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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the Quarterly Period Ended March 31, 2003. or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. Commission File Number: 000-31146
724 SOLUTIONS INC.
(Exact Name of Registrant as Specified in its Charter)
ONTARIO INAPPLICABLE
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4101 YONGE STREET, SUITE 702 M2P 1N6
TORONTO, ONTARIO (Zip Code)
(Address of Principal Executive Office)
(416) 226-2900
(Registrant's Telephone Number, Including Area Code)
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 whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes ___ No X
Common Shares, no par value - 59,833,492 shares outstanding as of March 31,
2003 (together with associated rights to purchase additional Common Shares)
Subsequent to the end of the quarter, 724 Solutions Inc. completed a 1 for
10 reverse stock split, and 5,983,349 Common Shares were outstanding as of April
28, 2003.
All other references to shares and options and per share amounts in this
report do not give effect to the reverse split share and option totals.
724 SOLUTIONS INC.
TABLE OF CONTENTS
PART 1. FINANCIAL INFORMATION............................................... 1
Item 1. Financial Statements............................................ 1
(a) Consolidated Balance Sheets................................ 1
(b) Condensed Consolidated Statement of Operations (unaudited). 2
(c) Condensed Consolidated Statement of Shareholders' Equity
(unaudited)................................................ 3
(d) Condensed Consolidated Statement of Cash Flows (unaudited). 4
(e) Notes to Consolidated Financial Statements................. 5
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk..... 23
Item 4. Controls and Procedures........................................ 23
PART II. OTHER INFORMATION................................................. 24
Item 1. Legal Proceedings.............................................. 24
Item 2. Changes in Securities.......................................... 24
Item 3. Defaults Upon Senior Securities................................ 25
Item 4. Submission of Matters to a Vote of Security Holders............ 25
Item 5. Other Information.............................................. 25
Item 6. Exhibits and Report on Form 8-K................................ 25
(a) Exhibits.................................................. 25
(b) Reports on Form 8-K....................................... 26
SIGNATURES................................................................. 27
CERTIFICATIONS............................................................. 27
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
(a) Consolidated Balance Sheets
(In thousands of U.S. dollars)
March 31, 2003 and December 31, 2002
- --------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents (note 3) $ 23,245 $ 19,129
Short-term investments (note 3) 5,858 18,562
Restricted Cash (note 3) 1,887 962
Accounts receivable - trade,
net of allowance of $150
(2002 - $150) 2,876 2,211
Prepaid expenses and other receivables 1,107 819
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34,973 41,683
Fixed assets 1,207 1,418
Goodwill (note 4) 9,097 9,097
Other intangible assets (note 4) 2,312 3,468
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$ 47,589 $ 55,666
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- --------------------------------------------------------------------------------
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 974 $ 1,254
Accrued liabilities 8,163 9,892
Note payable -- 600
Deferred revenue 1,300 1,414
Deferred consideration 1,357 1,414
- --------------------------------------------------------------------------------
11,794 14,377
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- --------------------------------------------------------------------------------
Shareholders' equity:
Share capital (note 6):
Authorized:
Unlimited common shares
Unlimited preferred shares
Issued and outstanding:
59,833,492 common shares
(December 31, 2002 - 59,833,492) 764,508 764,508
Deferred stock-based compensation (852) (1,616)
Accumulated deficit (727,892) (721,560)
Cumulative translation adjustment 31 (43)
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35,795 41,289
Contingent liabilities *
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$ 47,589 $ 55,666
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*See note 17 to our audited consolidated financial statements set forth in our
2002 annual report.
See accompanying notes to consolidated financial statements.
1
(b) CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
(In thousands of U.S. dollars)
Three months ended March 31, 2003 and 2002
(Unaudited)
- ----------------------------------------------------------------------------------------
2003 2002
- ----------------------------------------------------------------------------------------
Revenue:
Product $ 2,010 $ 2,555
Services 1,505 1,958
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3,515 4,513
Operating expenses:
Cost of revenue 1,574 1,703
Research and development 2,950 5,752
Sales and marketing 2,192 6,376
General and administrative 945 2,400
Stock-based compensation:
Cost of revenue 8 146
Research and development 529 5,118
Sales and marketing 112 1,805
General and administrative 115 1,311
Depreciation 359 1,682
Amortization of intangible assets 1,156 1,153
Restructuring costs (note 8) -- 16,987
Write-down of fixed assets (note 8) - -- 4,134
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9,940 48,567
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Loss from operations (6,425) (44,054)
Interest income 93 386
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Loss for the period $ (6,332) $(43,668)
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Basic and diluted loss per share $ (0.11) $ (0.75)
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Weighted-average number of shares used in computing
basic and diluted loss per share (in thousands) 59,833 58,583
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See accompanying notes to consolidated financial statements.
2
(c) CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)
(In thousands of U.S. dollars, except per share amounts)
Three months ended March 31, 2003 and 2002
(Unaudited)
Deferred
stock-based
compensation Cumulative Total
Common shares related to Accumulated translation shareholders'
Number Amount stock options deficit adjustment equity
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 2001 58,375,761 $763,033 $ (19,582) $(634,153) $(52) $109,246
Loss for the period -- -- -- (43,668) -- (43,668)
Cumulative translation
adjustment -- -- -- -- (32) (32)
Deferred stock-based
compensation -- (163) 163 -- -- --
Amortization of
deferred stock-based
compensation -- -- 8,380 -- -- 8,380
Issuance for cash on
exercise of options 240,900 126 -- -- -- 126
Issuance of common
shares 1,011,690 1,415 -- -- -- 1,415
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Balances,
March 31, 2002 59,628,351 $ 764,411 $ (11,039) $ (677,821) $(84) $ 75,467
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
December 31, 2002 59,833,492 $ 764,508 $ (1,616) $(721,560) $(43) $ 41,289
Loss for the period -- -- -- (6,332) -- (6,332)
Cumulative translation
adjustment -- -- -- -- 74 74
Amortization of
deferred stock-based
compensation -- -- 764 -- -- 764
- ------------------------------------------------------------------------------------------------------------------------------------
Balances,
March 31, 2003 59,833,492 $ 764,508 $ (852) $(727,892) $31 $ 35,795
- ------------------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
(d) CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
(In thousands of U.S. dollars)
Three months ended March 31, 2003 and 2002
(Unaudited)
- --------------------------------------------------------------------------------------
2003 2002
- --------------------------------------------------------------------------------------
Cash flows from (used in) operating activities:
Loss for the period $ (6,332) $(43,668)
Items not affecting cash:
Depreciation and amortization 1,515 2,835
Stock-based compensation 764 8,380
Other non-cash expenses (61) (264)
Write-down of fixed assets -- 4,134
Change in operating assets and liabilities:
Accounts receivable (665) 2,011
Prepaid expenses and other receivables (288) 295
Accrued interest on short-term investments -- 1,204
Accounts payable (280) (423)
Accrued liabilities (1,729) 9,266
Deferred revenue 83 469
- --------------------------------------------------------------------------------------
Net cash flows used in operating activities (6,993) (15,761)
Cash flows from (used in) financing activities:
Principal repayment of note payable (600) (532)
Issuance of common shares -- 125
- --------------------------------------------------------------------------------------
Net cash flows from (used in) financing activities (600) (406)
Cash flows from (used in) investing activities:
Purchase of fixed assets (70) 201
Sale of short-term investments, net 12,704 2,449
Purchase of intangible and other assets (925) --
- --------------------------------------------------------------------------------------
Net cash flows from investing activities 11,709 2,650
- --------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents 4,116 (13,517)
Cash and cash equivalents, beginning of period 19,129 60,279
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Cash and cash equivalents, end of period $ 23,245 $ 46,762
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
(e) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION:
The accompanying consolidated financial statements include the accounts of
724 Solutions Inc. and its wholly owned subsidiaries (collectively referred
to as the "Company"). Intercompany transactions and balances are eliminated
on consolidation.
The 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 conform, in all material
respects, with U.S. generally accepted accounting principles. Unless
otherwise noted in note 2, the interim financial statements follow the same
accounting policies and methods of application as the most recent annual
financial statements. For further information, reference should be made to
the audited annual consolidated financial statements for the year ended
December 31, 2002 that are included in the Company's Annual Report filed
with the Canadian Securities Administrators on March 31, 2003 and with the
Securities and Exchange Commission on Form 10-K filed on March 31, 2003.
The information furnished for the three months ended March 31, 2003 and
March 31, 2002 reflect, in the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of the interim periods presented. Interim
results are not necessarily indicative of results for a full year.
2. SIGNIFICANT ACCOUNTING POLICIES:
The unaudited interim consolidated financial statements are based upon
accounting principles consistent with those used and described in the
Company's audited financial statements for the year ended December 31,
2002.
3. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
All short-term investments 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 or available-for-sale securities.
5
The components of cash and cash equivalents and short-term investments are
summarized as follows:
- --------------------------------------------------------------------------------
March 31, December 31,
2003 2002
- --------------------------------------------------------------------------------
Cash and cash equivalents:
Cash $20,584 $ 6,375
Cash equivalents:
Government treasury bill 1,661 1,554
Corporate bonds 1,000 11,200
- --------------------------------------------------------------------------------
$23,245 $19,129
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Short-term investments:
Held-to-maturity:
Government treasury bill 3,959 4,681
Corporate bond 1,900 13,881
- --------------------------------------------------------------------------------
$ 5,859 $18,562
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The Company has entered into letters of credit in the aggregate amount
of $1,887,000 to guarantee payments under future contractual
commitments (December 31, 2002 - $962,000). The letters of credit are
secured by segregated instruments and are disclosed as restricted cash
on the consolidated balance sheet.
4. GOODWILL AND OTHER INTANGIBLE ASSETS:
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired and until January 1, 2002, had been amortized on a
straight-line basis over varying periods of up to five years. At that
time, the Company adopted the CICA standards issued in September 2001,
specifically Handbook Sections 1581, "Business Combinations", and 3062,
"Goodwill and Other Intangible Assets". The new standards require that
the purchase method of accounting must be used for business combinations
and require that goodwill no longer be amortized but instead be tested
for impairment at least annually.
Intangible assets with finite useful lives are amortized over their
useful lives. The amortization methods and estimated useful lives of
intangible assets which consist of unpatented technology, are reviewed
annually, and are currently being amortized on a straight line basis over
one to five years.
The following table sets out the Company's total purchased intangible
assets that are subject to amortization:
6
- --------------------------------------------------------------------------------------------------------------------------
Accumulated
Accumulated impairment Net book
March 31, 2003 Cost amortization charge value
- --------------------------------------------------------------------------------------------------------------------------
Technology $29,120 $13,498 $13,310 $2,312
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- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
Accumulated
Accumulated impairment Net book
December 31, 2002 Cost amortization charge value
- --------------------------------------------------------------------------------------------------------------------------
Technology $29,120 $12,342 $13,310 $3,468
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
5. SEGMENTED INFORMATION:
The Company operates in a single reportable operating segment, that is,
the design and delivery of an Internet infrastructure platform and
related applications that enable financial institutions, mobile network
operators and other customers to deliver 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 revenue and assets
is set forth below:
- --------------------------------------------------------------------------------
March 31, March 31,
2003 2002
- --------------------------------------------------------------------------------
Net revenue by geographic locations:
North America $3,097 $3,283
Europe 298 770
Asia Pacific 120 460
- --------------------------------------------------------------------------------
$3,515 $4,513
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
For the three months ended March 31, 2003, three customers accounted for
40%, 27% and 13% of revenue. For the three months ended March 31, 2002, two
customers accounted for 14% and 10% of revenue.
- --------------------------------------------------------------------------------------------------------------------------
March 31, 2003 December 31, 2002
- --------------------------------------------------------------------------------------------------------------------------
Goodwill Goodwill
and other and other
Fixed intangible Fixed intangible
assets assets assets assets
- --------------------------------------------------------------------------------------------------------------------------
North America $454 $11,409 $596 $12,565
Europe 727 -- 797 --
Asia Pacific 26 -- 25 --
- --------------------------------------------------------------------------------------------------------------------------
$1,207 $11,409 $1,418 $12,565
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
7
6. SHARE CAPITAL:
(a) Stock options:
At March 31, 2003 and December 31, 2002, there were options
outstanding to acquire 7,231,605 and 7,484,083 common shares of the
Company, respectively.
The Company has excluded from the calculation of diluted earnings per
share all common shares potentially issuable upon the exercise of
stock options and other potentially convertible instruments that
could dilute basic earnings per share in the future, because to do so
would have been anti-dilutive.
(b) Stock option exchange program:
In January 2002, the Company initiated a voluntary stock option
exchange program that offered eligible employees the opportunity to
exchange, on a one-for-one basis, certain stock options, with strike
prices greater than U.S. $3.00 and Cdn. $4.75, for an equal number of
new options to be granted on or after August 29, 2002. This program
resulted in 1,403,628 options being tendered, accepted and cancelled.
On August 29, 2002, the Company granted 1,179,170 options with an
exercise price of Cdn. $0.80 or U.S. $0.51, the market price at that
date. The new options are exercisable for a period of 10 years from
the grant date and vest 25% immediately upon grant and 25% on each
subsequent anniversary of the date of grant.
The Company also granted options to purchase an aggregate of
2,681,540 common shares with an exercise price of Cdn. $0.80 or U.S.
$0.51 to its directors, most of its officers, selected senior
personnel and some foreign-based employees who due to local
regulations were ineligible to participate in the voluntary exchange
program. The terms of the options are identical to the above
mentioned options granted to eligible employees. As of March 31,
2003, 893,750 of these options had been cancelled as some recipients
had left the Company.
7. PRO FORMA DISCLOSURE FOR STOCK-BASED COMPENSATION AND OTHER STOCK-BASED
PAYMENTS:
For companies electing not to adopt the fair value measurement for
stock-based compensation, the CICA Section 3870 accounting pronouncement
requires the disclosure of pro forma net income (loss) and net income
(loss) per share information. The Company has presented this pro forma
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 pro forma disclosure and the impact on the consolidated statement of
operations is presented in the following table:
8
- --------------------------------------------------------------------------------
March 31, March 31,
2003 2002
- --------------------------------------------------------------------------------
Loss for the period $ (6,332) $(43,688)
Compensation expense related
to the fair value of stock options
in excess of amounts recognized (4,522) (2,839)
- --------------------------------------------------------------------------------
Pro forma loss for the period $(10,854) $(46,527)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Pro forma loss per share:
Basic and diluted $ (0.18) $ (0.79)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The fair value of each option granted in the period ended March 31, 2003
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 100%, risk-free rate of return of 4.31% and
an expected life of the option of five years. The fair value of each
option granted prior to January 1, 2003, has been estimated at the date
of grant using the Black-Scholes option pricing model with the
assumptions disclosed in note 9(v) of the annual consolidated financial
statements.
The Company has assumed no forfeiture rate, as adjustments for actual
forfeitures are made in the period they occur. The weighted average grant
date fair value of options issued in three months ended March 31, 2003
was $0.35 (2002 - $ 1.39).
9
8. RESTRUCTURING AND OTHER CHARGES:
In 2001 and 2002, the Company recorded charges related to restructuring
activities and the write-down of fixed assets, long-term investments,
goodwill and other intangible assets.
(a) Restructuring charges:
- -------------------------------------------------------------------------------------------------------------
Severance Lease exit Hosting exit Write-down
costs costs of inventory Total
- -------------------------------------------------------------------------------------------------------------
Provision,
December 31, 2001 $ 2,331 $ 6,593 $ -- $ -- $ 8,924
Activity during the period ended
March 31, 2002
Restructuring charges 3,691 4,801 5,747 2,748 16,987
Cash payments (4,186) (1,727) (1,051) -- (6,964)
Non-cash charges -- -- -- (2,748) (2,748)
Provision,
March 31, 2002 $ 1,836 $ 9,667 $ 4,696 $ -- $ 16,199
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
Provision,
December 31, 2002 $ 967 $ 1,528 $ 2,487 $ -- $ 4,982
Activity during the period ended
March 31, 2003
Cash payments (491) (1,012) (147) -- (1,650)
Provision,
March 31, 2003 $ 476 $ 516 $ 2,340 $ -- $ 3,332
- -------------------------------------------------------------------------------------------------------------
(b) Write-down of intangible assets, fixed assets and investments:
Three months ended: March 31, 2003 March 31, 2002
- --------------------------------------------------------------------------------------------------
Fixed assets $-- $4,134
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
10
9. SUPPLEMENTAL DISCLOSURE:
- --------------------------------------------------------------------------------------------------
March 31, March 31,
2003 2002
- --------------------------------------------------------------------------------------------------
Supplemental disclosure of non-cash financing and investing activities:
Common shares issued upon settlement of
contingent consideration - 1,415
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
10. STATEMENT OF COMPREHENSIVE LOSS:
Comprehensive loss generally encompasses all changes in shareholders'
equity except those arising from transactions with shareholders.
- --------------------------------------------------------------------------------
March 31, March 31,
2003 2002
- --------------------------------------------------------------------------------
Loss for the period $ (6,332) $(43,668)
Other comprehensive loss, net of income taxes:
Cumulative translation adjustment 74 (32)
- --------------------------------------------------------------------------------
Comprehensive loss based on U.S. GAAP $ (6,258) $(43,700)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
724 Solutions Inc. is a leading provider of next-generation IP-based network and
data services. We were incorporated in 1997, and in 1999 we introduced our
initial products and solutions for the financial services industry. In 2001, we
began offering our Actionable Alerts and Mobile Internet Gateway products to
mobile network operators. In October 2002, our products and solutions for the
mobile network operators were brought under the umbrella of our X-treme Mobility
Suite of products. Through this family of products, 724 Solutions delivers
reliable, scalable technology and solutions that allow mobile network operators
to rapidly deploy flexible and open, next-generation IP-based network and data
services.
Financial institutions use 724's pro-active alerts-based solutions to offer
services across a broad range of channels, including the mobile channel, to
their consumer customers and internal enterprise users, allowing these
enterprises to improve customer satisfaction and retention while at the same
time lowering their operating costs.
Our customers currently include leading mobile network operators and financial
institutions. With our corporate office in Toronto, Canada, we have development
and sales offices around the world, including, Hong Kong, Germany, Switzerland,
the United Kingdom and the United States.
CRITICAL ACCOUNTING POLICIES
We periodically review our financial reporting and disclosure practices and
accounting policies to ensure that they provide accurate and transparent
information relative to the current economic and business environment. As part
of this process, we have reviewed our selection, application and communication
of critical accounting policies and financial disclosures. We have determined
that our critical accounting policies relating to our core ongoing business
activities are primarily those that relate to revenue recognition. Other
important accounting policies are described in Note 2 to our audited annual
consolidated financial statements set forth in our annual report on form 10-K,
which we encourage you to read.
REVENUE RECOGNITION
SOURCES OF REVENUE
We derive revenue from licensing our products and providing related services,
including installation, integration, training, maintenance and support, and
application hosting services. We recognize revenue from our license agreements
when all the following conditions are met:
- We have an executed license agreement with the customer;
- We have delivered the software product to the customer;
- The amount of the fees to be paid by the customer is fixed and
determinable; and
- Collection of these fees is deemed probable.
12
Typically, software license agreements are multiple element arrangements as they
include related maintenance and implementation fees. Accordingly, the entire
arrangement fee is allocated to each element in the arrangement based on the
respective vendor specific objective evidence of value (VSOE) of each element.
For contracts for which we do not have sufficient VSOE, we use the residual
method to record revenues. Under this method, as long as we have VSOE for all
undelivered elements (typically, services and maintenance) we can record the
remaining value of the contract as license revenue after allocating full value
to the undelivered elements.
PRODUCT REVENUE
Product revenue consists of the following:
- Fixed License Fee Arrangement - a one-time license fee for a fixed
number or copies of unlimited use of the software with a perpetual
term. We typically recognize the upfront fees in the period the
contract is executed or shortly thereafter.
- Variable License Fee Arrangement - a variable license fee based on a
per user fee with or without specified quarterly minimum payments. We
recognize revenue from these contracts on a quarterly basis as the
amount is determined. Our revenue under this model will vary with the
number of our customers' end users. However, over time, we believe
that these fees will grow as our customers roll out services based on
our products or solutions to substantial numbers of their customers.
- Reseller Arrangement - the reseller generally pays 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
non-refundable license fees when we have met our revenue recognition
criteria for license agreements as outlined above.
- Solutions Arrangement - there are two key factors that distinguish
what we consider to be a solutions sale versus a software and services
sale. Firstly, in a solutions sale, there may initially be a higher
mix of revenue for services than in a software sale. Secondly, in a
solutions sale the services include the development and implementation
of customized software code and more complex interfaces than in a
software sale, where the contracted services are primarily
installation services. Recognition of revenue from such contracts will
primarily be based on the percentage of work completed as described
below under service revenue.
For licensing and services agreements that provide significant commitments to
refunds and/or penalties on the services and/or license components should the
system not perform according to expectations, we defer recognition of revenue
for the amount subject to refund or penalty until we achieve contractually
defined milestones or until customer acceptance has occurred, as the case may be
for such agreements.
13
SERVICE REVENUE
IMPLEMENTATION AND CUSTOMER SERVICE FEES
Revenue from implementation and customer services includes fees for
implementation of our product offerings, consulting and training services.
Customers are charged a fee based on time and expenses. Revenue from
implementation and customer service fees is recognized as the services are
performed or deferred until we achieve contractually defined milestones or until
customer acceptance has occurred, as the case may be for such contracts.
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 recorded as deferred revenue and
recognized on a straight-line basis over the contract period. When associated
with the variable fee license model, any maintenance payments will be recognized
on a monthly basis as earned.
HOSTING FEES
We no longer provide hosting services directly, but instead have arranged an
alliance with CSC, whereby CSC is our preferred hosting partner for current and
future customer deployments where hosting is or will be required. Under our
existing hosting contracts, we typically charge customers a monthly flat fee or
a monthly fee based on the number of users. The fees are recognized on a monthly
basis.
For a more detailed description of our revenue recognition policies, refer to
note 2(c) of our annual audited consolidated financial statements for the year
ended December 31, 2002.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Our consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles. These principles conform in
all material respects with U.S. generally accepted accounting principles.
REVENUE
PRODUCT REVENUE
In the three months ended March 31, 2003, product revenue decreased to $2.0
million, including $860,000 related to a contract cancellation, from $2.6
million in 2002. Due to continuing poor economic conditions, our customers
remained reluctant to make large upfront commitments on license fees.
14
SERVICE REVENUE
Service revenue decreased to $1.5 million for the three months ended March 31,
2003 from $2.0 million for the same period in 2002. The decrease in service
revenue is due to the decline in the number of projects implemented by our
customers.
OPERATING EXPENSES
COST OF REVENUE
Cost of revenue (COR) consists primarily of personnel costs associated with
customer support, training, and implementations as well as amounts paid to
third-party consulting firms for those services, together with an allocation of
expenses for our facilities and administration.
Cost of revenue was $1.6 million for the three months ended March 31, 2003,
compared to $1.7 million for the same period in 2002. COR decreased in 2003 as
the number of projects deployed was down and because we eliminated costs not
essential to our focus on our two key markets, the mobile network operator and
financial services markets. Cost of revenue as a percentage of revenue, was 45%
for the three months ended March 31, 2003, compared to 38% for the same period
in 2002.
RESEARCH AND DEVELOPMENT
Research and development expenses include 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 (R&D) decreased to $3.0 million for the three months
ended March 31, 2003 compared to $5.8 million for the same period in 2002. The
decrease is a result of our 2001 and 2002 restructuring initiatives in which we
reduced our R&D headcount and developed a more streamlined, integrated and
focused product road map and reduced duplication in the R&D process. We continue
to evaluate our R&D expenditure needs based on our new product architecture and
services and the current market environment. R&D expense, as a percentage of
revenue, was 84% for the three months ended March 31, 2003, compared to 128% for
the same period in 2002.
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 (S&M) expenses were $2.2 million for the three months ended
March 31, 2003 compared to $6.4 million for the same period in 2002. The
decrease is a result of the reduction in the number of sales and marketing
personnel and reduced spending on discretionary
15
marketing programs. We continue to monitor our sales and marketing expenditures
to ensure that they remain aligned with our targeted opportunities as well as
prevailing market conditions.
GENERAL AND ADMINISTRATIVE
General and administrative (G&A) expenses include salaries and benefits for
corporate personnel and other general and administrative expenses such as
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 G&A expenses decreased to $945,000 for the three months ended March 31, 2003
compared to $2.4 million for the same period in 2002. The decrease in G&A
expenses reflected our efforts in our restructuring initiatives to reduce
complexity in our business and to make our infrastructure efficient in order to
support our business in the current market environment.
DEPRECIATION AND AMORTIZATION
Depreciation expense was $359,000 in the three months ended March 31, 2003
compared to $1.7 million for the same period in 2002. The decrease is a result
of the decommissioning of our redundant fixed assets and reductions in our
capital expenditure budgets as part of our restructuring initiatives.
Amortization expense was $1.2 million for the three months ended March 31, 2003,
unchanged from the same period in 2002. The Company wrote-down intangibles and
other assets in fiscal 2001 and adopted SFAS No. 142 and CICA Handbook section
3062, which require goodwill to be assessed for impairment only, rather than
being amortized, on a prospective basis starting January 1, 2002. The
amortization expense in 2003 and 2002 represents the amortization of acquired
technology, which is being amortized over a period of two to five years. At
March 31, 2003, the carrying value of goodwill was $9.1 million and the carrying
value of acquired technology was $2.3 million.
STOCK-BASED COMPENSATION
Stock-based compensation decreased to $764,000 for the three months ended March
31, 2003, compared to $8.4 million for the same period in 2002. The 2002 expense
included significant charges related to the immediate recognition of deferred
stock-based compensation associated with employees who were terminated as part
of our restructuring plan as well as the immediate recognition of the
unamortized portion of the deferred stock compensation for those employees who
tendered their options as part of our stock option exchange initiative in
January 2002. Also, the deferred stock compensation associated with the Tantau
acquisition was higher in 2002 as it was fully amortized by the end of January
2003.
RESTRUCTURING COSTS
With the downturn in general economic conditions, in the second quarter of 2001
we began to identify areas to reduce costs and to implement a restructuring
initiative. We eliminated duplicate resources and positions, narrowed our
product offerings and streamlined our operating
16
processes. We continued these initiatives in the first quarter of 2002 and, as a
result, we recorded a $17.0 million charge in the period ending March 31, 2002.
In addition, we recorded a $4.1 million charge in the three months ended March
31, 2002 related to the decommissioning of our redundant fixed assets. There
were no restructuring charges or fixed assets write-downs for the three months
ended March 31, 2003. Included in our "Accrued Liabilities" as at March 31, 2003
is approximately $3.3 million in restructuring reserves. This includes severance
costs of $476,000, lease exit costs of $516,000 and hosting exit costs of $2.3
million. See note 8 to our consolidated financial statements for the three
months ended March 31, 2003 for further details.
INTEREST INCOME
Interest income decreased to $93,000 for the three months ended March 31, 2003,
compared to $386,000 for the same period in 2002. 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. Interest
income is net of interest expense relating to our note payable. Interest income
decreased in the three months ended March 31, 2003 compared to the same period
in 2002 because we have reduced holdings of cash and cash equivalent balances
and short-term investments.
NET LOSS
Our net loss decreased to $6.3 million for three months ended March 31, 2003
compared to $43.7 million for the same period in 2002. Our net loss decreased
due to the significant restructuring charges and write down of intangible assets
recorded in the first quarter of 2002 and the substantial reduction in our
operating expenses resulting from our restructuring initiatives.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used in operating activities decreased to $7.0 million for the three
months ended March 31, 2003 compared to $15.8 million for the same period in
2002. We have significantly reduced our workforce and expense structure as a
result of our restructuring efforts. Net cash used in operating activities for
the three months ended March 31, 2003 consisted of our net loss of $6.3 million,
cash payments of accrued liabilities of $1.7 million plus an increase in working
capital items of $1.2 million, offset by non-cash items, specifically
depreciation and amortization of $1.5 million and stock-based compensation
expense of $764,000.
As at March 31, 2003, we had commitments to make $850,000 in minimum lease
payments up to 2005, primarily related to our facilities and equipment rentals.
As a result of our restructuring initiatives, we have vacated some of our
premises and we have been successful in reducing our total future lease
commitments with our landlords.
Cash used in financing activities was $600,000 for the three months ended March
31, 2003 compared to $406,000 for the same period in 2002. The $600,000
represents the final two payments of our note payable. In the same period in
2002 we paid $532,000 related to the same note but also had a cash source of
$126,000 from the issuance of common shares related to the exercise of options.
17
Excluding the sale (purchase) of short-term investments, and restricted cash
changes, the Company's investing activity in the three months ended March 31,
2003 consisted of the use of $70,000 related to the purchase of fixed assets
compared to a source of $201,000 in the same period in 2002.
In the three month period ended March 31, 2003, the Company had a cash inflow of
$4.1 million compared to a cash use of $13.5 million for the same period in
2002. This was due to the sale of $12.7 million in short-term investments in the
first quarter of 2003 ($2.5 million in the same period in 2002) as well as
significantly lower operating costs in 2003.
Due to the operational savings resulting from our restructuring, we expect that
cash from the sales of our products and our existing cash and cash equivalents
and short-term investments will be sufficient to cover our cash requirements,
including 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 PRINCIPLES
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities" ("FAS 146"), which is effective for exit or
disposal activities that are initiated after December 31, 2002. FAS 146 requires
that a liability be recognized for exit or disposal costs only when the
liability is incurred, as defined in the FASB's conceptual framework rather than
when a company commits to an exit plan, and that the liability be initially
measured at fair value. The Company is currently assessing the impact of the new
standard.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"), which requires certain disclosures to be
made by a guarantor in its interim and annual financial statements for periods
ending after December 15, 2002 about its obligations under guarantees. FIN 45
also requires the recognition of a liability by a guarantor at the inception of
certain guarantees entered into or modified after December 31, 2002. FIN 45
requires the guarantor to recognize a liability for the non-contingent component
of certain guarantees, that is, it requires the recognition of a liability for
the obligation to stand ready to perform in the event that specified triggering
events or conditions occur. The initial measurement of this liability is the
fair value of the guarantee at inception. As at March 31, 2003, the Company had
no guarantees that require disclosure under the standard.
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Statements contained in this report which are not historical facts are
forward-looking statements within the meaning of Section 21E of the U.S.
Securities Exchange Act of 1934, as amended. A forward-looking statement may
contain words such as "anticipate that," "believes," "continue to," "estimates,"
"expects to," "hopes," "intends," "plans," "to be," "will be," "will continue to
be," or similar words. These forward-looking statements include the statements
herein regarding: future developments in the financial services and mobile
network industries; our estimated cost reductions; our future ability to fund
our operations and become profitable; our development of new products and
relationships; our plans to operate in the mobile operator and
18
financial institutions markets; the rate at which consumers will adopt wireless
applications; our ability to increase our customer base; the services that we or
our customers will introduce and the benefits that end users will receive from
these services; the impact of entering new markets; our plans to use or not to
use certain types of technologies in the future; our future cost of revenue,
gross margins and net losses; our future restructuring, research and
development, sales and marketing, general and administrative, stock-based
compensation, depreciation and amortization expenses; our future interest
income; the value of our goodwill and other intangible assets; our future
capital expenditures and capital requirements; and the anticipated impact of
changes in applicable accounting rules.
The accuracy of these statements may be impacted by a number of business risks
and uncertainties that could cause actual results to differ materially from
those projected or anticipated. These risks include the risks described in our
SEC filings, including our annual report on Form 10-K. These risks are also
described in our filings with the Canadian Securities Administrators, including
our prospectuses, material change reports, Annual Information Form and
Management Information Circular. We encourage you to carefully review these
risks in order to evaluate an investment in our securities. Some of the key
risks that could cause actual results to differ materially from those projected
or anticipated also include the risks discussed below. We do not undertake any
obligation to update this forward-looking information, except as required under
applicable law.
GENERAL INDUSTRY, ECONOMIC AND MARKET CONDITIONS
Our future revenues and operating results are dependent to a large extent upon
general economic conditions, conditions in the wireless market and within that
market our primary target markets of mobile network operators and financial
institutions. As economic activity slowed in these markets beginning in 2001,
our customers began deferring their spending on our products and our revenues
began to decline. Our sales cycle has lengthened significantly as potential
customers have reduced their spending commitments, including their willingness
to make investments in new wireless services. Moreover, adoption of wireless
services has not proceeded as rapidly as previously anticipated. For example, in
2002, Bank of Montreal and Wells Fargo, two of our initial customers, ceased
offering their wireless banking and/or brokerage services. If general economic
conditions continue to be adverse, if the economies in which our target
customers are located enter into a recession, or if demand for our solutions
does not expand, our ability to increase our customer base may be limited, and
our revenue may decrease further.
ENTERING NEW MARKETS
We have made mobile network operators an important focus of our activities. In
order to encourage these potential customers to adopt and implement our
solutions, we may incur higher costs than we have in the past, and we may not be
able to attract a large number of these customers. Mobile network operators may
not be successful in rolling out our services, and subscribers to these services
may not seek to use them. Any developments of this kind could limit our ability
to sell our solutions to companies in this industry, may increase our expenses
and may damage our reputation.
INTERNATIONAL MARKETS
In December 2000, we first recognized revenues from sales in international
markets. We had expected that sales in these regions would be a major factor in
our growth, particularly since the use of wireless networks and wireless devices
have generally proceeded more rapidly there.
19
However, some key countries in these regions have experienced decreasing
economic activity, and our sales to these regions declined beginning in the
third quarter of 2001. This trend did not reverse in 2002 nor in the first
quarter of 2003 and it may not reverse in subsequent quarters in 2003 resulting
in us not being able to increase our customer base, and accordingly, limited
growth from these markets.
LIQUIDITY
In order to help ensure that we would have sufficient capital to take advantage
of our core business opportunities, we have taken significant actions since the
second quarter of 2001 to reduce our operating expenses. However, most of our
operating expenses, such as employee compensation and lease payments for
facilities and equipment, are relatively stable, and these expense levels are
based in part on our expectations regarding future revenues. As a result, any
sustained shortfall in our revenues relative to our expectations would
negatively impact our operating results. Accordingly, if the cost-cutting
actions that we have taken are insufficient, 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. We may need to undertake additional
measures to reduce our operating expenses in the future.
INVESTMENTS IN OTHER COMPANIES
For year ended December 31, 2001 we realized a loss of $4.6 million on sales of
our long-term investments and recorded a loss provision of $10.0 million against
these investments as they have experienced a significant other than temporary
decline in their value. In addition, in the third quarter of 2002, we recorded
an additional loss provision of $5.3 million. Because of the continuing
volatility in the financial markets, as well as other factors, we expect to
limit the extent to which we make equity investments in other non-core companies
during the next few fiscal quarters, and possibly longer. As a result, we may
not take advantage of investment opportunities that could provide significant
financial benefits to our company, or that could provide us with the opportunity
to build relationships with other companies in our industry and target markets.
INVESTMENTS IN NEW TECHNOLOGIES
During fiscal 2001, we made significant investments in new technology assets to
help expedite customer adoption of our solutions, including interactive voice
response technology, technologies relating to short messaging services and
technology to allow mobile applications to be executed with real-time
interaction. In accordance with our accounting policy, we review the carrying
value of these assets, considering key factors such as our estimate of customer
demand for these assets and the assets' fit with our product strategy. For the
year ended December 31, 2002, we recorded a charge of $2.7 million relating to
our decision not to use these assets that we purchased to resell to our
customers. In the future, if there are any circumstances in which there is a
decline in the carrying value of these assets or if we decide not to pursue
these technologies if we determine that customer demand for them is not
substantial, we may need to record additional charges.
RECEIVABLES
A significant portion of our receivables are derived from companies in foreign
countries. Due to varying economic conditions and business practices in these
countries, our collections cycle from
20
these customers may be longer than our past experience. In the first quarter of
2003, we recorded a provision of $150,000 relating to accounts that we believe
to be potential bad debts. There is risk that this provision is not sufficient.
As adverse economic conditions persist, there is a greater risk that our
customers will have difficulties in paying us in accordance with the terms of
their contracts, and our risk of bad debt may increase substantially in future
fiscal periods.
HOSTING SERVICES
In January 2002, we formalized our plan to transfer the management of our
application hosting services to Computer Sciences Corporation ("CSC"). We will
continue to be dependent on CSC to provide secure hosting services for our
software products. If CSC becomes unable to deliver these services, or other
circumstances occur that affect CSC or its computer systems, our hosting
services may be substantially impaired. If any of these circumstances occur and
cause us to fail to deliver our hosting services, we may lose customers, our
reputation may suffer, and our ability to attract new customers may be damaged.
EMPLOYEES
Our ability to execute our business successfully depends in large part upon our
ability to have a sufficient number of qualified employees to achieve our goals.
However, if our workforce is not properly sized to meet our operating needs, our
ability to achieve and maintain profitability is likely to suffer. As indicated
in this report, we have substantially reduced the number of our employees. This
means that we use a smaller number of employees to conduct some of the
operations that were previously performed by a larger workforce, which could
cause disruption of our business. In addition, the morale of our current
employees may have been adversely affected by previous workforce reductions,
reducing their performance. Our ability to attract potential new employees in
the future may suffer if our reputation suffers as a result of these staffing
reductions.
GROSS MARGINS
We believe that certain factors in the current market may contribute to the risk
that our gross margins will decrease in future fiscal quarters. We may have to
lower our prices, in order to accommodate our customers. In addition, due to the
downturn in the economy, many of our customers are reluctant to make a
commitment to pay a large upfront license fee, which could also cause our
revenues to decrease. With a greater percentage of our revenues coming from
services, if we are not successful in reducing our costs of sales, and our
customers continue to purchase licenses on an as-needed basis, we will
experience a decrease in our gross margins.
LITIGATION
The Company and certain of its present and former officers and directors were
named as defendants in a series of purported class actions relating to our
initial public off ering. Litigation may be time consuming, expensive, and
distracting from the conduct of our business, and the outcome of litigation may
be difficult to predict. The adverse resolution of any of these proceedings
could have a material adverse effect on our business, results of operations, and
financial condition.
NASDAQ LISTING
Our common shares trade on the NASDAQ SmallCap Market, which has a number of
compliance requirements for continued listing. One of these requirements is that
the market price of our common shares must be at least US$1.00 for 10
consecutive trading days. On April
21
28, 2003, our common shares began to trade on a consolidated basis above the
minimum price of $1.00, after the completion of a reverse-stock split. As a
result, we hope to remain in compliance and maintain our NASDAQ SmallCap Market
listing. If, however, we do not do so and our common shares are delisted from
the NASDAQ SmallCap Market, there would likely be a reduction in the liquidity
of our common shares and a further adverse effect on their trading price. Lack
of liquidity would also make it more difficult for us to raise capital in the
future, effect acquisitions or other strategic transactions, and to retain our
personnel.
22
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
IMPACT OF INTEREST RATE EXPOSURE
As of March 31, 2003 we had approximately $31.0 million in cash, cash
equivalents, short-term investments and restricted cash of which $7.7 million
consisted of 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 do not
liquidate our short-term investments before their maturity dates.
IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE
Our functional currency is the U.S. dollar. In the past, the majority of our
non-US dollar denominated expenses were incurred in Canadian dollars. As a
result of our recent restructuring efforts, in the foreseeable future the
majority of our non-US dollar denominated expenses will be incurred in Euros.
Changes in the value of these currencies relative to the U.S. dollar may result
in currency gains and losses, which could affect our operating results. In the
three months ended March 31, 2003, we incurred an unrealized foreign currency
gain relating to the translation of our non-US denominated monetary assets and
liabilities of approximately $74,000.
ITEM 4. CONTROLS AND PROCEDURES
During the 90-day period prior to the filing date of this report, management,
including the Company's Chief Executive Officer and Chief Financial Officer,
evaluated the effectiveness and operation of the Company's disclosure controls
and procedures. The Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures were effective, in all
material respects, to ensure that information required to be disclosed in the
reports the Company files and submits under the Exchange Act is recorded,
processed, summarized and reported as and when required. There have been no
significant changes in the Company's internal controls or in other factors,
which could significantly affect internal controls subsequent to the date the
Company carried out its evaluation. There were no significant deficiencies or
material weaknesses identified in the evaluation and therefore, no corrective
actions were taken.
23
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company has been named in several class actions filed in federal
court in the Southern District of New York between approximately June 13,
2001 and June 28, 2001 (collectively the "IPO Allocation Litigation"). The
IPO Allocation Litigation was filed on behalf of purported classes of
plaintiffs who acquired the Company's common shares during certain periods.
These lawsuits have since been consolidated into a single action and an
amended complaint was filed on or about April 19, 2002. Similar actions have
or since been filed against over 300 other issuers that have had initial
public offerings since 1998 and all are included in a single coordinated
proceeding in the Southern District of New York.
The amended complaint in the IPO Allocation Litigation names as
defendants, in addition to the Company, some or all of the current or former
directors and officers of the Company (the "Individual Defendants") and
certain underwriters of the Company's initial public offering of securities
(the "Underwriter Defendants"). In general, the amended complaint alleges
that the Underwriter Defendants: (1) allocated shares of the Company's
offering of equity securities to certain of their customers, in exchange for
which these customers agreed to pay the Underwriter Defendants extra
commissions on transactions in other securities; and (2) allocated shares of
the Company's initial public offering to certain of the Underwriter
Defendants' customers, in exchange for which the customers agreed to purchase
additional common shares of the Company in the after-market at certain
pre-determined prices. The amended complaint also alleges that the Company
and the Individual Defendants failed to disclose these facts and that the
Company and the Individual Defendants were aware of, or disregarded, the
Underwriter Defendants' conduct. In october 2002, the Individual Defendants
were dismissed from the IPO Allocation Litigation without prejudice.
The Company intends to vigorously defend itself and the Individual
Defendants against these claims. However, due to the inherent uncertainties
of litigation, and because the IPO Litigation is at a preliminary stage, we
cannot accurately predict the ultimate outcome IPO Allocation Litigation.
ITEM 2. CHANGES IN SECURITIES
RIGHTS PLAN. On January 22, 2003, the Company's Board of Directors
authorized the Company to adopt a shareholder rights plan. On February 10, 2003,
the Company and Computershare Trust Company of Canada, as Rights Agent, entered
into a Shareholders Rights Plan Agreement (the "Rights Plan") and one right
(each, a "Right") was issued under the Rights Plan and attached to each
outstanding common share of the Company. The Rights Plan was ratified by the
Company's shareholders at the annual shareholders' meeting held in April on
April 24, 2003 (the "Annual Meeting"). A Right only becomes exercisable upon the
occurrence of a Flip-In Event, which is a transaction in which a person becomes
an Acquiring Person and which otherwise does not meet the requirements of a
Permitted Bid or certain other limited exceptions (as such terms are defined in
the Rights Plan).
When exercised, a Right entitles each shareholder who is not then
attempting to acquire control of the Company to purchase additional common
shares at a substantial discount to market
24
value. Any such purchase would cause substantial dilution to the person or group
of persons attempting to acquire control of the Company, other than by way of a
Permitted Bid. The Rights will expire on the termination of the Rights Plan,
unless redeemed before such time.
The Rights Plan has been filed with the Securities and Exchange
Commission on the Company's Form 8-K, dated January 22, 2003.
CONSOLIDATION. At the Annual Meeting, the Company's shareholders
approved a ten (old) for one (new) reverse stock split. The Company's common
shares began trading on a consolidated basis on the Nasdaq SmallCap Market and
the Toronto Stock Exchange on April 28, 2003.
CONTINUANCE. At the Annual Meeting, the Company's shareholders approved
continuance (the "Continuance") of the Company under the Canada Business
Corporations Act (the "CBCA"). As a result, the Company continued its corporate
existence governed by the laws of the CBCA rather than the Ontario Business
Corporations Act. The Company believes that the Continuance will not materially
affect the share capital in the Company in any way.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
The following exhibits are filed with this Report:
3.1 Articles of Continuance of 724 Solutions Inc. (filed with the
Registrant's Definitive Schedule 14A, March 31, 2003)
3.2 Articles of Amendment of 724 Solutions Inc. (filed with the
Registrant's Definitive Schedule 14A, March 31, 2003)
3.3 By-laws of 724 Solutions Inc. (filed with the Registrant's Definitive
Schedule 14A, March 31, 2003)
4.1 Form of Certificate Representing Common Shares.
25
99.1 Certification of John J. Sims
99.2 Certification of Glenn Barrett
(b) REPORTS ON FORM 8-K:
During the period covered by this Report, the Company filed one report
on Form 8-K, dated January 22, 2003, reporting the Company's adoption of the
Rights Plan described in Part II, Item II above.
26
SIGNATURES
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.
SIGNATURES TITLES DATE
---------- ------ ----
/S/ JOHN J. SIMS Chief Executive Officer (principal executive officer) May 9, 2003
- ------------------
John J. Sims
/S/ GLENN BARRETT Chief Financial Officer (principal financial and accounting officer) May 9, 2003
- ---------------------------
Glenn Barrett
CERTIFICATIONS
I, John J. Sims, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 724 Solutions Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
27
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/S/ JOHN J. SIMS
---------------------------
John J. Sims
Chief Executive Officer
I, Glenn Barrett, certify that:
1. I have reviewed this quarterly report on Form 10-Q of 724 Solutions Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
28
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 9, 2003
/S/ GLENN BARRETT
--------------------------------------------------
Glenn Barrett
Chief Financial Officer and Senior Vice-President,
Corporate Services
29