5,356 $14,191
Services.................................... 597 1,377 2,632 2,697 7,303
Less: Stock-based compensation related to
software development revenue............. (248) - - - (248)
------ -------- -------- -------- -------
Net revenue.................................... 3,111 3,968 6,114 8,053 21,246
----- ----- ----- ----- ------
Operating expenses:
Cost of net revenue......................... 2,039 2,675 3,902 4,597 13,213
Research and development.................... 4,864 7,186 8,805 11,769 32,624
Sales and marketing......................... 2,559 3,475 3,792 3,189 13,015
General and administrative.................. 2,424 5,925 4,409 2,640 15,398
Depreciation................................ 317 684 1,313 1,632 3,946
Amortization of intangibles................. - 1,350 7,917 9,576 18,843
--------- ----- ----- ----- ------
Total operating expenses....................... 12,203 21,295 30,138 33,403 97,039
Loss from operations........................... (9,092) (17,327) (24,024) (25,350) (75,793)
Interest income................................ 2,237 2,772 3,631 2,942 11,582
Equity in losses of affiliate.................. (66) (213) 965 261 947
--------- --------- --------- -------- ---------
Net loss....................................... $(6,921) $(14,768) $(19,428) (22,147) (63,264)
-------- --------- --------- -------- --------
Basic and diluted net loss per share........... $(0.20) $(0.40) $(0.51) $(0.57) $(1.71)
Shares used in computing basic and diluted net
loss per share (in thousands)............... 34,037 36,717 37,961 39,092 36,963
====== ====== ====== ====== ======
QUARTER ENDED
1999 MAR. 31 JUN. 30 SEPT. 30 DEC. 31 TOTAL YEAR
---- ------- ------- -------- ------- -----------
1999
----
(In thousands of U.S. dollars, except for shares and
per share amounts)
Revenue:
Product............................................... $548 $383 $383 $383 $1,697
Services................................................ 34 - 754 381 1,169
Less: Stock-based compensation related to software (531) (371) (371) (371) (1,644)
development revenue................................... ----- ----- ----- ----- -------
Net revenue........................................... 51 12 766 393 1,222
-- -- --- --- -----
Operating expenses:
Cost of net revenue................................... - 20 811 1,076 1,907
Research and development.............................. 1,185 1,421 2,051 2,968 7,625
Sales and marketing................................... 210 307 634 1,560 2,711
General and administrative............................ 315 606 1,160 1,773 3,854
----- ----- ----- ----- -----
57
(In thousands of U.S. dollars, except for shares and
per share amounts)
Total operating expenses............................. 1,710 2,354 4,656 7,377 16,097
----- ----- ----- ----- ------
Loss from operations.................................. (1,659) (2,342) (3,890) (6,984) (14,875)
Interest income......................................... 61 28 252 703 1,044
------- ------- ------- ------- --------
Net loss.............................................. $(1,598) $(2,314) $(3,638) $(6,281) $(13,831)
-------- -------- -------- -------- ---------
Basic and diluted net loss per share.................. $(0.14) $(0.20) $(0.22) $(0.23) $(0.82)
Shares used in computing basic and diluted net loss per 11,429 11,609 16,870 27,557 16,887
share (in thousands).................................. ====== ====== ====== ====== ======
QUARTER ENDED
-------------
1998 MAR. 31, 1998 JUN. 30, SEPT. 30, DEC. 31, TOTAL YEAR 1998
- - ---- ------------- --------- ---------- --------- ---------------
1998 1998 1998
---- ---- ----
(In thousands of U.S. dollars, except for shares and per share amounts)
Revenue:
Software development......... $ - $419 $630 $629 $1,678
Services..................... 208 - - - 208
Less: Stock-based compensation - (91) (694) (610) (1,395)
related to software ----- ---- ----- ----- -------
development revenue.......
Net revenue..................... 208 328 (64) 19 491
--- --- ---- -- ---
Operating expenses:
Cost of net revenue.......... 61 - - - 61
Research and development..... 124 397 687 1,198 2,406
Sales and marketing.......... 27 86 109 213 435
General and administrative... 41 74 53 227 395
-- -- -- --- ---
Total operating expenses........ 253 557 849 1,638 3,297
--- --- --- ----- -----
Loss from operations............ (45) (229) (913) (1,619) (2,806)
Interest income................. 18 20 31 38 107
----- ----- ------ ------ ------
Net loss........................ $(27) $(209) $(882) $(1,581) $(2,699)
----- ------ ------ -------- -------
Basic and diluted net loss per $(0.01) $(0.04) $(0.18) $(0.17) $(0.47)
share........................ ------- ------- ------- ------- -------
Shares used in computing basic 4,000 4,667 5,000 9,286 5,784
and diluted net loss per share ===== ===== ===== ===== =====
(in thousands)...............
58
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through issuances of
common shares, together with revenue from operations. In February 2000, we
completed our initial public offering of an aggregate of 6,900,000 of our common
shares, raising net proceeds of approximately $165.7 million.
Net cash used in operating activities was $26.8 million for the year
ended December 31, 2000 compared to $5.5 million for the year ended December 31,
1999. Net cash used in operating activities for 2000 mainly consisted of our net
loss of $63.3 million and our net gain in equity of affiliate of $947,000 offset
by depreciation and amortization of $22.8 million, stock-based compensation of
$6.7 million and net changes in working capital of $6.2 million. Net changes in
working capital includes an accrued liability for non recurring costs of $9.0
million relating to the acquisition of TANTAU Software.
Cash provided from financing activities was $165.6 million for the
twelve months ended December 31, 2000, compared to $70.1 million for the year
ended December 31,1999. Cash flow from financing activities in 2000 reflects the
net proceeds of our initial public offering and funds received from the exercise
of stock options, as reduced by share issuance costs relating to our
acquisitions of Ezlogin and Spyonit.
Cash used in investing activities, before the purchase of short-term
investments, was $39.7 million for the year ended December 31, 2000 compared to
$2.3 million for the year ended December 31, 1999. At December 31, 2000,
short-term investments mainly consisted of government debt and commercial paper
with term to maturity of no greater than one year. Cash used in investing
activities in 2000, excluding the purchase of short-term investments, reflects
our investments in Corillian, Neomar and Maptuit, our acquisitions of YRless,
Ezlogin and Spyonit, acquisition costs related to TANTAU Software, as well as
purchases of capital and other assets. Capital expenditures for the year were
$11.8 million. We anticipate capital expenditures to continue to increase as we
continue to implement our data centers worldwide to support our hosting
activities. In addition, as at December 31, 2000, we had commitments to make
minimum lease payments of approximately $4.6 million in 2001.
As a result of our purchase of TANTAU, we acquired approximately $30.0
million in cash and cash equivalents and short term investments. In addition, as
of December 31, 2000, TANTAU had approximately $8.5 million in commitments
relating to facilities and equipment leases, which we are obligated to make as a
result of our acquisition.
We expect that the revenue from our operations, interest income and the
funds provided by our initial public offering will be sufficient to cover our
cash requirements, including our planned capital expenditures, for at least the
next 12 months. We may require additional financing if we expand our operations
at a faster rate than currently expected, or if we seek to effect one or more
significant acquisitions.
RECENT ACCOUNTING POLICIES AND REGULATIONS IN CANADA AND THE
UNITED STATES
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS
AND HEDGING ACTIVITIES (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded on
the balance sheet as either an asset or liability measured at its fair value.
SFAS
59
No. 133, as recently amended, is effective for fiscal years beginning after
June 15, 2000. To date, we have not entered into derivative instruments. We
believe that the adoption of SFAS No. 133 will not have a material effect on
our financial position or results of operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
IMPACT OF INTEREST RATE EXPOSURE
As of December 31, 2000, we had approximately $167 million in cash,
cash equivalents and short-term investments, of which over $93 million was
short-term investments. A significant portion of the cash earns interest at
variable rates. In addition, although our short-term investments are fixed-rate
instruments, the average term is short. Accordingly, our interest income is
effectively sensitive to changes in the level of prevailing interest rates. This
is partially mitigated by the fact that we generally hold our short-term
investments until their maturity date.
IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE
Our functional currency is the U.S. dollar, however a significant
portion of our expenses are incurred in Canadian dollars. With the purchase of
TANTAU, we expect that an increased portion of our expenses will be incurred in
Euros and other European currencies. Changes in the value of these currencies
relative to the U.S. dollar may result in currency translation gains and losses,
which could affect our operating results. In the year ended December 31, 2000,
we realized foreign currency losses of approximately $938,000. In the future, we
may seek to minimize this risk by hedging our known exposures, such as salaries,
rent and certain other recurring payments. We plan to account for any
arrangements of this kind under Canadian and U.S. GAAP in a manner consistent
with Financial Accounting Standards 133. See Note 14(a) to our consolidated
financial statements.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The consolidated financial statements and supplementary data of the
Company and the report of independent auditors thereon set forth beginning on
page F-1 are incorporated herein by reference.
Quarterly financial information set forth herein under "Item
7-Management's Discussion and Analysis of Financial Condition and Results of
Operations" is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
KPMG LLP has audited our consolidated balance sheets as at December 31,
2000 and 1999 and the consolidated statements of operations, shareholders'
equity and cash flows for the years ended December 31, 2000, 1999 and 1998, as
stated in their report appearing herein. KPMG LLP replaced Arthur Andersen LLP
in March 1999, several months prior to the time that we began to prepare the
registration statement relating to our initial public offering. The decision to
change accountants was approved by the Company's board of directors. Under the
applicable rules of the U.S. Securities and Exchange Commission and the Canadian
Securities Administrators, we have not made any public filings containing any
report of Arthur Andersen LLP as to our financial statements.
60
Arthur Andersen LLP's report as to our October 31, 1998 financial
statements, which was the only report issued by that firm, did not contain any
adverse opinion or a disclaimer of opinion, nor was it qualified or modified as
to uncertainty, audit scope, or accounting principles. There were no
disagreements between us and Arthur Andersen LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure which would have caused that firm to make reference to the subject
matter of such a disagreement in connection with its reports.
61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this Item is contained in the Company's
Management Information Circular and Proxy Statement, which was filed with the
Securities and Exchange Commission on March 21, 2001, and which is incorporated
by reference herein.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this Item is contained in the Company's
Management Information Circular and Proxy Statement, which was filed with the
Securities and Exchange Commission on March 21, 2001, and which is incorporated
by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item is contained in the Company's
Management Information Circular and Proxy Statement, which was filed with the
Securities and Exchange Commission on March 21, 2001, and which is incorporated
by reference herein.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item is contained in the Company's
Management Information Circular and Proxy Statement, which was filed with the
Securities and Exchange Commission on March 21, 2001, and which is incorporated
by reference herein.
62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
The following documents are filed as part of this Report:
1 Financial Statements.
Incorporated by reference from the financial statements and notes
thereto that are set forth beginning on page F-1 of this report.
2. Financial Statement Schedules.
None.
3. Exhibits.
EXHIBIT
NUMBER NAME OF DOCUMENT
- - ------ ----------------
3.1(1) Articles of the Registrant.
3.2(1) By-laws of Registrant.
10.1(1)(2) Technology License Agreement, dated as of April 30, 1998, between the Registrant and Bank of Montreal.
10.2(1) Mutual Indemnity Agreement, dated April 30, 1998, between the Registrant and Bank of Montreal.
10.3(1) Letter Agreement, dated November 27, 1998, between Bank of Montreal and the Registrant.
10.4(1) Letter Agreement, dated November 27, 1998, between Bank of Montreal and the Registrant.
10.5(1) Letter Agreement, dated July 26, 1999, between Bank of Montreal and the Registrant.
10.6(1) Form of Registration Rights Agreement
10.7(1)(2) Master Technology License Agreement, dated December 29, 1999, between Citicorp Strategic Technology
Corporation and the Registrant.
10.8(1) Support Agreement, dated December 29, 1999, among Citicorp Strategic Technology Corporation, 724 Solutions
International SRL and the Registrant.
10.9(2)(3) Licensed Affiliate Agreement between the Registrant and Citibank, N.A.
10.10(3) First Amended and Restated Agreement and Plan of Merger and Reorganization among the Registrant, Sapphire
Merger Sub, Inc., Ezlogin.com. and Alexandre Balkanski, as Shareholders' Agent, dated as of May 9, 2000.
10.11(3) Amendment to First Amended and Restated Agreement and Plan of Merger and Reorganization, among the
Registrant, Sapphire Merger Sub, Inc., Ezlogin.com, Inc. and Alexandre Balkanski, as Shareholders' Agent,
dated as of June 9, 2000.
10.12(4) Agreement and Plan of Merger and Reorganization among 724 Solutions Inc., the Registrant, Serpent Merger Sub,
Inc., Spyonit.com, Inc. and certain stockholders of Spyonit.com, Inc., dated as of September 12, 2000.
10.13(4) Agreement and Plan of Merger, dated as of November 29, 2000, by and among the Registrant, Saturn Merger
Sub, Inc. and TANTAU Software, Inc.
10.14(4) Form of Resale Restriction Agreement relating to former securityholders of TANTAU Software, Inc.
63
EXHIBIT
NUMBER NAME OF DOCUMENT
- - ------ ----------------
10.15(4) Form of Indemnification and Escrow Agreement relating to former securityholders of TANTAU Software, Inc.
10.16.1 Registrant's Canadian Stock Option Plan.
10.16.2 Registrant's U.S. Stock Option Plan.
10.16.3 Registrant's 2000 Stock Option Plan.
10.16.4 Registrant's TANTAU Software, Inc. Stock Option Plan.
10.17.1 Employment Agreement of Gregory Wolfond.
10.17.2 Employment Agreement of John Sims.
10.17.3 Employment Agreement of Christopher Erickson.
10.17.4 Employment Agreement of Karen Basian.
10.17.5 Employment Agreement of Andre Boysen.
10.17.6 Employment Agreement of Christopher Jarman.
16.1 Letter Regarding Change in Certifying Accountant.
21.1 List of Subsidiaries
23.1 Consent of KPMG LLP, Toronto.
------------------
(1) Incorporated by reference to the Registrant's Registration
Statement on Form F-1, File No. 333-90143.
(2) Confidential treatment has been requested with respect to
certain portions of the Exhibit pursuant to Rule 406 under the
Securities Act of 1933, as amended. Omitted portions have been
filed separately with the Securities and Exchange Commission.
(3) Incorporated by reference to the Registrant's Annual Report on
Form 20-F, Filed on June 29, 2000.
(4) Incorporated by reference to the Registrant's Registration
Statement on Form F-4, File No. 333-52698.
64
AUDITORS' REPORT TO THE SHAREHOLDERS
We have audited the consolidated balance sheets of 724 Solutions Inc. as at
December 31, 2000 and 1999 and the consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended December 31, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
With respect to the consolidated financial statements for the year ended
December 31, 2000, we conducted our audit in accordance with Canadian generally
accepted auditing standards and United States generally accepted auditing
standards. With respect to the consolidated financial statements for each of the
years in the two-year period ended December 31, 1999, we conducted our audits in
accordance with Canadian 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 December 31, 2000
and 1999 and the results of its operations and its cash flows for each of the
years in the three-year period ended December 31, 2000 in accordance with
Canadian generally accepted accounting principles.
Canadian generally accepted accounting principles 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 reported results for each of the years in the three-year
period ended December 31, 2000 to the extent summarized in note 14 to the
consolidated financial statements.
/s/ KPMG LLP
Chartered Accountants
Toronto, Canada
January 16, 2001, except
as to note 16 which is
as of January 23, 2001
F-1
724 SOLUTIONS INC.
Consolidated Balance Sheets
(In thousands of U.S. dollars)
December 31, 2000 and 1999
- - -------------------------------------------------------------------------------------------------------------------
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Assets
Current assets:
Cash and cash equivalents (note 4) $ 73,898 $ 65,287
Short-term investments (note 4) 92,726 -
Accounts receivable, net of allowance for
doubtful accounts of $56 (1999 - nil) 4,376 3,121
Prepaid expenses and other receivables 2,260 1,368
- - -------------------------------------------------------------------------------------------------------------------
Total current assets 173,260 69,776
Fixed assets (note 5) 11,297 2,366
Investments (note 6) 12,196 -
Intangible and other assets (note 7) 90,563 1,100
- - -------------------------------------------------------------------------------------------------------------------
Total assets $ 287,316 $ 73,242
- - -------------------------------------------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 2,203 $ 1,982
Accrued liabilities 18,198 2,967
Deferred revenue, net of deferred
stock-based compensation of nil (1999 - $248) 1,887 6,022
Deferred consideration (note 3(a)) 1,190 -
- - -------------------------------------------------------------------------------------------------------------------
Total current liabilities 23,478 10,971
Leasehold inducements 375 103
Deferred consideration, net of current portion (note 3(a)) 1,200 -
Shareholders' equity (note 8): Unlimited common shares authorized:
39,112,975 common shares issued and
outstanding (1999 - 29,402,426) 357,158 84,762
Deferred stock-based compensation (14,946) (5,909)
Accumulated deficit (79,949) (16,685)
- - -------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 262,263 62,168
- - -------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 287,316 $ 73,242
- - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-2
724 SOLUTIONS INC.
Consolidated Statements of Operations
(In thousands of U.S. dollars, except number of shares and per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Revenue:
Product:
Related parties (note 12) $ 11,363 $ 1,697 $ 1,678
Other 2,828 - -
Less stock-based compensation
related to software development
(notes 8 and 12) (248) (1,644) (1,395)
Services:
Related parties (note 12) 4,733 963 208
Other 2,570 206 -
- - -------------------------------------------------------------------------------------------------------------------
Net revenue 21,246 1,222 491
Operating expenses:
Cost of net revenue, including
stock-based compensation expense
of $653 (1999 - $19; 1998 - $21) 13,213 1,858 82
Research and development, including
stock-based compensation expense
of $3,748 (1999 - $97; 1998 - $107) 32,624 7,255 2,194
Sales and marketing, including
stock-based compensation expense
of $484 (1999 - $24; 1998 - $27) 13,015 2,598 405
General and administrative, including
stock-based compensation expense
of $1,530 (1999 - $25; 1998 - $26) 15,398 3,634 528
Depreciation 3,946 752 88
Amortization of intangible assets 18,843 - -
- - -------------------------------------------------------------------------------------------------------------------
Total operating expenses 97,039 16,097 3,297
- - -------------------------------------------------------------------------------------------------------------------
Loss from operations (75,793) (14,875) (2,806)
Interest income 11,582 1,044 107
Equity in loss of affiliate (943) - -
Dilution gain (note 6(a)) 1,890 - -
- - -------------------------------------------------------------------------------------------------------------------
Loss for the year $ (63,264) $ (13,831) $ (2,699)
- - -------------------------------------------------------------------------------------------------------------------
Basic and diluted loss per share (note 13) $ (1.71) $ (0.82) $ (0.47)
- - -------------------------------------------------------------------------------------------------------------------
Weighted average number of shares used
in computing basic and diluted loss per
share (in thousands) 36,963 16,887 5,784
- - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-3
724 SOLUTIONS INC.
Consolidated Statements of Shareholders' Equity
(In thousands of U.S. dollars, except number of shares and per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - -------------------------------------------------------------------------------------------------------------------
Deferred
Deferred stock-based
stock-based compensation
compensation related to
related software Total
Common shares to stock development Accumulated shareholders'
Number Amount options revenue deficit equity
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1997 4,000,000 $ 1,443 $ - $ - $ (155) $ 1,288
Loss for the year - - - - (2,699) (2,699)
Deferred stock-based
compensation - 414 (414) (3,287) - (3,287)
Amortization of deferred
stock-based compensation - - 181 - - 181
Allocation of deferred
stock-based compensation
to software development
revenue and deferred
revenue - - - 1,815 - 1,815
Issuance on exercise
of options 4,000,000 1,296 - - - 1,296
Issuance of common shares 3,428,570 4,599 - - - 4,599
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 11,428,570 7,752 (233) (1,472) (2,854) 3,193
Loss for the year - - - - (13,831) (13,831)
Deferred stock-based
compensation - 5,841 (5,841) - - -
Amortization of deferred
stock-based compensation - - 165 - - 165
Allocation of deferred
stock-based compensation
to software development
revenue and deferred revenue - - - 1,472 - 1,472
Issuance of common shares 17,973,856 71,169 - - - 71,169
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 29,402,426 84,762 (5,909) - (16,685) 62,168
Loss for the year - - - - (63,264) (63,264)
Deferred stock-based
compensation - 14,364 (14,364) - - -
Common share purchase
options - 4,786 - - - 4,786
Amortization of deferred
stock-based compensation - - 5,327 - - 5,327
Issuance on exercise of options 765,339 627 - - - 627
Issuance of common shares 8,945,210 252,619 - - - 252,619
- - -------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 39,112,975 $ 357,158 $ (14,946) $ - $ (79,949) $ 262,263
- - -------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
F-4
724 SOLUTIONS INC.
Consolidated Statements of Cash Flows
(In thousands of U.S. dollars)
Years ended December 31, 2000, 1999 and 1998
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Cash flows from (used in) operating activities:
Loss for the year $ (63,264) $ (13,831) $ (2,699)
Depreciation and amortization 22,789 752 88
Stock-based compensation 6,663 1,809 1,576
Other non-cash expenses 1,722 - -
Equity in loss of affiliate 943 - -
Dilution gain (1,890) - -
Foreign exchange loss 34 - -
Change in operating assets and liabilities:
Accounts receivable (1,255) (3,086) (34)
Prepaid expenses and other
receivables (632) (1,347) (21)
Accrued interest on short-term
investments (2,290) - -
Accounts payable 221 1,746 213
Accrued liabilities 14,638 2,504 453
Deferred revenue (4,486) 5,953 420
- - -------------------------------------------------------------------------------------------------------------------
Net cash flows used in operating activities (26,807) (5,500) (4)
Cash flows from (used in) financing activities:
Issuance of common shares for cash 165,555 71,169 2,608
Deferred charges - (1,100) -
- - -------------------------------------------------------------------------------------------------------------------
Net cash flows from financing activities 165,555 70,069 2,608
Cash flows from (used in) investing activities:
Purchase of capital assets (11,814) (2,258) (927)
Purchase of short-term investments (90,436) - -
Purchase of intangible and other assets (2,230) - -
Investment in Neomar Inc. (3,500) - -
Investment in Corillian Corporation (7,000) - -
Investment in Maptuit.com Inc. (750) - -
Acquisition of Yrless Internet Corporation (1,272) - -
Acquisition of Ezlogin.com, Inc. (1,651) - -
Acquisition of Spyonit.com, Inc. (2,065) - -
Acquisition costs of Tantau Software, Inc. (9,385) - -
- - -------------------------------------------------------------------------------------------------------------------
Net cash flows used in investing activities (130,103) (2,258) (927)
Foreign exchange loss on cash held in a
foreign currency (34) - -
- - -------------------------------------------------------------------------------------------------------------------
Net increase in cash and cash equivalents 8,611 62,311 1,677
Cash and cash equivalents, beginning of year 65,287 2,976 1,299
- - -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 73,898 $ 65,287 $ 2,976
- - -------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of cash flow information (note 15)
See accompanying notes to consolidated financial statements.
F-5
- - --------------------------------------------------------------------------------
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
1. ORGANIZATION OF THE COMPANY:
The Company was established in July 1997 to provide Internet
infrastructure solutions to financial institutions, enabling them to
offer personalized and secure mobile banking, investment and commerce
services across a wide range of internet-enabled wireless and consumer
electronic devices. The Company also offers end-to-end customer support
through its global application hosting and contact centre services.
2. SIGNIFICANT ACCOUNTING POLICIES:
These consolidated financial statements are stated in U.S. dollars,
except as otherwise noted. They have been prepared in accordance with
Canadian generally accepted accounting principles which, except as
disclosed in note 14, conform, in all material respects, with generally
accepted accounting principles in the United States.
(a) Consolidation:
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The results of operations
for acquisitions are included in these consolidated financial
statements from the date of acquisition. Intercompany transactions
and balances are eliminated on consolidation.
(b) Financial instruments:
Financial instruments consist of cash and cash equivalents,
short-term investments, accounts receivable, accounts payable and
accrued liabilities. The Company determines the fair values of its
financial instruments based on quoted market values or discounted
cash flow analyses. Unless otherwise indicated, the fair values of
financial assets and financial liabilities approximate their recorded
amounts.
F-6
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. Cash and
cash equivalents consist primarily of deposits with major commercial
banks and high-grade commercial paper, the maturities of which are
three months or less from the date of purchase. Short-term
investments consist of high-grade fixed income securities with
maturities of more than three months but less than one year. The
Company performs periodic credit evaluations of the financial
condition of its customers. Allowances are maintained for potential
credit losses consistent with the credit risk of specific customers.
(c) Revenue recognition:
The Company's revenue is primarily derived from (i) the licensing of
its products, (ii) application hosting services and (iii) the
provision of related services, including installation, integration,
training and maintenance and support. Product revenues are recognized
when a contract with a customer has been executed, delivery and
acceptance have occurred, the Company has no significant remaining
performance requirements and collection of the related receivables is
deemed probable by management. Application hosting services revenue
is recognized monthly as earned either on a fixed fee or variable
rate basis. Services revenues are recognized as the services are
performed. Maintenance and support revenues paid in advance are
non-refundable and are recognized rateably over the term of the
agreement, which is typically 12 months. Product and services
revenues that have been prepaid but do not yet qualify for
recognition as revenues under the Company's revenue recognition
policy are reflected as deferred revenue on the Company's balance
sheet.
(d) Research and development expenses:
Costs related to research, design and development of software
products are charged to research and development expenses as
incurred. Software development costs are capitalized beginning when a
product's technological feasibility has been established, which
generally occurs upon completion of a working model, and ending when
a product is available for general release to customers. All
subsequent costs are expensed as incurred. To date, completing a
working model of the Company's product and the general release of the
product have substantially coincided. As a result, the Company has
not capitalized any software development costs since such costs have
not been significant.
F-7
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(e) Investment tax credits:
The Company is entitled to Canadian federal and provincial investment
tax credits, which are earned as a percentage of eligible research
and development expenditures incurred in each taxation year.
Investment tax credits are accounted for as a reduction of the
related expenditure for items of a current nature and a reduction of
the related asset cost for items of a long-term nature, provided that
the Company has reasonable assurance that the tax credits will be
realized.
(f) Stock-based compensation:
The Company uses the intrinsic value method to account for
stock-based compensation. As such, deferred stock-based compensation
is recorded if, on the date of grant of the stock option or the
subscription right, the current market value of an underlying common
share exceeds the exercise price per share. Deferred stock-based
compensation is recognized as an expense over the vesting period of
the option or where the stock-based compensation is issued to a
customer in connection with the sale of products or services, as a
reduction of revenue over the term of the related revenue contract.
(g) Fixed assets:
Fixed assets are stated at cost, net of accumulated depreciation and
amortization, and are amortized over their estimated useful lives
except for leasehold improvements, which are amortized over the
lesser of their useful lives or the term of the related lease.
Expenditures for maintenance and repairs are charged to the statement
of operations as incurred. Depreciation and amortization are computed
using the straight-line method as follows:
- - --------------------------------------------------------------------------------
Computer equipment 3 years
Computer software 1 year
Office furniture and equipment 5 years
Leasehold improvements 5 years
- - --------------------------------------------------------------------------------
F-8
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
The Company regularly reviews the carrying values of its fixed assets
by comparing the carrying amount of the asset to the expected future
undiscounted cash flows to be generated by the asset. If the carrying
value exceeds the amount recoverable, a write-down equal to the
excess is charged to the statement of operations. To December 31,
2000, no write-down of fixed assets has been recorded.
(h) Investments:
Investments in affiliates are recorded on the equity method when the
Company's ownership interest in the affiliate is greater than 20% but
not more than 50% and where the Company can exercise significant
influence over the affiliate.
Long-term investments in affiliates in which the Company's ownership
interest is less than 20% and where the Company cannot exercise
significant influence over the affiliate are accounted for by the
cost method. Under this method of accounting, the investment is
recorded at cost and only written down in value if a decline in value
is other than temporary.
(i) Intangible and other assets:
Intangible and other assets are recorded at cost, and are amortized
on a straight-line basis at the following rates:
- - --------------------------------------------------------------------------------
Workforce Over 2 - 5 years
Acquired technology Over 1 - 5 years
Goodwill Over 2 - 5 years
- - --------------------------------------------------------------------------------
Goodwill represents the excess of the purchase price over the fair
value of net identifiable assets acquired in a business combination.
On an ongoing basis, management reviews the valuation and
amortization of goodwill, taking into consideration any events and
circumstances which might impair the fair value of the related asset.
Intangible and other assets are written down to fair value when
decreases in value are considered to be other than temporary, based
upon expected cash flows of the acquired business.
F-9
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(j) Deferred acquisition costs:
The Company commences the deferral of business acquisition costs when
the proposed transaction has been specifically identified and the
completion of the transaction is considered to be more likely than
not. The Company defers only those costs that are direct and
incremental costs incurred in connection with the proposed
transaction. The Company records deferred acquisition costs as
non-current assets. The Company expenses costs related to abandoned
proposed acquisitions in the period in which the Company determines
that the transaction is not likely to be completed.
(k) Currency translation:
Effective July 31, 1999, the U.S. dollar became the functional
currency of the Company. This change resulted from the increased
significance of U.S. dollar-denominated revenue and expenditures in
relation to the Company's Canadian dollar-denominated transactions.
In addition, the Company's recent issuances of common shares have
been primarily denominated in U.S. dollars. Exchange gains and losses
resulting from transactions denominated in currencies other than
U.S. dollars are included in the results of operations for the year.
Prior to July 31, 1999, the functional currency of the Company was
the Canadian dollar. Accordingly, monetary assets and liabilities of
the Company that were denominated in foreign currencies were
translated into Canadian dollars at the exchange rate prevailing at
the balance sheet date. Transactions included in operations were
translated at the average rate for the period. Exchange gains and
losses resulting from the translation of these amounts were reflected
in the statement of operations in the period in which they occurred.
In these consolidated financial statements, the Canadian dollar
amounts have been translated into U.S. dollars based on exchange
rates reflecting those in effect at the dates of the underlying
transactions.
The aggregate foreign currency gain (loss) included in determining
net income for the three years ended December 31, 2000 are as
follows: 2000 - $(938,000); 1999 - $105,000; 1998 - $52,000.
F-10
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED):
(l) Income taxes:
The Company provides for income taxes under the liability method.
Under the liability method, deferred tax assets and liabilities are
recognized for the future tax consequences attributable to
differences between the financial statement carrying value of
existing assets and liabilities and their respective tax basis and
operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in
income in the period that includes the enactment date.
(m) 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 the disclosure of contingencies at the date of the
financial statements and the reported amounts of revenue and expenses
during the reporting year. Actual results could differ from those
estimates.
3. ACQUISITIONS:
(a) YRLess Internet Corporation:
On March 17, 2000, the Company acquired all the outstanding common
shares of YRLess Internet Corporation ("YRLess"), an Internet message
gateway developer, for total cash consideration of approximately
$1,272,000, including acquisition costs of approximately $34,000. The
transaction has been accounted for by the purchase method, with the
results of operations included in these financial statements from the
date of acquisition. The cash consideration paid has been allocated
to the net identifiable assets acquired based on their fair values,
and the excess of the purchase price over the fair value of the net
assets acquired has been recorded as goodwill and is being amortized
over 36 months. Amortization expense of $378,000 has been recorded in
the year ended December 31, 2000.
F-11
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED):
In addition, the Company is committed to pay approximately $4,401,000
in common shares, or cash if the Company agrees to a cash payment,
over the next three years. The Company intends to settle this
liability in shares. As the purchase agreement contains certain terms
that may require the Company to settle the payments in cash, and
these terms are out of the control of the Company, the commitment is
being recorded as a liability under the heading deferred
consideration. Of the additional $4,401,000 in consideration,
$2,640,000 is contingent on certain former shareholders of Yrless
remaining employees of the Company. As such, this amount is being
recorded as stock-based compensation on a monthly basis as the
services are being performed. The deferred consideration represents
$1,761,000 in unconditional additional consideration and $629,000 in
accrued contingent consideration. To December 31, 2000, $1,108,000
related to the $4,401,000 commitment has been recorded as an expense.
(b) Ezlogin.com, Inc.:
On June 16, 2000, the Company acquired all of the outstanding shares
of Ezlogin.com, Inc. ("Ezlogin"), a privately held company
incorporated in California in the business of providing Internet
infrastructure tools for user-driven personalization. The transaction
has been accounted for by the purchase method, with the results of
operations included in these financial statements from the date of
acquisition. The purchase price of approximately $55.8 million,
before acquisition costs, was satisfied by the issuance of 1,003,594
common shares of the Company and the assumption of the existing
Ezlogin option plan which, if all options outstanding under the plan
are exercised, would result in the issuance of an additional 91,796
common shares of the Company. In addition, the Company incurred $3.0
million in costs related to the acquisition. The excess of the
purchase price over the fair value of the net identifiable assets of
Ezlogin at the date of acquisition of $56.9 million has been
allocated to goodwill and other intangible assets and is being
amortized over 24 months. Amortization expense of the resulting
goodwill and acquired intangible assets of $16.0 million has been
recorded in the year ended December 31, 2000.
F-12
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED):
(c) Spyonit.com, Inc.:
On September 12, 2000, the Company acquired all of the outstanding
shares of Spyonit.com, Inc. ("Spyonit"), a privately held company
incorporated in Delaware which develops software to monitor the
Internet and other content sources for items of interest to
end-users. The transaction has been accounted for by the purchase
method, with the results of operations included in these financial
statements from the date of acquisition. The purchase price of
approximately $40.0 million was satisfied by the issuance of
1,041,616 common shares of the Company and $2.0 million in cash. As
part of the terms of purchase, up to 137,062 common shares of the
total common shares issued are subject to repurchase at a minimum
value if the vendors do not remain employees of the Company through
September 2003. The Company has recorded deferred stock-based
compensation in the amount of $6.0 million related to the 137,062
common shares and is amortizing this amount as compensation expense
on a straight-line basis over three years. In addition, the Company
incurred $200,000 in costs related to the acquisition. The excess of
the purchase price over the fair value of the net tangible assets of
Spyonit at the date of acquisition of $39.9 million has been
allocated to goodwill and acquired intangible assets and is being
amortized over 60 months. Amortization expense of the resulting
goodwill and acquired intangible assets of $2.4 million has been
recorded in the year ended December 31, 2000.
F-13
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
3. ACQUISITIONS (CONTINUED):
The transactions are summarized as follows:
- - -------------------------------------------------------------------------------------------------------------------
YRLess Ezlogin Spyonit
- - -------------------------------------------------------------------------------------------------------------------
Net identifiable assets acquired at fair values:
Cash $ - $ 1,517 $ 66
Fixed assets 17 529 87
Other assets 43 272 38
Current liabilities (177) (486) (109)
Acquired technology - 2,290 7,290
Workforce - 560 280
Non-competition agreements - - 260
- - -------------------------------------------------------------------------------------------------------------------
Fair value of identifiable assets (117) 4,682 7,912
Goodwill 1,389 54,103 32,063
- - -------------------------------------------------------------------------------------------------------------------
$ 1,272 $ 58,785 $ 39,975
- - -------------------------------------------------------------------------------------------------------------------
Purchase price:
Cash $ 1,238 $ - $ 2,000
Common shares - 51,186 37,775
Fair value of options - 4,599 -
Acquisition expenses 34 3,000 200
- - -------------------------------------------------------------------------------------------------------------------
$ 1,272 $ 58,785 $ 39,975
- - -------------------------------------------------------------------------------------------------------------------
The table below reflects unaudited pro forma consolidated results of the
Company, YRLess, Ezlogin and Spyonit as if the acquisitions had taken
place on January 1, 2000 and January 1, 1999, respectively.
- - -------------------------------------------------------------------------------------------------------------------
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Revenue $ 21,267 $ 1,536
Loss for the year (86,465) (43,738)
Loss for the year per common share (2.27) (2.44)
- - -------------------------------------------------------------------------------------------------------------------
4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
Cash consists of deposits with major financial institutions. Cash
equivalents consist of short-term deposits and high-grade commercial
paper with an original term to maturity of three months or less at the
date of purchase.
F-14
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS (CONTINUED):
All short-term debt securities are classified as held-to-maturity because
the Company has the positive intent and ability to hold the securities to
maturity. Held-to-maturity securities are stated at amortized cost,
adjusted for amortization of premiums and accretion discounts to
maturity. The Company owns no short-term investments that are considered
to be trading securities nor available-for-sale securities.
The components of cash and cash equivalents and short-term investments
are summarized as follows:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents:
Cash $ 1,297 $ 3,264
Cash equivalents:
Term deposits - 52,000
Bankers' acceptance - 6,000
Government T-Bills 32,086 4,023
Corporate bonds 33,374 -
Corporate commercial paper 7,141 -
- - -------------------------------------------------------------------------------------------------------------------
$ 73,898 $ 65,287
- - -------------------------------------------------------------------------------------------------------------------
Short-term investments:
Held-to-maturity:
Corporate commercial paper $ 90,546 $ -
Government term deposits 2,180 -
- - -------------------------------------------------------------------------------------------------------------------
$ 92,726 $ -
- - -------------------------------------------------------------------------------------------------------------------
5. FIXED ASSETS:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Computer equipment $ 7,770 $ 1,499
Computer software 2,602 500
Office furniture and equipment 2,142 453
Leasehold improvements 3,150 754
- - -------------------------------------------------------------------------------------------------------------------
15,664 3,206
Less accumulated depreciation and amortization 4,367 840
- - -------------------------------------------------------------------------------------------------------------------
$ 11,297 $ 2,366
- - -------------------------------------------------------------------------------------------------------------------
F-15
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
6. INVESTMENTS:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Investments, at cost:
Corillian Corporation $ 7,000 $ -
Neomar Inc. 3,500 -
Investments, at equity:
Maptuit.com Inc. 1,696 -
- - -------------------------------------------------------------------------------------------------------------------
$ 12,196 $ -
- - -------------------------------------------------------------------------------------------------------------------
(a) On March 8, 2000, the Company purchased a one-third interest in
Maptuit.com Inc. ("Maptuit") for cash consideration of $750,000.
Maptuit is a privately held Canadian company in the business of
developing directional mapping software and providing online
directional services, mapping services and spatial relational search
services to its customers.
The investment in Maptuit has been accounted for using the equity
method. Under the equity method, the original cost of the investment
is adjusted for the Company's share of post-acquisition income or
losses, less dividends. The excess of the cost of the shares of
Maptuit over the Company's proportionate interest in the net book
value of Maptuit's net assets on the date of acquisition amounted to
approximately $677,000. This excess is being amortized on a
straight-line basis over three years.
On September 27, 2000 and December 6, 2000, Maptuit completed two
separate private placements through the issuance of convertible
preferred shares for aggregate proceeds of $8.0 million. The Company
recorded a dilution gain of $1,890,000, which reduced its investment
from a 33.3% interest to a 24.88% interest.
(b) In April 2000, the Company acquired 875,000 common shares (then
representing approximately a 2.9% interest) for $7.0 million in cash
in Corillian Corporation ("Corillian"), a provider of eFinance
solutions for the Internet. The market value of the Corillian shares,
based on the publicly quoted price, on December 31, 2000, is $10.5
million. In addition, the Company announced its intention to work
with Corillian to provide financial services providers with a
seamless wired and wireless Internet banking services solution based
on the 724 Solutions Financial Services Platform in combination with
Corillian's eFinance Voyager platform. Corillian is a U.S. publicly
traded company on the NASDAQ exchange trading under the symbol CORI.
The investment is accounted for using the cost method of accounting.
F-16
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
6. INVESTMENTS (CONTINUED):
(c) In June 2000, the Company acquired a 9.5% interest (December 31, 2000
- 5.98%) in Neomar Inc. ("Neomar") for $3.5 million in cash. Neomar
is a privately held company in the business of providing Wireless
Application Protocol ("WAP")-based services for personal digital
assistants. In addition, the Company has entered into a license
agreement with Neomar to license the WAP solution and incorporate it
into the Company's Financial Services Platform. The investment is
accounted for using the cost method of accounting.
7. INTANGIBLE AND OTHER ASSETS:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Goodwill $ 87,387 $ -
Deferred acquisition costs 9,385 -
Acquired technology and other assets 12,634 1,100
- - -------------------------------------------------------------------------------------------------------------------
109,406 1,100
Less accumulated amortization 18,843 -
- - -------------------------------------------------------------------------------------------------------------------
$ 90,563 $ 1,100
- - -------------------------------------------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY:
(a) Common share issuances:
1997:
In September 1997, the Company issued 3,999,800 common shares and
granted an option to acquire an additional 4,000,000 common shares to
the founder of the Company for gross proceeds of Cdn. $1,999,900. The
option was exercisable at the holder's option at a price of $0.50 per
common share. The option was exercised in October 1998.
F-17
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY (CONTINUED):
1998:
In April 1998, the Company issued to Bank of Montreal ("BMO")
1,000,000 common shares for gross proceeds of Cdn. $1,000,000 and
granted BMO an option to subscribe for 2,428,570 additional common
shares for Cdn. $1,000,000, exercisable upon BMO's extension of its
technology licensing agreement with the Company for a second year,
and payment of the second year's technology licensing fee. In October
1998, following BMO's extension of the technology license agreement,
BMO exercised the option to subscribe for 2,428,570 common shares for
Cdn. $1,000,000. On the date of exercise, the fair value of the
2,428,570 common shares was determined to be Cdn. $6,071,425,
resulting in a deferred stock-based compensation charge of Cdn.
$5,071,425 (U.S. $3,286,943).
1999:
In June 1999, the Company issued 541,790 common shares to Bank of
America ("BA") at a price of $3.69 per share for gross proceeds of
$2,000,000 and BA committed to subscribe for 541,790 additional
common shares for $2,000,000. BA subscribed for the 541,790
additional common shares in October 1999 for gross proceeds of
$2,000,000.
In August 1999, the Company issued to Citicorp Strategic Technology
Corporation 950,000 common shares at a price of $3.83 per share for
gross proceeds of $3,633,750. Citicorp Strategic Technology
Corporation also contracted at this time to subscribe for 5,450,000
additional common shares at a price of $3.83 per share upon the
satisfaction of certain conditions, including the receipt of
applicable regulatory approvals. The option was exercised in October
1999 for gross proceeds of $20,846,250.
In August 1999, the Company granted BA an option to subscribe for
2,116,420 common shares at a price of $3.90 per share. The option was
exercised in October 1999 for cash proceeds of $8,243,446.
In August 1999, the Company issued 6,400,000 common shares to Sonera
Corporation for a price of $3.83 per share for gross proceeds of
$24,480,000.
F-18
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY (CONTINUED):
In October 1999, the Company completed three private placements for a
total issuance of 1,973,856 common shares at prices of $3.83 and
$7.50 per share and a warrant in respect of 666,668 common shares
exercisable at a price of $7.50 per share for total proceeds of
$10,000,000. This warrant expired unexercised on January 14, 2000.
On December 30, 1999, all of the outstanding and reserved common
shares were split on a basis of two-for-one. The Company's share
capital and earnings (loss) per share have been restated on a
retroactive basis to give effect to this share split.
2000:
In February 2000, the Company issued 6,900,000 common shares through
an initial public offering at $26.00 per common share on the NASDAQ
National Market and The Toronto Stock Exchange for net proceeds of
approximately $164,200,000.
During 2000, in connection with the acquisitions of Ezlogin and
Spyonit, the Company issued an aggregate of 2,045,210 common shares
with an ascribed aggregate value of $89,000,000 (note 3).
(b) Stock option plans:
The Company currently has a Canadian stock option plan, a U.S. stock
option plan and a new 2000 stock option plan (the "Plans"), each of
which is intended to attract, retain and motivate employees,
officers, directors and consultants. The stock option committee, in
conjunction with the compensation committee, determines, among other
things, the eligibility of individuals to participate in the Plans
and the term, vesting periods and the exercise price of options
granted under the Plans. The Company has reserved an aggregate of
3,200,000 common shares for issuance under the Canadian and U.S.
plans, and an additional 2,000,000 common shares under the new 2000
plan. In April 2000, the Board of Directors approved an increase in
the maximum number of shares issuable under the 2000 Plan to
3,800,000 common shares, which was ratified by the Company's
shareholders at the meeting of shareholders held May 31, 2000.
F-19
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY (CONTINUED):
The Canadian stock option plan was adopted in September 1997. All
options granted under the plan have a maximum term of 10 years and
have an exercise price per share of no less than the fair market
value of the common shares on the date of the option grant as
determined by the Board of Directors or duly authorized committee as
at the time of the grant. If an optionee's employment is terminated
without cause, the vested portion of any grant will remain
exercisable until its expiration date subject to compliance with
certain non-competition and non-solicitation obligations. In the
event of termination for cause, the vested portion of any grant will
remain exercisable for a period of 30 days after the date of
termination. Unvested options will expire on termination, except for
such portion thereof which would have vested within six months or
within the required statutory notice period following a termination
without cause, whichever is earlier, or within one year if
termination is due to death or disability. If a change of control of
the Company occurs, all options become immediately vested and
exercisable.
The U.S. stock option plan was adopted in October 1999. The plan
provides for the grant of both incentive stock options and
non-qualified stock options. Incentive stock options granted under
the plan have a maximum term of 10 years, or five years in the case
of incentive stock options granted to an employee who owns common
shares having more than 10% of the voting power of the Company. The
exercise price of incentive stock options is the fair market value of
common shares on the date of the grant, or 110% of the fair market
value in the case of an incentive stock option granted to an employee
who owns common shares having more than 10% of the voting power of
the Company. Non-qualified stock options granted under the plan have
a maximum term of 10 years and an exercise price of no less than 85%
of the fair market value of the common shares on the date of the
grant, or 110% of the fair market value for those employees who own
common shares representing more than 10% of the voting power.
Restricted shares granted under the plan have a maximum term of 10
years and an exercise price of no less than 85% of the fair market
value of the common shares on the date of the grant, or 100% of the
fair market value in the case of restricted shares granted to an
employee who owns common shares having more than 10% of the voting
power.
Under the Plans, the Company has the right to repurchase options from
optionees after termination of employment on certain terms.
F-20
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY (CONTINUED):
The new 2000 stock option plan was adopted in December 1999 and
replaced, on a prospective basis, the Canadian and U.S. stock option
plans. The stock options granted under the Canadian and U.S. stock
option plans prior to the date of completion of the IPO, continued to
be effective and governed by the terms of the plans under which they
were granted. The options granted under the 2000 plan have a maximum
term of 10 years and an exercise price no less than the fair market
value of the common shares on the date of the grant as determined by
the Board of Directors or duly authorized committee at the date of
the grant. Options held by any person under the new plan, together
with any other options granted to that person may not at any time
exceed 5% of the aggregate number of common shares outstanding. If a
change of control of the Company occurs, all options granted under
this plan will become immediately vested and exercisable.
On June 16, 2000, the Company assumed the Ezlogin stock option plan
in connection with its acquisition of Ezlogin. In aggregate, the
Company assumed options to issue common shares of the Company
totalling 91,796 to the Ezlogin option holders. The Company does not
plan to issue any additional options under the Ezlogin stock option
plan in the future. Instead, any of the former directors, officers,
employees and consultants of Ezlogin will be issued options under the
Company's 2000 stock option plan.
The Ezlogin plan provided for the grant of both incentive stock
options and non-qualified stock options. Incentive stock options
granted under the plan have a maximum term of 10 years, or five years
in the case of incentive stock options granted to an employee who
owned common shares having more than 10% of the voting power of
Ezlogin. In the event of termination and to the extent unexercised
and exercisable, the option will remain exercisable for a period of
three months after the date of termination. If termination is due to
death or disability, the right to exercise the option will expire
within one year.
F-21
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
8. SHAREHOLDERS' EQUITY (CONTINUED):
A summary of the status of the Company's options under the Plans
as at December 31, 2000 and 1999 is as follows:
2000:
- - -------------------------------------------------------------------------------------------------------------------
Weighted
average
remaining Number of
Number of contractual options
Exercise price ranges options life (years) exercisable
- - -------------------------------------------------------------------------------------------------------------------
$ 0.34 - 20.00 2,180,354 8.0 1,250,251
$ 29.82 - 36.78 449,055 9.8 1,002
$ 40.53 - 58.38 1,020,366 9.5 566
$ 64.03 - 76.45 38,597 9.3 672
$ 83.07 - 90.89 158,200 9.3 12,000
$ 105.95 - 155.98 68,900 9.2 -
$ 163.87 - 207.82 58,050 9.2 -
- - -------------------------------------------------------------------------------------------------------------------
3,973,522 8.7 1,264,491
- - -------------------------------------------------------------------------------------------------------------------
The following table summarizes the continuity of options issued under
the Plans:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
average average average
Number of exercise Number of exercise Number of exercise
options price options price options price
- - -------------------------------------------------------------------------------------------------------------------
Outstanding,
beginning of year 2,876,930 $ 2.81 1,865,000 $ 0.49 400,000 $ 0.35
Granted 2,238,836 50.84 1,071,196 8.44 1,465,000 0.54
Exercised (765,339) 0.81 - - - -
Cancelled (376,905) 40.76 (59,266) 3.42 - -
- - -------------------------------------------------------------------------------------------------------------------
Outstanding, end
of year 3,973,522 26.65 2,876,930 2.81 1,865,000 0.49
- - -------------------------------------------------------------------------------------------------------------------
Options exercisable,
end of year 1,264,491 $ 3.15 1,237,926 $ 0.72 625,166 $ 0.34
- - -------------------------------------------------------------------------------------------------------------------
The Company recorded deferred stock-based compensation relating to
options issued under the Company's Plans amounting to $14,364,000 for
the year ended December 31, 2000 (1999 - $5,841,000; 1998 -
$414,000). Amortization of deferred stock-based compensation amounted
to $5,327,196 for the year ended December 31, 2000 (1999 - $165,000;
1998 - $181,000).
F-22
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
9. INCOME TAXES:
The provision for income taxes differs from the amount computed by
applying the statutory income tax rate to net income (loss) before income
taxes. The sources and tax effects of the differences are as follows:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Basic rate applied to loss before
provision for income taxes $ (27,156) $ (6,168) $ (1,201)
Adjustments resulting from:
Scientific research expenses not
deducted for tax 1,320 2,285 333
Foreign losses affected at lower rates 6,935 991 -
Stock-based compensation not
deductible for tax 2,815 789 701
Amortization of intangibles 7,962 - -
Share issue costs (1,208) - -
Other 1,563 218 167
(7,769) (1,885) -
- - -------------------------------------------------------------------------------------------------------------------
Unrecognized benefit of net operating
losses carried forward 7,769 1,885 -
- - -------------------------------------------------------------------------------------------------------------------
Income taxes $ - $ - $ -
- - -------------------------------------------------------------------------------------------------------------------
Significant components of the Company's future tax assets are as follows:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Research and development expenses deferred
for income tax purposes $ 4,387 $ 3,067
Net operating losses carried forward 11,427 1,909
Share issue costs 5,383 -
Capital assets 1,326 -
- - -------------------------------------------------------------------------------------------------------------------
Future tax asset 22,523 4,976
Less:
Future tax liability related to capital assets - 420
Future tax liability related to acquired technology 3,781 -
Valuation allowance 18,742 4,556
- - -------------------------------------------------------------------------------------------------------------------
$ - $ -
- - -------------------------------------------------------------------------------------------------------------------
F-23
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
9. INCOME TAXES (CONTINUED):
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future
tax assets will not be realized. The ultimate realization of future tax
assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible.
Management considers projected future taxable income, uncertainties
related to the industry in which the Company operates, and tax planning
strategies in making this assessment. In order to fully realize the
future tax assets, the Company will need to generate future taxable
income of approximately $71 million prior to the expiration of the net
operating losses carried forward in the years 2003 to 2019. Due to the
uncertainties related to the industry in which the Company operates, the
tax benefit of the above carried forward amounts have been completely
offset by a valuation allowance.
10. LEASE COMMITMENTS:
Future minimum lease payments under non-cancellable operating leases for
premises and equipment at December 31, 2000 are as follows:
- - -------------------------------------------------------------------------------
2001 $ 4,558
2002 3,885
2003 3,479
2004 3,100
2005 and thereafter 1,544
- - --------------------------------------------------------------------------------
$ 16,566
- - --------------------------------------------------------------------------------
Rent expense for the year ended December 31, 2000 was $3,733,000 (1999 -
$590,000; 1998 - $107,000). The Company is also responsible for certain
common area costs at its various leased premises.
F-24
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
11. SEGMENTED INFORMATION:
The Company operates in a single reportable operating segment, that is,
the design and delivery of an Internet infrastructure platform that
enables financial institutions and other customers to deliver financial
information and services to a range of internet-enabled devices. The
single reportable operating segment derives its revenue from the sale of
software and related services. Information about the Company's
geographical net revenues and assets is set forth below:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Net revenue by geographic locations:
Other North America $ 16,871 $ 1,135 $ -
Canada 4,038 87 491
International 337 - -
- - -------------------------------------------------------------------------------------------------------------------
$ 21,246 $ 1,222 $ 491
- - -------------------------------------------------------------------------------------------------------------------
- - -------------------------------------------------------------------------------------------------------------------
2000 1999
- - -------------------------------------------------------------------------------------------------------------------
Intangible Intangible
Fixed and other Fixed and other
assets assets assets assets
- - -------------------------------------------------------------------------------------------------------------------
United States $ 1,383 $ 87,913 $ 41 $ 1,100
Canada 9,537 2,650 2,325 -
International 376 - - -
- - -------------------------------------------------------------------------------------------------------------------
$ 11,296 $ 90,563 $ 2,366 $ 1,100
- - -------------------------------------------------------------------------------------------------------------------
For the year ended December 31, 2000, four customers accounted for 43%,
18%, 15% and 14% of revenue, respectively. For the year ended December
31, 1999, three customers accounted for 100% of revenue. For the year
ended December 31, 1998, one customer accounted for 100% of revenue.
At December 31, 2000, three customers accounted for 41%, 25% and 16% of
the accounts receivable balance. At December 31, 1999, three customers
accounted for 100% of the accounts receivable balance.
F-25
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS:
(a) On April 30, 1998, the Company entered into a share subscription
agreement and a technology license agreement with Bank of Montreal
("BMO"). Pursuant to the share subscription agreement, on April 30,
1998, BMO subscribed for 1,000,000 of the Company's common shares for
Cdn. $1,000,000 and received an option to subscribe for 2,428,570
additional common shares for Cdn. $1,000,000, exercisable in the
event that BMO extended its technology license agreement for a second
year and paid the second year's technology licensing fee. In October
1998, upon exercising its right to extend the technology license
agreement, BMO exercised the option and subscribed for 2,428,570
shares for Cdn. $1,000,000. On the date of exercise, the fair value
of the 2,428,570 common shares was determined to be Cdn. $6,071,425,
resulting in a stock-based compensation charge related to software
development revenue of Cdn. $5,071,425 (U.S. $3,286,943). The
stock-based compensation is being attributed to the software
development revenue over the term of the technology license agreement
in proportion to the revenue recognized in the first and second years
under the agreement. The excess of the stock-based compensation over
the accumulated allocation to software development revenue has been
netted against the related deferred revenue, with the balance being
recorded as deferred stock-based compensation in shareholders'
equity. As of December 31, 2000, the deferred stock-based
compensation has been fully expensed. As at December 31, 2000 and
1999, BMO owned approximately 8.8% and 11.7%, respectively, of the
Company's outstanding common shares.
The BMO technology license agreement had an initial term of 10 months
commencing on April 30, 1998. BMO has extended the term of the
technology license for two additional years such that the current
renewal period ends on March 1, 2001. BMO has notified the Company
that it intends to renew the agreement for an additional year. The
technology license agreement provides for fixed annual license fees
of Cdn. $3,000,000 in exchange for a worldwide perpetual license for
all technology existing at the commencement of the license period and
all technology developed during each term of the agreement. The
annual license fees in the first two technology licensing terms of
the agreement were subject to refund to the extent that the Company
failed to meet certain spending commitments. As at December 31, 1999,
all spending commitments had been satisfied. Initially BMO had a
right to be the exclusive Canadian financial institution to which the
Company would license its technology. In November 1998, BMO agreed to
waive this right in exchange for the right to a payment, if any,
equal to a percentage of licence fees paid by other Canadian
financial institutions to license the Company's technology up to a
maximum payment of Cdn. $700,000. To December 31, 2000, no amounts
have been subject to payment under this provision. The Company has
recognized the annual license fees of the technology license on a
straight-line basis over the term of the license.
F-26
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS (CONTINUED):
On December 29, 2000, the Company entered into an agreement with BMO
that amended certain terms of the April 30, 1998 technology license
agreement. The amended grants BMO the right to act as a service
bureau, including sublicensing and hosting, in relation to the
Company's financial service platform, comprising the banking and
brokerage modules as well as the LiveClips aggregation and Spyonit
alerts products. BMO is restricted to providing these services to
financial institutions carrying on business anywhere in North America
and having a total asset value of less than $20 billion. In return,
BMO has agreed to pay a monthly royalty fee based on the number of
end users. The Company has recognized royalty revenue in the amount
of $1,300,000 related to a non-refundable royalty prepayment. In
addition, BMO shall pay the Company for maintenance fees based on a
fixed percentage of royalties related to activated end users.
(b) On June 1, 1999, the Company entered into a subscription agreement
with Bank of America, NA ("BA") and a technology licensing agreement
with an affiliate of BA. Pursuant to the subscription agreement, BA
subscribed for 541,790 common shares of the Company for $2,000,000.
The subscription agreement also stipulated that BA would
unconditionally subscribe for an additional 541,790 common shares on
February 1, 2000 for $2,000,000. BA subscribed for the 541,790
additional common shares in October 1999 as a result of the Company
attracting additional equity investors at that time. On August 2,
1999, an Option and Subscription Amending Agreement was entered into
which granted BA the option to acquire a further 2,116,420 common
shares for an aggregate subscription price of $8,243,456. BA
exercised this option in October 1999.
The technology license agreement provides for a fixed license fee to
be paid to the Company over a 20-month period commencing on June 1,
1999, in exchange for the delivery of specific products over the term
of the agreement and for a license of all technology developed during
the license period. The license fee has been recognized over the term
of the contract commencing upon the delivery of the first product. As
at December 31, 2000, the Company has delivered all the software
products specified in the agreement. BA has an option to extend this
agreement for consecutive one-year terms at the end of the 20-month
term. The Company has also contracted with BA to provide consulting
fees at commercial rates. As at December 31, 2000 and 1999, BA owned
approximately 8.2% and 10.9%, respectively, of the Company's
outstanding common shares.
F-27
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS (CONTINUED):
(c) On December 29, 1999, the Company entered into a master technology
license agreement with Citicorp Strategic Technology Corporation
("Citibank"). The initial term of the master agreement is five years.
The agreement enables Citigroup and its affiliates to license the
technology by entering into separate agreements which will
incorporate the terms of the master agreement. During 2000, the
Company has entered into an agreement under the master technology
license agreement with a Citigroup affiliate in Asia. As at December
31, 2000 and December 31, 1999, Citibank owned approximately 7.7% and
21.8%, respectively, of the Company's outstanding common shares.
Under the terms of the master agreement, Citibank is required to pay
to the Company a specified minimum amount during each year that the
master agreement is in effect, whether or not Citigroup or any
Citigroup affiliates actually enter into agreements under the master
agreement to license the technology. The required payments may
increase each year of the agreement, up to specified maximum levels,
based on specified targets relating to the number of worldwide
Citigroup customers that use services based upon the Company's
financial services platform, the number of Citigroup affiliates that
license the technology and the amount of revenue generated under this
agreement. The specified minimum amount received in respect of the
first year of the contract has been recognized as revenue in the year
ended December 31, 2000 and is being recognized rateably over the
first year of the contract.
The Company agreed to purchase from Citicorp Strategic Technology
Corporation a range of consulting services that are described in the
master agreement. These services will include consulting services
relating to the promotion of the technology for adoption by
Citigroup's affiliates. The Company will pay for these services a fee
that will be calculated based upon the number of Citigroup affiliates
that enter into agreements to license the technology during the first
year of the master agreement, which ended at the end of December 31,
2000. In the year ended December 31, 2000, the Company paid
approximately $400,000 for these services.
These technology license agreements are extendible annually at the
option of the licensees. In addition, the Company has agreed to
provide related support and maintenance services to the licensees at
commercial rates.
F-28
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
12. RELATED PARTY TRANSACTIONS (CONTINUED):
The following table sets out the balances and transactions with the
licensees relating to these agreements:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Related party balances:
Accounts receivable, net of allowance
for doubtful accounts $ 2,904 $ 2,051 $ 34
Deferred revenue, net of deferred
stock-based compensation of nil
(1999 - $248) 1,400 4,125 -
- - -------------------------------------------------------------------------------------------------------------------
Related party transactions:
Net revenue:
Product $ 11,115 $ 53 $ 283
Services 4,733 963 208
- - -------------------------------------------------------------------------------------------------------------------
(d) In August 1999, the Company entered into a two-year consulting
agreement with a director of the Company providing for a monthly
consulting fee of $34,000, together with options, granted under the
option plan, to purchase 48,000 common shares of the Company at an
exercise price of $3.75 per share. This consulting agreement was
cancelled, with the last payment being made in August 2000.
13. EARNINGS (LOSS) PER SHARE:
Due to the net loss for all periods presented, all potential common
shares outstanding are considered anti-dilutive and are excluded from the
calculation of diluted loss per share. Common shares issuable on the
exercise of common shares that could potentially dilute basic loss per
share in the future that were not included in the computation of diluted
loss per share, because to do so would have been anti-dilutive for the
year ended December 31, 2000 and 1999, amounted to 2,999,473 and
2,117,951, respectively.
F-29
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
14. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES:
The financial statements of the Company have been prepared in accordance
with generally accepted accounting principles ("GAAP") as applied in
Canada, which conform in all material respects with generally accepted
accounting principles in the United States, except as noted below.
Comprehensive income:
In June 1997, the Financial Accounting Standards Board issued
SFAS No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which
establishes standards for reporting and presentation of comprehensive
income. This standard defines comprehensive income as the changes in
equity of an enterprise, except those resulting from stockholder
transactions.
As described in note 6(b), the Company has an investment in a publicly
traded entity which the Company has classified as an available-for-sale
security. Under U.S. GAAP, the Company would record the investment at
fair value and record the unrealized gain as a separate component of
stockholders' equity. This would result in investments and stockholders'
equity on the balance sheet being increased by $3.5 million and a
separate caption in stockholders' equity entitled "accumulated other
comprehensive income" with a balance of $3.5 million. Comprehensive loss
for the year ended December 31, 2000 would be $59.8 million. For all
other periods presented, comprehensive loss would be the same as the loss
for the period presented.
Supplemental disclosures required under U.S. GAAP include the following:
(a) Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities"
(SFAS No. 133). SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded
on the balance sheet as either an asset or liability measured at
its fair value. SFAS No. 133, as recently amended, is effective
for fiscal years beginning after June 15, 2000. To date, the
Company has not entered into derivative instruments. Management
believes the adoption of SFAS No. 133 will not have a material effect
on the Company's financial position or results of operations.
F-30
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
14. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES (CONTINUED):
(b) SFAS 123 Pro Forma Information:
The Company has elected to apply the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation, for the
disclosure of compensation costs related to employee stock options
valued at fair value. For companies electing not to adopt the fair
value measurement for stock-based compensation, the pronouncement
requires the disclosure of pro forma net income and net income (loss)
per share information as if the Company had accounted for its stock
options issued from inception on July 28, 1997 under the fair value
method. A summary of the required pro forma disclosure of the impact
on the statement of operations is presented in the table below:
- - -------------------------------------------------------------------------------------------------------------------
2000 1999 1998
- - -------------------------------------------------------------------------------------------------------------------
Loss for the year - U.S. GAAP $ (63,264) $ (13,831) $ (2,699)
Compensation expense related
to the fair value of stock options (17,064) (362) (23)
- - -------------------------------------------------------------------------------------------------------------------
Pro forma loss for the year $ (80,328) $ (14,193) $ (2,722)
- - -------------------------------------------------------------------------------------------------------------------
Pro forma loss for the year per share $ (2.17) $ (0.84) $ (0.47)
- - -------------------------------------------------------------------------------------------------------------------
The fair value of each option granted prior to the Company becoming a
publicly traded company has been estimated at the date of grant using
the minimum value method and by applying the following assumptions:
weighted average risk-free interest rate of 4.9% for the year ended
December 31, 2000 (1999 - 4.9%; 1998 - 5.1%), dividend yield of 0%
and an expected life of the options of five years.
The fair value of each option granted between the date the Company
became a publicly traded company and December 31, 2000 has been
estimated at the date of grant using the Black-Scholes option pricing
model with the following assumptions used: dividend yield of zero,
expected volatility of 145%, risk-free rate of return of 6.41% and an
expected life of the option of five years.
The Company has assumed no forfeiture rate, as adjustments for actual
forfeitures are made in the year they occur. The weighted average
grant date fair value of options issued in the year ended December
31, 2000 was $78.28 (1999 - $3.26; 1998 - $0.13).
F-31
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
14. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES (CONTINUED):
(c) Other disclosures:
U.S. GAAP requires the disclosure of accrued liabilities that exceed
5% of current liabilities.
Included in accrued liabilities at December 31, 2000, are accrued
compensation expenses of $3.3 million, accrued acquisition costs of
$9.0 million and consulting fees of $2.1 million. At December 31,
1999, there were no individual amounts that accounted for more than
5% of current liabilities.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The following presents the supplemental disclosure of cash flow
information for the year ended December 31, 2000. Non-cash activities in
the other periods presented in these financial statements are not
significant.
- - -------------------------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing and investing activities:
Liabilities assumed in business acquisitions $ 772
Fair value of assets assumed on business
acquisitions less cash acquired 11,666
- - -------------------------------------------------------------------------------------------------------------------
F-32
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
16. SUBSEQUENT EVENTS:
On November 29, 2000, the Company entered into an agreement to acquire
all of the issued and outstanding shares of Tantau Software, Inc. in
exchange for the issuance of common shares of the Company. The
acquisition closed on January 16, 2001. Under the terms of the agreement,
the Company acquired all of the outstanding common shares and common
share purchase options in exchange for the issuance of 17,091,679 common
shares and 2,039,245 replacement common share purchase options.
Of the 17,091,679 common shares issued, 14,248,346 common shares are
fully vested shares with the balance of 2,843,333 subject to future
vesting. The value of the fully vested shares has been recorded as a
component of the purchase consideration. The value of the unvested shares
has been allocated between purchase consideration and deferred
stock-based compensation. The Company has determined the amount
attributable to deferred stock-based compensation as the proportionate
share of the intrinsic value of the unvested shares pertaining to the
service period subsequent to the date of acquisition. The amount
attributable to purchase consideration represents the fair value of the
unvested shares as at the purchase date less the amount recorded as
deferred stock-based compensation related to these unvested shares.
The value of the 2,039,245 replacement options issued on acquisition has
been allocated between purchase consideration and deferred stock-based
compensation. The Company has determined the amount attributable to
deferred stock-based compensation as the proportionate share of the
intrinsic value of the stock option pertaining to the service period
subsequent to the date of acquisition. The amount attributable to
purchase consideration represents the fair value of the stock option as
at the purchase date less the amount recorded as deferred stock-based
compensation related to the stock options.
The purchase price has been determined to be approximately $407,734,000
including acquisition costs of approximately $9,385,000. The deferred
stock-based compensation related to the unvested shares and replacement
stock options has been determined to be approximately $53 million.
F-33
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
16. SUBSEQUENT EVENTS (CONTINUED):
The acquisition will be accounted for by the purchase method with the
fair value of the consideration paid being allocated to the fair value of
the identifiable assets and liabilities assumed on the closing date. A
preliminary acquisition equation based on the estimated fair values of
the identifiable assets and liabilities as at December 31, 2000 has been
set out below. There are no significant accounting differences between
Canadian and U.S. GAAP in the accounting for the acquisition. The Company
has not yet finalized its assessment of the allocation between intangible
assets and goodwill.
- - -------------------------------------------------------------------------------------------------------------------
Fair value
- - -------------------------------------------------------------------------------------------------------------------
Net assets acquired:
Cash and cash equivalents $ 33,270
Accounts receivable 5,498
Prepaid expenses and other receivables 398
Investment in Accrue Software Inc. 830
Capital assets 1,835
Intangible and other assets 205
Accounts payable (1,700)
Accrued liabilities (2,878)
Deferred revenue (665)
Notes payable (5,000)
- - -------------------------------------------------------------------------------------------------------------------
31,793
Allocation of the net purchase price:
Goodwill and other intangibles 322,661
Deferred stock-based compensation 53,280
- - -------------------------------------------------------------------------------------------------------------------
375,941
- - -------------------------------------------------------------------------------------------------------------------
$ 407,734
- - -------------------------------------------------------------------------------------------------------------------
Consideration paid:
Share and stock option consideration $ 398,349
Costs of acquisition 9,385
- - -------------------------------------------------------------------------------------------------------------------
$ 407,734
- - -------------------------------------------------------------------------------------------------------------------
F-34
724 SOLUTIONS INC.
Notes to Consolidated Financial Statements (continued)
(Tabular amounts in thousands of U.S. dollars, except per share amounts)
Years ended December 31, 2000, 1999 and 1998
- - --------------------------------------------------------------------------------
16. SUBSEQUENT EVENTS (CONTINUED):
The table below reflects unaudited pro forma consolidated results of the
Company and Tantau as if the acquisition had taken place on January 1,
2000. The pro form results assume that the allocation of the excess
purchase price over the net asets of Tantau before the identification of
identifiable intangible assets has been allocated to goodwill and is
being amortized on a straight line basis over five years.
- - --------------------------------------------------------------------------------
Year ended
December 31,
2000
- - --------------------------------------------------------------------------------
(Unaudited)
Revenue $ 31,477
Pro forma loss for the period (223,390)
Pro forma loss for the period per common share (4.43)
- - --------------------------------------------------------------------------------
F-35
SIGNATURES
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Toronto, Ontario on March 29, 2001.
724 SOLUTIONS INC.
By:/s/ Gregory Wolfond
---------------------
Gregory Wolfond
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLES DATE
--------- ------ ----
/s/ Gregory Wolfond Chairman (principal executive officer) March 29, 2001
-----------------
Gregory Wolfond
/s/ John Sims Chief Executive Officer (principal March 29, 2001
------------------ executive officer)
John Sims
/s/ Karen Basian Chief Financial Officer (principal March 29, 2001
------------------ financial and accounting officer)
Karen Basian
/s/ Lloyd F. Darlington Director March 29, 2001
------------------
Lloyd F. Darlington
/s/ James D. Dixon Director March 29, 2001
------------------
James D. Dixon
/s/ Antti Vasara Director March 29, 2001
------------------
Antti Vasara
/s/ Heather Reisman Director March 29, 2001
------------------
Heather Reisman
/s/ Barry J. Reiter Director March 29, 2001
------------------
Barry J. Reiter
/s/ Holger Kluge Director March 29, 2001
-----------------
Holger Kluge
/s/ J. Robert S. Prichard Director March 29, 2001
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J. Robert S. Prichard
/s/ Frederick T. White Director March 29, 2001
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Frederick T. White
/s/ Joseph Aragona Director March 29, 2001
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Joseph Aragona
/s/ Charles Goldman Director March 29, 2001
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Charles Goldman
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 13 of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the city of
Toronto, Ontario on March 29, 2001.
724 SOLUTIONS CORP
By: /s/ Karen Basian
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Karen Basian
Chief Financial Officer