UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 20-F

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 20-F
oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

ORx   

ýANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 20032004

OR

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from __________ to .

__________.

Commission File No. 001-14835

ADB SYSTEMS INTERNATIONAL LTD.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant’s name into English)
ONTARIO, CANADA
(Jurisdiction of incorporation or organization)
302 The East Mall, Suite 300 Toronto, Ontario M9B 6C7
(Address of principal executive offices)
Securities registered or to be registered pursuant to Section 12(b) of the Act.
None
Securities registered or to be registered pursuant to Section 12(g) of the Act.
Common Shares
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.
69,870,131 Common Shares as of December 31, 2004
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 o
Indicate by check mark which financial statement item the registrant has elected to follow.
Item 17 o    Item 18x





ADB SYSTEMS INTERNATIONAL LTD.

(Exact name of Registrant as specified in its charter)

Not Applicable
(Translation of Registrant’s name into English)

ONTARIO, CANADA

(Jurisdiction of incorporation or organization)

6725 Airport Road, Suite 201
Mississauga, Ontario L4V 1V2
CANADA
(Address of principal executive offices)

Securities registered or to be registered pursuant to Section 12(b) of the Act.

None

Securities registered or to be registered pursuant to Section 12(g) of the Act.

Common Shares

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act.

None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the Annual Report.

59,422,779 Common Shares as of December 31, 2003

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

ý

No

o

Indicate by check mark which financial statement item the registrant has elected to follow.

Item 17

o

Item 18

ý


ADB SYSTEMS INTERNATIONAL LTD.

AnnualAnnual Report on Form 20-F for the Fiscal Year

Ended December 31, 20032004

FORWARD LOOKING STATEMENTS

From time to time, we make oral and written statements that may be considered “forward"forward looking statements”statements" (rather than historical facts). We are taking advantage of the “safe-harbour”"safe-harbour" provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements we may make from time to time, including the forward-looking statements in this Annual Report.

You can identify these statements when you see words such as “may”"may", “expect”"expect", “anticipate”"anticipate", “estimate”"estimate", “believe”"believe", “intend”"intend", and other similar expressions. These forward-looking statements relate, among other items to:

•                                          our future capital needs;

•                                          future expectations as to profitability and operating results;

•                                          our ability to further develop business relationships and revenues;

•                                          our expectations about the markets for our products and services;

•                                          acceptance of our products and services;

•                                          competitive factors;

•                                          our ability to repay debt;

•                                          our ability to attract and retain employees;

•                                          new products and technological changes;

•                                          our ability to develop appropriate strategic alliances;

•                                          protection of our proprietary technology;

•                                          our ability to acquire complementary products or businesses and integrate them into our business; and

•                                          geographic expansion of our business.

•our future capital needs;
•future expectations as to profitability and operating results;
•our ability to further develop business relationships and revenues;
•our expectations about the markets for our products and services;
•acceptance of our products and services;
•competitive factors;
•our ability to repay debt;
•our ability to attract and retain employees;
•new products and technological changes;
•our ability to develop appropriate strategic alliances;
•protection of our proprietary technology;
•our ability to acquire complementary products or businesses and integrate them into our business; and
•geographic expansion of our business.

We have based these forward-looking statements largely on our current plans and expectations. Forward-looking statements are subject to risks and uncertainties, some of which are beyond our control. Our actual results could differ materially from those described in our forward-looking statements as a result of the factors described in the “Risk Factors” included elsewhere in this Annual Report, including, among others:

•                                          the timing of our future capital needs and our ability to raise additional capital when needed;

•                                          our limited operating history in our current business as a combined entity;

•                                          increasingly longer sales cycles;

•                                          potential fluctuations in our financial results and our difficulties in forecasting;

•                                          volatility of the stock markets and fluctuations in the market price of our stock;

•                                          your ability to buy and sell our shares on the Over the Counter Bulletin Board;

•                                          our ability to compete with other companies in our industry;

•                                          our ability to repay our debt to lenders;

•                                          our ability to retain and attract key personnel;

2


•

•the timing of our future capital needs and our ability to raise additional capital when needed;
•our limited operating history in our current business as a combined entity;
•increasingly longer sales cycles;
•increasingly longer collection cycles;
•potential fluctuations in our financial results and our difficulties in forecasting;
•volatility of the stock markets and fluctuations in the market price of our stock;
•your ability to buy and sell our shares on the Over the Counter Bulletin Board;
•our ability to compete with other companies in our industry;
•our ability to repay our debt to lenders;
•our ability to retain and attract key personnel;
risk of significant delays in product development;

•                                          failure to timely develop or license new technologies;

•                                          risks relating to any requirement to correct or delay the release of products due to software bugs or errors;

•                                          risk of system failure or interruption;

•                                          problems which may arise in connection with the acquisition or integration of new businesses, products, services, technologies or other strategic relationships;

•                                          risks associated with international operations;

•                                          risks associated with protecting our intellectual property, and potentially infringing the intellectual property rights of others;

•                                          uncertainty about the continued acceptance of the Internet as a viable commercial medium; and

•                                          sensitivity to the overall economic environment.




•failure to timely develop or license new technologies;
•risks relating to any requirement to correct or delay the release of products due to software bugs or errors;
•risk of system failure or interruption;
•problems which may arise in connection with the acquisition or integration of new businesses, products, services, technologies or other strategic relationships;
•risks associated with international operations;
•risks associated with protecting our intellectual property, and potentially infringing the intellectual property rights of others;
•uncertainty about the continued acceptance of the Internet as a viable commercial medium; and
•sensitivity to the overall economic environment.

We do not have, and do not undertake, any obligation to publicly update or revise any forward-looking statements contained in this Annual Report, whether as a result of new information, future events or otherwise. Because of these risks and uncertainties, the forward-looking statements and circumstances discussed in this Annual Report might not transpire.

Trademarks or trade names which we own and are used in this Annual Report include: ADB™; PROCUREMATE™; WORKMATE™; BID BUDDY™; SEARCH BUDDY™; DYNAMIC BUYER™ and DYNAMIC SELLER™. Each trademark, trade name, or service mark of any other company appearing in this Annual Report belongs to its holder.

3




TABLE OF CONTENTS






Page
PART I

6

ITEM 1 -

IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

6

ITEM 2 -

OFFER STATISTICS AND EXPECTED TIMETABLE

6

ITEM 3 -

KEY INFORMATION

6

A.

A.

Selected Financial Data

6

B.

B.

Capitalization and Indebtedness

8

C.

C.

Reasons For The Offer And Use Of Proceeds

8

D.

D.

Risk Factors

8

ITEM 4 -

INFORMATION ON THE COMPANY

16

A.

Company Background

16

B.
Business Overview
18
C.
Organizational Structure
28
D.
Property, Plants and Equipment
28
ITEM 5 -
OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

25

29

ITEM 6 -

DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

35

37

A.

A.

Directors And Senior Management

35

37

B.

B.

Compensation

37

39

C.

C.

Board Practices

39

40

D.

D.

Employees

40

41

E.

E.

Share Ownership

41

42

ITEM 7 -

MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

42

43

A.

A.

Major Shareholders

42

43

B.

B.

Related Party Transactions

42

43

ITEM 8 -

FINANCIAL INFORMATION

43

44

ITEM 9 -

THE OFFER AND LISTING

43

44

ITEM 10 -

ADDITIONAL INFORMATION

45

47

A.

A.

Share Capital

45

47

B.

B.

Memorandum and Articles of Association

45

47

C.

C.

Material Contracts

48

50

D.

D.

Exchange Controls

50

52

E.

E.

Taxation

50

52

F.

F.

Dividends and Paying Agents

55

58

G.

G.

Statements by Experts

55

58

H.

H.

Documents on Display

55

58
I.

4


I.

Subsidiary Information

56

58







Page

ITEM 11 -    QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

56

58

ITEM 12 -    DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES

56

59

PART II

56

59

ITEM 13 -    DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES

56

59

ITEM 14 -    MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

56

59

ITEM 15 – -    CONTROLS AND PROCEDURES

56

59

ITEM 16A – AUDIT COMMITTEE FINANCIAL EXPERT

57

ITEM 16B – CODE OF ETHICS

57

ITEM 16C – PRINCIPAL ACCOUNTANT FEES AND SERVICES

57

PART III

57

60

ITEM 17- FINANCIAL STATEMENTS

57

60

ITEM 18 - FINANCIAL STATEMENTS

57

60

ITEMTEM 19 – -     EXHIBITS

58

60

5




Unless otherwise indicated, all references in this Annual Report to “dollars” or “$” are references to Canadian dollars. Our financial statements are expressed in Canadian dollars. Except as otherwise noted, certain financial information presented in this Annual Report has been translated from Canadian dollars to U.S. dollars at an exchange rate of Cdn$1.291.2034 to US$1.00 (or US$ 0.8310 to Cdn 1.00), the noon buying rate in New York City on December 31, 20032004 for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York. These translations are not intended to suggest that Canadian dollars have been or could be converted into U.S. dollars at that or any other rate.

On October 11, 2001, our shareholders approved a two-for-one share consolidation. Unless otherwise indicated, all share and option figures in this Annual Report that relate to the period prior to October 11, 2001 have been adjusted retroactively to reflect the share consolidation.

References to the “Company” and “ADB” refer to ADB Systems International Ltd., as successor to ADB Systems International Inc. as a result of the implementation of the plan of arrangement described on page 17 under the heading “Major Developments.”


PART I

ITEM 1- IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISORS

Not applicable.

ITEM 2- OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3- KEY INFORMATION

A.SELECTED FINANCIAL DATA

A.
SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction with, and is qualified by reference to, our consolidated financial statements and the related notes, and the section “Operating"Operating and Financial Review and Prospects”Prospects" included elsewhere in this Annual Report. The consolidated statement of operations data for the years ended December 31, 2004, 2003 2002 and 20012002 and consolidated balance sheet data as of December 31, 20032004 and 2002,2003, as set forth below, are derived from our consolidated audited financial statements and the related notes included elsewhere in this Annual Report. The consolidated statement of operations data for the years ended December 31, 20002001 and 19992000 and the consolidated balance sheet data as at December 31, 2002, 2001 2000 and 19992000 have been derived from our consolidated audited financial statements for those years, which are not included in this Annual Report.

We have prepared our audited financial statements in accordance with accounting principles generally accepted in Canada, which differ in certain respects from accounting principles generally accepted in the United States. However, as applied to us, for all fiscal periods for which financial data is presented in this Annual Report, Canadian GAAP and U.S. GAAP were substantially identical in all material respects, except as disclosed in Note 2024 of our consolidated financial statements.

Historical results are not necessarily indicative of results to be expected for any future period.

6


Statement of Operations Data:
  
Year Ended December 31
 
  
2004
(Cdn$)
 
2004
(U.S.$) 
 
2003
(Cdn$)
 
2002
(Cdn$)
 
2001
(Cdn$)
 
2000
(Cdn$)
 
  
(Audited)
 
  
(in thousands except for per share data)
 
Revenue  4,930  4,097  5,853  5,780  4,455  12,497 
Less: Customer acquisition costs  -  -  -  -  (60) (157)
Net Revenue  4,930  4,097  5,853  5,780  4,395  12,340 
Expenses                   
Direct expenses  -  -  -  -  -  11,460 
Advertising and promotion  -  -  -  -  -  5,040 
General and administrative  4,365  3,627  4,648  
6,288
  7,622  16,236 
Sales and marketing  749  622  1,098  1,875  4,040  3,161 
Software development and technology  3,257  2,706  2,817  
4,101
  3,691  1,802 
Employee stock options  39  32  193  -  -  - 
Depreciation and amortization  
1,190
  989  
1,901
  
2,602
  1,572  1,130 
Interest expense  433  360  280  155  (345) (467)
Total expenses  10,033  8,336  10,937  15,021  16,580  38,362 
Loss from operations  (5,103) (4,239) (5,084) (9,241) (12,185) (26,022)
Loss from continuing operations
                   
Net Loss  (5,104) (4,240) (2,815) (9,364) (18,714) (20,366)
Loss per common share (1) 
  (0.08) (0.07) (0.05) (0.22) (0.64) (0.76)
Net loss from continuing operations per common share (2)
                   
Weighted average number of common shares (1)
  61,938  61,938  54,324  41,968  29,130  26,844 

Balance Sheet Data:

STATEMENT OF OPERATIONS(3)

DATA:

 

 

Year Ended
December 31

 

 

 

2003

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

(Cdn$)

 

(U.S.$) (1)

 

(Cdn$)

 

(Cdn$)

 

(Cdn$)

 

(Cdn$)

 

 

 

(Audited)
(in thousands except for per share data)

 

Revenue

 

5,853

 

4,537

 

5,780

 

4,455

 

12,497

 

31,001

 

Less:  Customer Acquisition Costs

 

—

 

—

 

—

 

(60

)

(157

)

—

 

Net Revenue

 

5,853

 

4,537

 

5,780

 

4,395

 

12,340

 

31,001

 

Expenses Direct expenses

 

—

 

—

 

—

 

—

 

11,460

 

26,696

 

Advertising and promotion

 

—

 

—

 

—

 

—

 

5,040

 

11,870

 

General and administrative

 

4,648

 

3,603

 

6,288

 

7,622

 

16,236

 

12,405

 

Sales and marketing

 

1,098

 

851

 

1,875

 

4,040

 

3,161

 

—

 

Software development and technology

 

2,817

 

2,183

 

4,101

 

3,691

 

1,802

 

1,001

 

Employee stock options

 

193

 

150

 

—

 

—

 

—

 

—

 

Depreciation and amortization

 

1,901

 

1,474

 

2,602

 

1,572

 

1,130

 

621

 

Interest expense

 

280

 

217

 

155

 

(345

)

(467

)

(767

)

Total expenses

 

10,937

 

8,478

 

15,021

 

16,580

 

38,362

 

51,826

 

Loss from operations

 

(5,084

)

(3,941

)

(9,241

)

(12,185

)

(26,022

)

(20,825

)

Net Loss

 

(2,815

)

(2,182

)

(9,364

)

(18,714

)

(20,366

)

(20,825

)

Loss per common share(2)

 

(0.05

)

(0.04

)

(0.22

)

(0.64

)

(0.76

)

(0.84

)

Weighted average number of common shares(2)

 

54,324

 

54,324

 

41,968

 

29,130

 

26,844

 

24,792

 

BALANCE SHEET DATA:(3)

 

 

As at December 31

 

 

 

2003

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

(Cdn$)

 

(U.S.$(1)

 

(Cdn$)

 

(Cdn$)

 

(Cdn$)

 

(Cdn$)

 

 

 

(Audited)

 

 

 

(in thousands)

 

Working capital

 

486

 

376

 

(1,757

)

3,115

 

13,671

 

21,523

 

Total assets

 

3,211

 

2,488

 

6,355

 

10,592

 

20,801

 

36,743

 

Long-term Deferred Revenue

 

—

 

—

 

—

 

33

 

1,195

 

1,289

 

Shareholders equity

 

1,026

 

794

 

1,198

 

8,014

 

15,860

 

28,985

 

  
As at December 31
 
  
2004
(Cdn$)
 
2004
(U.S.$) 
 
2003
(Cdn$)
 
2002
(Cdn$)
 
2001
(Cdn$)
 
2000
(Cdn$)
 
  
(Audited)
 
  
(in thousands)
 
Working capital  381  317  486  (1,757) 3,115  13,671 
Total assets  2,493  2,072  3,211  6,355  10,592  20,801 
Net assets
                   
Long-term deferred revenue  -  -  -  -  33  1,195 
Shareholders’ (deficiency) equity  (1,009) (838) 1,026  1,198  8,014  15,860 
(1)In October 2001, our shareholders approved a 2 for 1 share consolidation. All per share amounts have been adjusted retroactively to reflect the consolidation. See Note 8(d) of our consolidated financial statements for a discussion regarding the calculation of common shares outstanding and loss per common share.
(2)For each fiscal year, the Company excluded the effect of all convertible debt, stock options and share-purchase warrants, as their impact would have been anti-dilutive.
(3)We have not paid dividends since our formation.

(1)                                  Convenience translation into U.S. $. See Note 24 of our consolidated financial statements.

(2)                                  In October 2001, our shareholders approved a 2 for 1 share consolidation.  All per share amounts have been adjusted retroactively to reflect the consolidation.  See Note 9(g) of our consolidated financial statements for a discussion regarding the calculation of common shares outstanding and loss per common share.

(3)                                  We have not paid dividends since our formation.



EXCHANGE RATES

The following tables set forth, for the periods indicated, certain exchange rates based on the noon buying rate in New York City for cable transfers in Canadian dollars, as certified for customs purposes by the Federal Reserve Bank of New York. Such rates are the number of U.S. dollars per one Canadian dollar and are the inverse

7


of the rates quoted by the Federal Reserve Board of New York for Canadian Dollars per U.S. $1.00. On June 3, 2004,May 31, 2005, the exchange rate was US$1.00 = Cdn$1.36060.7992.

 

 

Year Ended December 31,

 

Rate

 

2003

 

2002

 

2001

 

2000

 

1999

 

 

 

 

 

 

 

 

 

 

 

 

 

Average (1) during year

 

.7205

 

.6344

 

.6449

 

.6725

 

.6744

 

(1) The average rate is the average of the exchange rates on the last day of each month during the year.

Month

 

High during month

 

Low during month

 

 

 

 

 

 

 

November 2003

 

.7692

 

.7484

 

December 2003

 

.7738

 

.7522

 

January 2004

 

.7880

 

.7496

 

February 2004

 

.7629

 

.7439

 

March 2004

 

.7645

 

.7418

 

April 2004

 

.7633

 

.7293

 

May 2004

 

.7364

 

.7158

 

B.CAPITALIZATION AND INDEBTEDNESS

  Year Ended December 31, 
Rate 2004 2003 2002 2001 2000 
Average (1) during year  0.7702  0.7205  0.6344  0.6449  0.6725 

(1)The average rate is the average of the exchange rates on the last day of each month during the year.



Month High during month Low during month 
November 2004  0.8493  0.8155 
December 2004  0.8435  0.8064 
January 2005  0.8346  0.8050 
February 2005  0.8134  0.7961 
March 2005  0.8315  0.8024 
April 2005  0.8233  0.7957 
May 2005  0.8082  0.7872 

B.
CAPITALIZATION AND INDEBTEDNESS
Not applicable.

C.REASONS FOR THE OFFER AND USE OF PROCEEDS.

C.
REASONS FOR THE OFFER AND USE OF PROCEEDS.
Not applicable.

D.
RISK FACTORS

D.RISK FACTORS

The following is a summary of certain risks and uncertainties which we face in our business. This summary is not meant to be exhaustive. These Risk Factors should be read in conjunction with other cautionary statements which we make in this Annual Report and in our other public reports, registration statements and public announcements.

WE WILL NEED ADDITIONAL CAPITAL AND IF WE ARE UNABLE TO SECURE ADDITIONAL FINANCING WHEN WE NEED IT, WE MAY BE REQUIRED TO SIGNIFICANTLY CURTAIL OR CEASE OUR OPERATIONS.

The Company is

We have not yet profitable.realized profitable operations and have relied on non-operational sources of financing to fund our operations. Since we began our operations, we have been funded primarily through the sale of securities to investors in a series of private placements, convertible debt instruments, sales of equity to, and investments from, strategic partners, gains from investments, option exercises convertible debt instruments and, to a limited extent, through cash flow from operations. The Company’sOur ability to continue as a going concern will be dependent on management’s ability to successfully execute its business plan including a substantial increase in revenue and obtain additional forms of debtas well as maintaining operating expenses at or equity financing.  As of June 18, 2004, we had cash and marketable securities of approximately $1.23 million dollars. The Company expects that additional debt or equity financing suchnear the same level as the issuance of loans or debentures, issuance of shares, conversion of warrants and exercise of options in the amount of $3.7 million will be required in order for the Company to be able to fund its operations through 2004. The CompanyManagement cannot provide assurance that it will be able to execute on its business plan or assure that efforts to raise such additional financings willwould be successful.

8


Management believes that continued existence beyond 20042005 is dependent on its ability to increase revenue from sales of existing products, and to expand the scope of its product offering through the expansionwhich entails a combination of internally developed software and partnerships with third parties.

As of May 31, 2005, we had cash on hand and



marketable securities of approximately $610,000. Management believes that it has the ability to raise additional financing if required.
We do not have any committed sources of additional financing at this time and we are uncertain whether additional funding will be available when we need it on terms that will be acceptable to us or at all. If we are not able to obtain financing when we need it, we would be unable to carry out our business plan and would have to significantly curtail or cease our operations. We have included in Note 2 to our financial statements a discussion about the ability of our company to continue as a going concern.

Potential sources of financing include strategic relationships, public or private sales of our shares, debt, convertible securities or other arrangements. If we raise funds by selling additional shares, including common shares or other securities convertible into common shares, the ownership interests of our existing shareholders will be diluted. If we raise funds by selling preference shares, such shares may carry more voting rights, higher dividend payments or more favorable rights upon distribution than those for the common shares. If we incur debt, the holders of such debt may be granted security interests in our assets. Because of our potential long termlong-term capital requirements, we may seek to access the public or private equity or debt markets whenever conditions are favorable, even if we do not have an immediate need for additional capital at that time.

WE ARE NOT PROFITABLE AND WE MAY NEVER BECOME PROFITABLE.

We have accumulated net losses of approximately $99.8$104.9 million as of December 31, 2003.2004. For the year ended December 31, 20032004 our net loss was $2.8$5.104 million. We have never been profitable and expect to continue to incur losses for the foreseeable future. We cannot assure you that we will earn profits or generate positive cash flows from operations in the future.

OUR LIMITED OPERATING HISTORY IN OUR CURRENT BUSINESS AS A COMBINED ENTITY AND OUR JOINT VENTURE WITH GE COMMERCIAL FINANCE MAKES EVALUATING OUR BUSINESS DIFFICULT.

From the time

Since we were founded in September 1995 and until 1999 we operated solely as an online retailer of computer and other goods. Since 1999In 2000, we have shifted our focus to providing dynamic pricing solutions..solutions. In October 2001, we acquired ADB Systemer ASA of Norway, a provider of enterprise asset management and electronic procurement software and services. While ADB Systemer has operated since 1988, we have only a limited operating history as a combined entity on which you can base your evaluation of our business and prospects.

In December 2003 we formed the joint venture, GE Asset Manager LLC, with GE Commercial Equipment Financing. Growing this business venture has required us to shift focus from a broad spectrum of customers to focusing on a small number of large clients. By further investing in our relationship with GE Commercial Equipment Financing we are increasing our business risk by becoming substantially dependent on the business generated by the joint venture.
Our business and prospects must be considered in light of the risks, uncertainties and expenses frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets. Our business strategy may not be successful and we may not successfully address those risks.

WE MAY EXPERIENCE INCREASINGLY LONGER SALES CYCLES

CYCLES.

A significant portion of our revenue in any quarter is derived from a relatively small number of contracts. We often experience sales cycles of six (6) to eighteen (18) months. If the length of our sales cycles increases, our revenues may decrease and our quarterly results would be adversely affected. In addition, our current and future expense levels are based largely on our investment plans and estimates of future revenues and are, to a large extent, fixed. We may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Any significant shortfall in revenues relative to our planned expenditures would have a material adverse effect on our business, financial condition, cash flows and results of operations.

POTENTIAL FLUCTUATIONS IN OUR FINANCIAL RESULTS MAKE FINANCIAL FORECASTING DIFFICULT

DIFFICULT.

Our operating results have varied on a quarterly basis in the past and may fluctuate significantly as a result of a variety of factors, many of which are outside our control. Factors that may affect our quarterly operating results include:

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•

general economic conditions as well as economic conditions specific to our industry;

•                                          long sales cycles, which characterize our industry;

•                                          implementation delays, which can affect payment and recognition of revenue;

•                                          any decision by us to reduce prices for our solutions in response to price reductions by competitors;

•                                          the amount and timing of operating costs and capital expenditures relating to monitoring or expanding our business, operations and infrastructure; and

•                                          the timing of, and our ability to integrate, any future acquisition, technologies or products or any strategic investments or relationships into which we may enter.




•long sales cycles, which characterize our industry;
•implementation delays, which can affect payment and recognition of revenue;
•any decision by us to reduce prices for our solutions in response to price reductions by competitors;
•the amount and timing of operating costs and capital expenditures relating to monitoring or expanding our business, operations and infrastructure; and
•the timing of, and our ability to integrate, any future acquisition, technologies or products or any strategic investments or relationships into which we may enter.
Due to these factors, our quarterly revenues and operating results are difficult to forecast. We believe that period-to-period comparisons of our operating results may not be meaningful and should not be relied upon as an indication of future performance. In addition, it is likely that in one or more future quarters, our operating results will fall below the expectations of securities analysts and investors. In such event, the trading price of our common shares would almost certainly be materially adversely affected.

OUR SHARE PRICE HAS FLUCTUATED SUBSTANTIALLY AND MAY CONTINUE TO DO SO.

The trading price of our common shares on The Toronto Stock Exchange and on the NASDAQ Over the Counter Bulletin Board (“OTCBB”) has fluctuated significantly in the past and could be subject to wide fluctuations in the future. The market prices for securities of technology companies have been highly volatile. These companies have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to their operating performance. Broad market and industry factors may materially and adversely affect the market price of our common shares, regardless of our operating performance. In addition, fluctuations in our operating results, and concerns regarding our competitive position can have an adverse and unpredictable effect on the market price of our shares.

In the past, following periods of volatility in the market price of a company’s securities, securities class-action litigation has often been instituted against that company. Such litigation, if instituted against us, could result in substantial costs and a diversion of management’s attention and resources, which could have a material adverse effect on our business, results of operations, cash flow, financial condition and prospects.

YOUR ABILITY TO BUY OR SELL OUR COMMON SHARES ON THE OTCBB MAY BE LIMITED

LIMITED.

On June 3, 2002, we transferred the listing of our common shares from the Nasdaq National Market to the Nasdaq SmallCap Market. On August 22, 2002, our common shares were delisted from the Nasdaq SmallCap Market because we did not satisfy the minimum bid price per share requirement for continued listing on that market. Our common shares immediately became eligible for and began trading on the OTCBB. The OTCBB is generally considered to be a less efficient market than the Nasdaq National Market or the Nasdaq SmallCap Market on which our shares previously traded. As a result, your ability to buy or sell our common shares on the OTCBB may be limited. In addition, since our shares are no longer listed on the Nasdaq National Market or Nasdaq SmallCap Market, our shares may be subject to the “penny stock” regulations described below. De-listing from the Nasdaq National Market and the Nasdaq SmallCap Market will not affect the listing of the common shares on The Toronto Stock Exchange.


OUR COMMON SHARES MAY BECOMEARE SUBJECT TO “PENNY STOCK” REGULATIONS WHICH MAY AFFECT YOUR ABILITY TO BUY OR SELL OUR COMMON SHARES.

Our common shares have traded on the Nasdaq National and Small Cap Markets and on the OTCBB at prices below US$5.00 since April 2000 (on a pre-consolidation basis). As a result, our shares may becomeare characterized as “penny stocks” which couldmay severely affect market liquidity. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock.

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Securities and Exchange Commission regulations generally define a penny stock to be an equity security that has a market price of less than US$5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on Nasdaq or a national securities exchange and any equity security issued by an issuer that has:

•                                          net tangible assets of at least US$2,000,000, if such issuer has been in continuous operation for three years;

•                                          net tangible assets of at least US$5,000,000, if such issuer has been in continuous operation for less than three years; or

•                                          average annual revenue of at least US$6,000,000, if such issuer has been in continuous operation for less than three years.

Unless an exception is available, theThe regulations require, prior to any transaction involving a penny stock, delivery of a disclosure schedule explaining the penny stock market and the risks associated therewith. The penny stock regulations wouldmay adversely affect the market liquidity of our common shares by limiting the ability of broker/dealers to trade the shares and the ability of purchasers of our common shares to sell in the secondary market. Certain institutions and investors will not invest in penny stocks.

THE MARKETS IN WHICH WE OPERATE ARE HIGHLY COMPETITIVE.

The market for asset lifecycle management solutions is rapidly evolving and intensely competitive. We face significant competition in each segment of our business (sourcing, procurement, enterprise asset management and asset disposition). We expect that competition will further intensify as new companies enter the different segments of our market and larger existing companies expand their product lines. If the global economy continues to lag, we could face increased competition, particularly in the form of lower prices.

Many of our competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than we. We cannot assure you that we will be able to compete with them effectively. If we fail to do so, it would have a material adverse effect on our business, financial condition, cash flows and results of operations.

WE MAY NOT BE ABLE TO RETAIN OR ATTRACT THE HIGHLY SKILLED PERSONNEL WE NEED.

NEED, IN PARTICULAR AS A RESULT OF OUR RECENT WORKFORCE REDUCTIONS.

Our success is substantially dependent on the ability and experience of our senior management and other key personnel. We do not have long termlong-term employment agreements with any of our key personnel and maintain no “key person” life insurance policies.

In 2002, we implemented a workforce reduction. We experienced some attrition during 2003 and 2004 as a result of the reduction. The number of our employees as of March 15, 2005 represents a 5% decrease in our workforce as compared with the number of our employees as of May 12, 2004. We may need to hire new or additional personnel to respond to attrition or future growth of our business. However, there is significant competition for qualified personnel. We cannot be certain we will be able to retain existing personnel or hire additional, qualified personnel when needed.

SIGNIFICANT DELAYS IN PRODUCT DEVELOPMENT WOULD HARM OUR REPUTATION AND RESULT IN LOSS OF REVENUE.

If we experience significant product development delays, our position in the market would be harmed, and our revenues could be substantially reduced, which would adversely affect our operating results. As a result of the complexities inherent in our software, major new product enhancements and new products often require long development and test periods before they are released. On occasion, we have experienced delays in the scheduled release date of new or enhanced products, and we may experience delays in the future. Delays may occur for many reasons, including an inability to hire a sufficient number of developers, discovery of bugs and errors or a failure of our current or future products to conform to industry requirements. Any such delay, or the failure of new products or enhancements in achieving market acceptance, could materially impact our business and reputation and result in a decrease in our revenues.

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WE MAY HAVE TO EXPEND SIGNIFICANT RESOURCES TO KEEP PACE WITH RAPID TECHNOLOGICAL CHANGE

CHANGE.

Our industry is characterized by rapid technological change, changes in user and customer requirements, frequent new service or product introductions embodying new technologies and the emergence of new industry standards and practices. Any of these could hamper our ability to compete or render our proprietary technology obsolete. Our future success will depend, in part, on our ability to:

•                                          develop new proprietary technology that addresses the increasingly sophisticated and varied needs of our existing and prospective customers;

•                                          anticipate and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis;

•                                          continually improve the performance, features and reliability of our products in response to evolving market demands; and

•                                          license leading technologies.

•develop new proprietary technology that addresses the increasingly sophisticated and varied needs of our existing and prospective customers;
•anticipate and respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis;
•continually improve the performance, features and reliability of our products in response to evolving market demands; and
•license leading technologies.
We may be required to make substantial expenditures to accomplish the foregoing or to modify or adapt our services or infrastructure.



OUR BUSINESS COULD BE SUBTANTIALLYSUBSTANTIALLY HARMED IF WE HAVE TO CORRECT OR DELAY THE RELEASE OF PRODUCTS DUE TO SOFTWARE BUGS OR ERRORS

ERRORS.

We sell complex software products. Our software products may contain undetected errors or bugs when first introduced or as new versions are released. Our software products may also contain undetected viruses. Further, software we license from third parties and incorporate into our products may contain errors, bugs or viruses. Errors, bugs and viruses may result in any of the following:

•                                          adverse customer reactions;

•                                          negative publicity regarding our business and our products;

•                                          harm to our reputation;

•                                          loss of or delay in market acceptance;

•                                          loss of revenue or required product changes;

•                                          diversion of development resources and increased development expenses;

•                                          increased service and warranty costs;

•                                          legal action by our customers; and

•                                          increased insurance costs.

•adverse customer reactions;
•negative publicity regarding our business and our products;
•harm to our reputation;
•loss of or delay in market acceptance;
•loss of revenue or required product changes;
•diversion of development resources and increased development expenses;
•increased service and warranty costs;
•legal action by our customers; and
•increased insurance costs.

SYSTEMS DEFECTS, FAILURES OR BREACHES OF SECURITY COULD CAUSE A SIGNIFICANT DISRUPTION TO OUR BUSINESS, DAMAGE OUR REPUTATION AND EXPOSE US TO LIABILITY.

We host certain websites and sub-sites for our customers. Our systems are vulnerable to a number of factors that may cause interruptions in our ability to enable or host solutions for third parties, including, among others:

•                                          damage from human error, tampering and vandalism;

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•                                          breaches of security;

•                                          fire and power losses;

•                                          telecommunications failures and capacity limitations; and

•                                          software or hardware defects.

•damage from human error, tampering and vandalism;
•breaches of security;
•fire and power losses;
•telecommunications failures and capacity limitations; and
•software or hardware defects.
Despite the precautions we have taken and plan to take, the occurrence of any of these events or other unanticipated problems could result in service interruptions, which could damage our reputation, and subject us to loss of business and significant repair costs. Certain of our contracts require that we pay penalties or permit a customer to terminate the contract if we are unable to maintain minimum performance levels. Although we continue to take steps to enhance the security of our systems and ensure that appropriate back-up systems are in place, our systems are not now, nor will they ever be, fully secure.

OUR BUSINESS HAS UNDERGONE DRAMATIC EXPANSION AND RETRACTION PHASES SINCE OUR FORMATION. WE MAY NOT BE ABLE TO MANAGE FURTHER DRAMATIC EXPANSIONS AND RETRACTIONS IN THE FUTURE.

Our business has undergone dramatic expansion and retraction since our formation, which has placed significant strain on our management resources. If we should grow or retract dramatically in the future, there may be further significant demands on our management, administrative, operating and financial resources. In order to manage these demands effectively, we will need to expand and improve our operational, financial and management information systems and motivate, manage and retain employees. We cannot assure you that we will be able to do so, that our management, personnel or systems will be adequate, or that we will be able to achieve levels of revenue commensurate with the resulting levels of operating expenses.



INTERNATIONAL SALES ACCOUNT FOR A SIGNIFICANT PORTION OF OUR REVENUE, WHICH EXPOSES US TO CERTAIN RISKS.

We currently operate in Canada, Norway, Ireland, the United States and England. In the 20032004 fiscal year, sales to customers outside North America represented approximately 79%84% of our revenues. There are risks inherent in doing business on a global level, including:

•                                          difficulties in managing and staffing an organization spread across several continents;

•                                          differing laws and regulatory requirements;

•                                          political and economic risks;

•                                          currency and foreign exchange fluctuations and controls;

•                                          tariffs, customs, duties and other trade barriers;

•                                          longer payment cycles and problems in collecting accounts receivable in certain countries;

•                                          export and import restrictions;

•                                          the need for product compliance with local language and business customs;

•                                          seasonal reductions in business activity during the summer months in Europe and elsewhere; and

•                                          potentially adverse tax consequences.

•difficulties in managing and staffing an organization spread across several continents;
•differing laws and regulatory requirements;
•political and economic risks;
•currency and foreign exchange fluctuations and controls;
•tariffs, customs, duties and other trade barriers;
•longer payment cycles and problems in collecting accounts receivable in certain countries;
•export and import restrictions;
•the need for product compliance with local language and business customs;
•seasonal reductions in business activity during the summer months in Europe and elsewhere; and
•potentially adverse tax consequences.
Any of these risks could adversely affect the success of our global operations.

ACQUISITIONS OF COMPANIES OR TECHNOLOGIES MAY RESULT IN DISRUPTIONS TO OUR BUSINESS AND/OR DISTRACTIONS FOR OUR MANAGEMENT.

We acquired ADB Systemer ASA of Norway in October 2001. In the future, we may seek to acquire other businesses or make investments in complementary businesses or technologies. We may not be able to acquire or

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manage additional businesses profitably or successfully integrate any acquired businesses with our business. Businesses that we acquire may have liabilities that we underestimate or do not discover during our pre-acquisition investigations. Certain liabilities, even if we do not expressly assume them, may be imposed on us as the successor to the business. Further, each acquisition may involve other special risks that could cause the acquired businesses to fail to meet our expectations. For example:

•                                          the acquired businesses may not achieve expected results;

•                                          we may not be able to retain key personnel of the acquired businesses;

•                                          we may incur substantial, unanticipated costs, delays or other operational or financial problems when we try to integrate businesses we acquire with our own;

•                                          our management’s attention may be diverted; or

•                                          our management may not be able to manage the combined entity effectively or to make acquisitions and grow our business internally at the same time.

•the acquired businesses may not achieve expected results;
•we may not be able to retain key personnel of the acquired businesses;
•we may incur substantial, unanticipated costs, delays or other operational or financial problems when we try to integrate businesses we acquire with our own;
•our management’s attention may be diverted; or
•our management may not be able to manage the combined entity effectively or to make acquisitions and grow our business internally at the same time.
The occurrence of one or more of these factors could have a material adverse effect on our business, financial condition, cash flows and results of operations.

In addition, we may incur debt or issue equity securities to pay for any future acquisitions or investments, which could dilute the ownership interest of our existing shareholders.

IF WE ARE UNABLE TO SUCCESSFULLY PROTECT OUR INTELLECTUAL PROPERTY OR OBTAIN CERTAIN LICENSES, OUR COMPETITIVE POSITION MAY BE WEAKENED.

Our performance and ability to compete are dependent in part on our technology. We rely on a combination of patent, copyright, trademark and trade secret laws as well as confidentiality agreements and technical measures, to establish and protect our rights in the technology we develop. We cannot guarantee that any patents issued to us will afford meaningful protection for our technology. Competitors may develop similar technologies which do not conflict with our patents. Others may challenge our patents and, as a result, our patents could be narrowed or invalidated.

Our software is protected by common law copyright laws, as opposed to registration under copyright statutes. Common law protection may be narrower than that which we could obtain under registered copyrights. As a result, we may experience difficulty in enforcing our copyrights against certain third parties. The source code for our proprietary software is protected as a trade secret. As part of our confidentiality protection


procedures, we generally enter into agreements with our employees and consultants and limit access to, and distribution of, our software, documentation and other proprietary information. We cannot assure you that the steps we take will prevent misappropriation of our technology or that agreements entered into for that purpose will be enforceable. In order to protect our intellectual property, it may be necessary for us to sue one or more third parties. While this has not been necessary to date, there can be no guarantee that we will not be required to do so in the future to protect our rights. The laws of other countries may afford us little or no protection for our intellectual property.

We also rely on a variety of technology that we license from third parties, including our database and Internet server software, which is used to perform key functions. These third partythird-party technology licenses may not continue to be available to us on commercially reasonable terms, or at all. If we are unable to maintain these licenses or obtain upgrades to these licenses, we could be delayed in completing or prevented from offering some products or services.

OTHERS COULD CLAIM THAT WE INFRINGE ON THEIR INTELLECTUAL PROPERTY RIGHTS, WHICH MAY RESULT IN COSTLY AND TIME CONSUMINGTIME-CONSUMING LITIGATION.

Our success will also depend partly on our ability to operate without infringing upon the proprietary rights of others, as well as our ability to prevent others from infringing on our proprietary rights. We may be required at times to take legal action in order to protect our proprietary rights. Also, from time to time, we may receive notice from third parties claiming that we infringe their patent or other proprietary rights. In the past, a certain third party

14


has claimed that certain of our technology infringed their intellectual property rights. The Company does not believe it does or ever has infringed the intellectual property rights whichof any third party. The claim with the particular third party has been resolved through a licensing arrangement that remains in effect.arrangement. There can be no assurances that other third parties will not make similar claims in the future.

We believe that infringement claims will increase in the electronic commercetechnology sector as competition intensifies. Despite our best efforts, we may be sued for infringing on the patent or other proprietary rights of others. Such litigation is costly, and even if we prevail, the cost of such litigation could harm us. If we do not prevail or cannot fund a complete defense, in addition to any damages we might have to pay, we could be required to stop the infringing activity or obtain a license. We cannot be certain that any required license would be available to us on acceptable terms, or at all. If we fail to obtain a license, or if the terms of a license are burdensome to us, this could have a material adverse effect on our business, financial condition, cash flows and results of operations.

OUR PRODUCT STRATEGY IS PARTIALLY DEPENDENT UPON THE CONTINUED ACCEPTANCE AND USE OF THE INTERNET AS A MEDIUM OF COMMERCE.

Our success depends in part on the continued growth of the Internet and reliance on and use of the Internet by businesses. Because use of the Internet as a source of information, products and services is a relatively recent phenomenon, it is difficult to predict whether the number of users drawn to the Internet will continue to increase and whether the market for commercial use of the Internet will continue to develop and expand.

The Internet may not be commercially viable for a number of reasons, including potentially inadequate development of the necessary network infrastructure, delayed development of enabling technologies and inadequate performance improvements. In addition, the Internet’s viability as a commercial marketplace could be adversely affected by delays in the development of services or due to increased government regulation. Moreover, concern about the security of transactions conducted on the Internet and the privacy of users may also inhibit the growth of commerce on the Internet. If the use of the Internet does not continue to grow or grows more slowly than expected, or if the infrastructure for the Internet does not effectively support growth that may occur, our business would be materially and adversely affected.

OUR BUSINESS IS SENSITIVE TO THE OVERALL ECONOMIC ENVIRONMENT. ANY SLOWDOWN IN INFORMATION TECHNOLOGY SPENDING BUDGETS COULD HARM OUR OPERATING RESULTS

RESULTS.

Any significant downturn in our customers’customers' markets or in general economic conditions that results in reduced information technology spending budgets would likely result in a decreased demand for our products and services, longer selling cycles and lower prices, any of which may harm our business.

WE ARE SUBJECT TO RISKS ASSOCIATED WITH EXCHANGE RATE FLUCTUATIONS.

Substantially all of our revenues are in European currencies or U.S. dollars, while the majority of our operating expenses are in Canadian dollars and Norwegian kroner and Euros.kroner. We do not have any hedging programs in


place to manage the potential exposure to fluctuations in the Canadian dollar and Norwegian kroner or Euro exchange rates. Fluctuations in the exchange rates of these currencies or the exchange rate of other currencies against the Canadian dollar or Norwegian kroner or Euro could have a material adverse effect on our business, financial condition, cash flows and results of operations.

OUR PREFERENCE SHARES COULD PREVENT OR DELAY A TAKEOVER THAT SOME OR A MAJORITY OF SHAREHOLDERS CONSIDER FAVORABLE.

Our Board of Directors, without any further vote of our shareholders, may issue preference shares and determine the price, preferences, rights and restrictions of those shares. The rights of the holders of common shares will be subject to, and may be adversely affected by, the rights of the holders of any series of preference shares that may be issued in the future. That means, for example, that we can issue preference shares with more voting rights, higher dividend payments or more favorable rights upon distribution than those for our common shares. If we issue certain types of preference shares in the future, it may also be more difficult for a third party to acquire a majority of

15


our outstanding voting shares and such issuance may, in certain circumstances, deter or delay mergers, tender offers or other possible transactions that may be favored by some or a majority of our shareholders.

IT MAY BE DIFFICULT FOR YOU TO ENFORCE LEGAL CLAIMS AGAINST US OR OUR OFFICERS OR DIRECTORS.

We are incorporated under the laws of the Province of Ontario, Canada. Certain of our directors and officers are residents of Canada Norway and Ireland,Norway and substantially all of our assets and the assets of such persons are located outside the United States. As a result, it may be difficult for holders of common shares to effect service of legal process within the United States upon those directors and officers who are not residents of the United States. It may also be difficult to realize in the United States upon judgments of courts of the United States without enforcing such judgments in our home jurisdiction or the jurisdiction of residence of the director or officer concerned.

ITEM 4- INFORMATION ON THE COMPANY

OVERVIEW

We develop and sell software solutions and services that allow our customers to source, manage, and sell their assets and capital equipment.  We refer to our product and services suite as asset lifecycle management solutions.  Our solutions help our customers reduce sourcing, procurement and maintenance costs, improve asset utilization, reduce operational downtime, and generate higher yields for surplus equipment.

In October, 2001, we acquired ADB Systemer ASA (“ADB Systemer”), a Norway-based software company with more than 10 years of experience developing enterprise asset management solutions to customers primarily involved in the oil and gas industry.  Since the acquisition, ADB Systems has maintained sales and development offices in Canada, the United States, the United Kingdom, Ireland and Norway.

We work with a growing number of customers and partners in a variety of sectors including oil and gas, government, healthcare, manufacturing and financial services.   Current customers include BP, GE Commercial Equipment Financing, Halliburton Energy Resources, National Health Service, permanent TSB, Talisman Energy, and Vesta Insurance.

A. COMPANY BACKGROUND

The name of ourthe company is ADB Systems International Ltd.  We areLtd (“ADB,”“ADB Systems” or the “Company”). The Company was formed as a business corporation underpursuant to the laws of Ontario, Canada.  OurBusiness Corporations Act (Ontario). The business began as Internet Liquidators Inc. (“IL Inc.”), a business corporation formed under the laws of Ontario, Canada, in September 1995.1995 and after a series of corporate reorganizations, as described below developed into the present Company. In May 1996, Internet Liquidators International Inc. (“ILI Inc.”), also an Ontario company, acquired all of the shares of Internet LiquidatorsIL Inc. These two companies were amalgamated inon January 9, 1997. InBy articles of amendment dated June 25 1998, weILI Inc. changed ourits name from Internet Liquidators International Inc. to Bid.Com International Inc.

Prior to October 24, 2000, we operated two national business-to-consumer auction sites at www.bid.com, one in the United States and one in Canada. Following an extensive strategic review by ADB’s Board of Directors and management, ADB decided late in 2000 to focus on its software business.

On October 11, 2001, weBid.Com acquired substantially all of the shares of ADB Systemer ASA, a Norway-based providerpublic limited liability company organized under the laws of enterprise asset management and electronic procurement software.the Kingdom of Norway. As part of the acquisition of ADB Systemer, weBid.Com completed a two for one share consolidation and changed ourits name to ADB Systems International Inc. and completed a two for one share consolidation.  In this report, we refer to(“ADB Inc.”) by articles of amendment dated October 11, 2001.
During 2002, ADB Systems International Inc. as “Old ADB.(“ADB Inc.”

), entered into a series of agreements with the Brick Warehouse Corporation (“The Brick”), which are described below under the heading “The Brick Transaction” and subsequently ADB Inc. changed its name to Bid.com International Ltd.

On August 30,20, 2002, we formed a new company called ADB Systems International Ltd., which we refer to in this report as the “Company” or “ADB” or “we” or “our company”.was incorporated by certificate and Articles of Incorporation. On October 31, 2002, the shareholders of Old ADB Inc. exchanged their shares of Old ADB Inc. for shares of the Company on a one-for-one basis. This exchange was

16


implemented pursuant to a plan of arrangement approved by the shareholders of Old ADB Inc. on October 22, 2002 and by the Ontario Superior Court of Justice on October 24, 2002 (which we refer to in this reportform as the “Arrangement”). As a result of the Arrangement, the business of Old ADB Inc., including all assets and liabilities of Old ADB Inc. (other than those related to retail activities),



was transferred to the Company in the form of a return of capital. Old ADB Inc. subsequently changed its name to Bid.Com International Ltd. .  In late 2002, Bid.Com International Ltd. resumed on-line retail activities. For more details on
The principal place of business and registered office of the Arrangement, see the next section under the heading “Major Developments”.

We are governed by the Ontario Business Corporations Act. Our principal business offices in North America areCompany is located at 6725 Airport Road,302 The East Mall, Suite 201, Mississauga,300 Toronto, Ontario, L4V 1V2, Canada, M9B 6C7 and our telephone number is (905) 672-7467.(416) 640-0400. In Norway, our principal business offices are located at Vingveien 2, 4050 Sola, Norway and our telephone number is +47 51 64 71 00. In the United States, our principal business office is located at 3001 North Rocky Point Drive East, Suite 200, Tampa, Florida 33607 and our telephone number is (813) 281-4825.

Our shares trade on the Toronto Stock Exchange under the symbol “ADY” and are traded on the OTCBBOver the Counter Bulletin Board (the “OTCBB”) under the symbol “ADBY”“ADBYF”. Additional information about our company can be obtained at our web site –- www.adbsys.com. The information contained on our web site is not deemed to be part of this Annual Report.


MAJOR DEVELOPMENTS

Fiscal 2004
•ADB was engaged in a number of activities aimed at expanding our relationships with existing customers and developing relationships with new customer organizations. Through these efforts, which included the introduction of new technology enhancements to our suite of product offerings, the cross selling of ancillary applications, and the increase in the number of users of our technology, ADB was able to expand our working relationships with BP the National Health Services (UK), and GE CEF, among others.
•
In North America, the primary thrust of our activities in 2004 concentrated on the rollout of Asset Manager from GE, our joint venture with GE Commercial Finance. This joint venture is designed to combine GE’s equipment financing and asset management expertise together with our experience in providing mission-critical technology solutions for asset lifecycle management. Together, we have developed web-based solutions to help our customers:
•Track and re-deploy assets more effectively;
•Automate equipment appraisals;
•Efficiently market and sell surplus equipment; and
•Automate sourcing and tendering processes.
•Through the joint venture, we signed a customer agreement with Kraft Foods Global, Inc. (“Kraft”) and continued to service our customer agreement with the General Electric Company, acting through its GE Aircraft Engines division (“GE Aircraft Engines”).
•ADB made a number of enhancements to our suite of technology product offerings in 2004. These enhancements, which centered on re-architecting the under-lying platform of our Dyn@mic Buyer solution and expanding the functionality of our WorkMate and Material Transfer applications, allow us to stay current with the latest technology trends while maintaining a competitive advantage.
•A key cornerstone of our technology activities focused on the development of Asset Tracker, a new, web-based asset-tracking offering that is delivered through our joint venture with GE.
•Effective November 15, 2004 our stock symbol on the Over The Counter Bulletin Board (the “OTCBB”) was changed to ADBYF. The addition of the F to the symbol was a requirement of the OTCBB to signify that we are a foreign issuer.
The Brick Transaction
On August 30, 2002, we entered into a series of agreements with The Brick Warehouse Corporation (“The Brick”) which contemplated a series of transactions among The Brick, , ADB Systems International Inc. (“Old ADBADB”) and ADB. We refer to those transactions in this reportAIF as “The Brick Transaction”.

Pursuant to The Brick Transaction:

•

The Brick made a $2.0 million secured loan to Old ADB and ADB at an interest rate of 12% per annum;

•                  ADB and Old ADB agreed to enter into Arrangement; and

•                  The Brick and Old ADB agreed to utilize the online retail technology, experience and expertise of ADB developed and operated under the name “Bid.Com International Inc.” for the online sale of consumer products to be supplied by The Brick (which we refer to in this report as the “Retail Business”).

year;




•ADB and Old ADB agreed to enter into the Arrangement (as defined above); and
•The Brick and Old ADB agreed to utilize the online retail technology, experience and expertise of ADB developed and operated under the name “Bid.Com International Inc.” for the online sale of consumer products to be supplied by The Brick (which we refer to in this report as the “Retail Business”).
The $2.0 million secured loan made by The Brick matured on June 30, 2003 or upon earlier demand by The Brick.2003. At maturity, ADB had the right, at its option, to: (i) repay the loan in cash or (ii) transfer to The Brick all of the issued shares of Old ADB owned by ADB in satisfaction of the outstanding principal amount and accrued interest then owing to The Brick. The obligations of Old ADB and ADB were secured by a general security agreement delivered by ADB to The Brick covering all the property and assets of ADB. On June 30, 2003, ADB exercised its option to transfer to The Brick all of the issued shares of Old ADB in satisfaction of the outstanding principal amount and accrued interest then owing to The Brick.

The principal consequences of the Arrangement, which was effective as of October 31, 2002, are as follows:

1.                                       Shareholders of Old ADB received from ADB one common share of ADB in exchange for each of their common shares of Old ADB.  As a result (i) Old ADB became a wholly-owned subsidiary of ADB and (ii) each former shareholder of Old ADB owns the same number of shares in ADB that it owned in Old ADB prior to the exchange.

2.                                       Old ADB transferred all of its assets to ADB and ADB assumed all of the liabilities and obligations of Old ADB, except that Old ADB retained specific assets and liabilities of the Retail Business.

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3.                                       The registered office, articles of incorporation, by-laws, directors and executive officers of Old ADB immediately prior to the Arrangement became the registered office, articles, by-laws, directors and executive officers of ADB upon consummation of the Arrangement.

4.                                       ADB adopted the Stock Option Plan of Old ADB.  Upon consummation of the Arrangement, all options, warrants or debt that was exercisable or convertible into shares of Old ADB became convertible into the same number of shares of ADB.

5.                                       The articles of amalgamation of Old ADB were amended to: (i) change the name of Old ADB to Bid.Com International Ltd. and (ii) delete the authorized Preference Shares (as defined in such articles) and the rights, preferences and restrictions on the transfer of such Preference Shares.

The following diagrams illustrate the corporate structure of our Company prior to the Arrangement and following the Arrangement.

Prior to Arrangement

Following Arrangement

1.Shareholders of Old ADB received from ADB one common share of ADB in exchange for each of their common shares of Old ADB. As a result (i) Old ADB became a wholly owned subsidiary of ADB and (ii) each former shareholder of Old ADB owns the same number of shares in ADB that it owned in Old ADB prior to the exchange.
2.Old ADB transferred all of its assets to ADB and ADB assumed all of the liabilities and obligations of Old ADB, except that Old ADB retained specific assets and liabilities of the Retail Business.
3.The registered office, articles of incorporation, by-laws, directors and executive officers of Old ADB immediately prior to the Arrangement became the registered office, articles, by-laws, directors and executive officers of ADB upon consummation of the Arrangement.
4.ADB adopted the Stock Option Plan of Old ADB. Upon consummation of the Arrangement, all options, warrants or debt that was exercisable or convertible into shares of Old ADB became convertible into the same number of shares of ADB.
5.The articles of amalgamation of Old ADB were amended to: (i) change the name of Old ADB to Bid.Com International Ltd. and (ii) delete the authorized Preference Shares (as defined in such articles) and the rights, preferences and restrictions on the transfer of such Preference Shares.
Upon completion of the Arrangement, the Toronto Stock Exchange approved the listing of the ADB common shares issued in exchange for Old ADB common shares or issuable upon the exercise of options or warrants or conversion of debt. ADB common shares are listed on the Toronto Stock Exchange for trading under the symbol “ADY”. The shares of Old ADB ceased trading on the Toronto Stock Exchange on November 5, 2002. On April 2, 2003 an order was issued by the Ontario Securities Commission pursuant to which Old ADB has ceased to be a reporting issuer in all jurisdictions in Canada in which it was a reporting issuer.

Joint Venture with GE Commercial Finance, Commercial Equipment Financing
On December 31, 2003 ADB Systems USA, Inc. (“ADB USA”), a wholly-ownedwholly owned subsidiary of ADB, entered into an Amended and Restated Operating Agreement (the “Operating Agreement”) with General Electric Capital Corporation through is business division GE Commercial Finance, Commercial Equipment Financing (“GE Capital”Commercial Finance”). This agreement was entered into in connection with the establishment of GE Asset Manager, LLC a joint business venture in which both GE CapitalCommercial Finance and ADB USA each hold a 50% interest. Pursuant to this business venture, GE CapitalCommercial Finance and ADB USA also entered into the following agreements that are included as exhibits to the Operating Agreement: ADB License Agreement, ADB Services Agreement, GE License

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Agreement and GE Service Agreement. GE Asset Manager LLC, which carries on business under the name GE Commercial Finance Asset Manager (“Asset Manager”), is an integrated, web-based business enabling mid- and large-size organizations to reduce operating costs by simplifying and consolidating their asset management programs. GE Asset Manager will feature features all-in-one capabilities designed for sourcing of new equipment, tracking and reallocation of existing assets, automated appraisal management and disposition of surplus equipment.




PRINCIPAL CAPITAL EXPENDITURES AND DIVESTITURES

For a description of principal capital expenditures and divestitures, see Item 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS - REALIZED GAINS AND LOSSES ON MARKETABLE SECURITIES AND STRATEGIC INVESTMENTS and CAPITAL ASSETS.

As of May 31, 2005 we do not have any significant current capital divestitures or any current capital expenditures so far in 2005.

B. BUSINESS OVERVIEW
ADB Systems develops and sells software products and services that allow our customers to source, buy, track, manage and sell assets, primarily in asset intensive industries. We refer to our product and services suite as asset lifecycle management solutions. Our solutions can reduce sourcing, procurement and tracking costs, improve tracking and monitoring of asset performance and reduce operational downtime.
We acquired ADB Systemer ASA (“ADB Systemer”), in October 2001. For more than ten years, ADB Systemer provided enterprise asset management solutions (EAM) to customers in Norway and Europe. For the past three years, we have provided EAM solutions to customers in North America and Europe and during the past two years we have introduced sourcing and procurement solutions to customers in North America and Europe.
Our customer list includes a number of leading organizations, such as BP p.l.c. (“BP”), GE Commercial Equipment Financing (“GE CEF”), National Health Services (NHS) , permanent TSB (the retail banking division of Irish Life Permanent p.l.c.) (“permanent TSB”), Talisman Energy Inc. (“Talisman Energy”) and Vesta Insurance Group, Inc. (“Vesta Insurance”). Through our wholly-owned subsidiary, ADB Systems USA Inc., ADB owns a 50 percent interest in GE Commercial Finance Asset Manager, a joint business venture launched with the General Electric Capital Corporation, through its business division GE Commercial Finance, Commercial Equipment Financing (referred to in this report as “GE” or “GE Commercial Finance”).
INDUSTRY BACKGROUND AND OVERVIEW

Asset management software has existed for more than thirty years, initially through computerized maintenance management systems (CMMS), and more recently including more comprehensive and robust enterprise asset management (EAM) and enterprise resource planning (ERP) solutions. The early CMMS systems automated daily management of assets, while ERP solutions consolidate basic asset information with financial information at the corporate level. EAM solutions encompass elements of both, serving as the next evolution of CMMS solutions by bridging the gap between asset management and corporate-level planning and tracking requirements.

The key value proposition for EAM solutions is that they can provide a quick and quantifiable return on investment (ROI) and return on assets (ROA). Cost and productivity improvements can immediately and measurably benefit organizations, and thus are highly desirable to potential customers, particularly in difficult economic times where the focus is increasingly bottom line oriented.

In addition to EAM solutions, we offer sourcing and procurement solutions as well as sales solutions. These are natural extensions to EAM solutions, as organizations seek to extend asset management and corporate-level planning and tracking onto other elements of the asset lifecycle.

OUR PRODUCTS AND OFFERINGSSERVICES


SOFTWARE SOLUTIONSGE’s Asset Manager

GE's Asset Manager is a joint venture between GE Commercial Finance, Commercial Equipment Financing and ADB Systems International Ltd. that combines GE's equipment financing and asset management expertise together with ADB's experience in providing mission critical technology solutions for asset lifecycle management.
With organizations needing to generate improved bottom-line results and comply with new financial regulatory requirements, GE's Asset Manager has introduced a new suite of integrated, web-based solutions that are designed to help organizations gain greater control of their capital assets and implement new process efficiencies to their operational activities. We have offered the Asset Manager suite of solutions to our customers since 2004.


Our industry-proven solutions enable our customers to:
•Track and re-deploy assets more effectively
•Automate equipment appraisals
•Efficiently market and sell surplus equipment
•Automate sourcing and tendering processes
There are four key components to Asset Manager’s offerings:
Asset Tracker
Designed to allow organizations to more effectively utilize their assets, Asset Tracker is a web-based solution for keeping track of the location, details and status of capital equipment - regardless of where the equipment is being deployed.
Using a dedicated tracking site that is password protected, Asset Tracker provides users the ability to search and locate capital assets throughout their organization. Users can search for equipment in a number of ways. Assets can be searched by business unit, function, or by specific piece of equipment category.
Once an asset is located, users can determine its status and take appropriate action. Idle or under-utilized assets, for example, can be re-deployed, helping to increase their value to the organization and reducing capital spending on new equipment.
Assets no longer required or deemed surplus can be earmarked for disposition through traditional or on-line sales methods, such as Asset Seller.
With Asset Tracker, users can:
•Search and request for capital equipment within their organization, across multiple locations or facilities
•Review asset details, such as equipment description, image, financial information, and contact information
•Add new asset details by uploading data from spreadsheet applications
•Extract asset details and generate asset management reports
•Instantly determine the status of capital equipment
•Transfer and re-deploy idle assets
•Dispose of unnecessary or surplus equipment

Asset Appraiser
Asset Appraiser is a web-based solution that allows organizations to more effectively manage the capital equipment appraisal process. With Asset Appraiser organizations can create an appraisal scope, source collateral specific appraisers, confirm appraisal data, distribute documents and data collection tools, compile appraisal results and access stored appraisals on-line in a protected environment.
Asset Appraiser generates and receives complete narrative appraisal reports on-line in an easy to use, password-protected website. Capabilities provided by Asset Appraiser include:
•Create the full scope of appraisals on-line
•Source collateral-specific appraisal companies on-line
•Receive competitive bids on appraisal services needed
•Create complete appraisal requirements
•Source appraisal services electronically and receive competitive bids on appraisal services needed
•Confirm appraisal details via electronic drafts
•Access appraisals in a 24 x 7 environment - for users and suppliers
•Capture all relevant data through drop down text boxes
•Store and review appraisals in a secure environment
•Download spreadsheet templates into reports
•Add attachments, such as image, text or movie files, to reports
•Ability to add an addendum to a completed appraisal report
•An aid to Sarbanes-Oxley compliance



Asset Seller
Asset Seller facilitates instant and global access to a buying community by presenting surplus equipment or inventory on geasset.com, GE's off-lease equipment re-marketing website. Asset Seller is a proven take-to-market solution that will connect a customer’s equipment to a global community of qualified organizational buyers using multiple sales platforms, all developed to help maximize asset recovery value and improve cycle time. We have offered Asset Seller since 2004.
Asset Seller brings together multiple sales platforms into one integrated on-line environment, providing flexibility, while maximizing the yield for a customer’s surplus equipment.
Asset Seller's direct sale platform features equipment showcases that are designed to promote private treaty sales. Other sales platforms available through Asset Seller include ranked sealed bid and top bid sale events that enable a customer to market equipment in an auction-like environment.
Utilizing GE's patent pending ranked sealed bid method, Asset Seller encourages multiple bids and retains buyer anonymity, creating competitive sales environments that generate a higher recovery for asset investment.
Asset Seller also enables organizations to feature equipment specifications, photos, videos and contact information, and allows them to coordinate off-line sales activities such as equipment inspections.
Asset Buyer
Asset Buyer is a web-based solution designed for automating sourcing activities and improving purchasing decisions. Using Asset Buyer, purchasers can determine the factors that are the most important to their procurement decisions and identify suppliers that deliver the greatest value - from the lowest price to the ability to match exact specification requirements.
Asset Buyer also streamlines the procurement process, making it easier to create and distribute tenders, select vendors and negotiate with suppliers.
With Asset Buyer, organizations can:
•generate cost savings on sourcing activities
•reduce purchasing cycle times
•take advantage of multiple sourcing formats including request for proposals, reverse auction, and sealed bid
•rank suppliers based on their ability to match buying criteria
•improve relations with suppliers through on-line collaborations.

Company Products

We offer solutions to manage all aspects of the asset lifecycle –- sourcing/procurement, maintenance, materials management and disposition. Below is a detailed description of our offerings:

Dyn@mic Buyer (TM)
An on-line sourcing solution, Dyn@mic Buyer automates the tendering process, and can be used to improve the decision-making process involved in sourcing goods and services by providing automated analysis and selection among competing bids, based on a variety of pre-determined factors. We have offered Dyn@mic Buyer to our customers since 2002. The current release of Dyn@mic Buyer can be delivered on a hosted or client-server (licensed) basis.

Key features include:

•                  The ability for buyers to create tenders using automated tools that accelerate the purchasing process and reduce procurement costs.

•                  Capabilities for buyers to post and distribute their tenders on-line to qualified suppliers

•                  The ability for buyers to assign values to criteria involved in the purchase decision, such as price, product availability, post-sales support and certification standards.  Suppliers’ responses to tender questions are then weighed for evaluation by buyers.

•                  Functionality that allows for the posting of detailed technical information, question and answer forums, and automatic e-mail notification of amended or new buyer-posted documents.

•                  Capabilities to allow for the use of sealed bid sourcing formats enabling users to post their product or service requirements to selected vendors.  The sealed bid system differs from the request for quotation in that the vendors only have one opportunity to supply a bid.  Only after the close of the auction is the user able to view the vendor bids.

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product include:
•The ability for buyers to create tenders using automated tools that accelerate the purchasing process and reduce procurement costs.
•Capabilities for buyers to post and distribute their tenders on-line to qualified suppliers.




•The ability for buyers to assign values to criteria involved in the purchase decision, such as price, product availability, post-sales support and certification standards. Suppliers’ responses to tender questions are then weighed for evaluation by buyers.
•Functionality that allows for the posting of detailed technical information, question and answer forums, and automatic e-mail notification of amended or new buyer-posted documents.
•
Capabilities to allow for the use of sealed bid sourcing formats enabling users to post their product or service requirements to selected vendors. The sealed bid system differs from the request for quotation in that the vendors only have one opportunity to supply a bid. Only after the close of the auction is the user able to view the vendor bids.

Dyn@mic Buyer is licensed to our customers. Fees for Dyn@mic Buyer are determined on a per usean annual basis, depending on the number of sourcing events identified by customers. Service fees are charged separately for implementation, systems integration, training and other consulting activities. Dyn@mic Buyer can be bundled with our procurement solutions or used separately depending on customer requirements. Current customers using Dyn@mic Buyer include the National Health ServiceServices (UK) and Vesta Insurance.

ProcureMate (TM)
ProcureMate is our web-based business-to-business e-Procurement solution designed to reduce purchase costs, improve purchasing efficiencies and reduce maverick buying. ProcureMate allows users to select goods for purchase from a web-based catalog and automatically issue purchase orders to their suppliers.

We have offered ProcureMate to our customers since 2000.

Key features of ProcureMate include:

•                  The ability to notify suppliers automatically of purchase orders requiring processing.

•                  Functionality for allowing on-line dialogue to take place between buyers and suppliers.

•                  The ability to integrate to enterprise resource planning and financial systems, reducing manual efforts for processing and consolidating purchase orders, goods receipt and payment activities.

•                  Functionality for facilitating direct payment and electronic funds transfer.

•                  The ability to integrate user workflow and approvals into the procurement process.

•The ability to notify suppliers automatically of purchase orders requiring processing.
•Functionality for allowing on-line dialogue to take place between buyers and suppliers.
•The ability to integrate to enterprise resource planning and financial systems, reducing manual efforts for processing and consolidating purchase orders, goods receipt and payment activities.
•Functionality for facilitating direct payment and electronic funds transfer.
•The ability to integrate user workflow and approvals into the procurement process.

ProcureMate is licensed to customers and license fees for ProcureMate are based on the number of users named by the customer. Service fees are charged separately for implementation, systems integration, training and other consulting activities. ProcureMate can be bundled with our other on-line purchasing solutions or used separately depending on customer requirements. Existing ProcureMate customers include BP (Norway), NHS,National Health Services (UK), Vesta Insurance, and Hordaland HFK County, a large local government entity in Norway.

WorkMate (TM)
Our company’sCompany’s flagship solution, WorkMate provides integrated capabilities for enterprise asset management. WorkMate is a client-server solution that operates as an extension of (and can be fully integrated with) a customer’s existing ERP system. We have offered WorkMate to our customers since 1997. The most advanced version of WorkMate incorporates asset maintenance, asset tracking, materials management and procurement functionality.

WorkMate is designed for use by customers in asset intensive industries –- typically those where maintenance, repair and operations purchases outnumber raw material purchases by more than ten to one on a transaction volume basis. Examples of asset intensive industries are oil and gas, process industries (such as mining) and the utilities sector.

The three main modules (procurement, materials management and maintenance functionality) may be licensed independently or together as a fully integrated system:

•                  Procurement Module – for sophisticated domestic and international purchasing operations.  Key capabilities include: order requisitioning, quotations, purchase orders, contracts, cost controls and vendor catalogues.  The procurement module also monitors supplier performance in terms of accuracy, punctuality and cost.

•                  Materials Management Module – for managing inventory and logistics operations.  Key features include: inventory status, goods receipt, stock issue, reordering, packing/unpacking, transportation, goods return and equipment rentals.  This Module will log all movements of an item and generates the necessary financial transactions.

•                  Maintenance Module – for all types of maintenance, including corrective, preventive or condition-based activities. Customers can automate manual routines and track maintenance costs and equipment history. 

•Procurement Module - for sophisticated domestic and international purchasing operations. Key capabilities include: order requisitioning, quotations, purchase orders, contracts, cost controls and vendor catalogues. The procurement module also monitors supplier performance in terms of accuracy, punctuality and cost.
•Materials Management Module - for managing inventory and logistics operations. Key features include: inventory status, goods receipt, stock issue, reordering, packing/unpacking, transportation, goods return and



equipment rentals. This Module will log all movements of an item and generates the necessary financial transactions.
•Maintenance Module - for all types of maintenance, including corrective, preventive or condition-based activities. Customers can automate manual routines and track maintenance costs and equipment history.
Each WorkMate module also includes workflow and reporting tools.

WorkMate is a licensed client-server application and pricing is based on the number of users named by the customer. Service fees are charged separately for implementation, systems integration, training and other consulting

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activities. Our WorkMate customers include some of the largest global players in the oil and gas sector, such as: BP (Norway), Mesta AS (Norway), Halliburton Productus, Prosafe, and Talisman Energy (Canada).

Dyn@mic Seller (TM)
Dyn@mic Seller is an on-line sales solution designed to help our customers with the disposition of surplus assets and equipment. Dyn@mic Seller integrates multiple pricing methods, such as fixed priced, top bid (auction), dutch (declining price) and hybrids, through private-labeled websites. Dyn@mic Seller is delivered through an application service provider model (remotely through the internet).

We have offered and sold Dyn@mic Seller to our customers since 2000.

Key capabilities include:

•                  Traditional rising price auctions, where the highest bids win the items being sold. The rising price auction allows participants to competitively bid on available products by incrementally adjusting their bid amounts.  Our user interface allows users to easily identify current leading bidders, minimum new bids and initial bid pricing.  Participants are informed of their bid status, stating whether they have won, been outbid, approved or declined via electronic mail.

•                  A patented Dutch (declining) auction format, in which a starting price is set and a limited time period is allocated for a fixed quantity of the product to be sold.  As time advances, the price drops in small increments until the asset is sold.  The declining bid auction allows participants to bid in a real-time format utilizing on-screen data which provides the time and quantity remaining as well as the falling price of the items for sale.

•                  Hybrid auction formats that blend multiple pricing formats to meet a customer’s particular needs.

•                  Fixed price sales where assets are sold in a catalogue or directory format.  The purchaser cannot bid on the price, but merely elects whether or not to purchase the good or service.

include:

•Traditional rising price auctions, where the highest bids win the items being sold. The rising price auction allows participants to competitively bid on available products by incrementally adjusting their bid amounts. Our user interface allows users to easily identify current leading bidders, minimum new bids and initial bid pricing. Participants are informed of their bid status, stating whether they have won, been outbid, approved or declined via electronic mail.
•A patented Dutch (declining) auction format, in which a starting price is set and a limited time period is allocated for a fixed quantity of the product to be sold. As time advances, the price drops in small increments until the asset is sold. The declining bid auction allows participants to bid in a real-time format utilizing on-screen data which provides the time and quantity remaining as well as the falling price of the items for sale.
•Hybrid auction formats that blend multiple pricing formats to meet a customer’s particular needs.
•Fixed price sales where assets are sold in a catalogue or directory format. The purchaser cannot bid on the price, but merely elects whether or not to purchase the good or service.
Our customers pay monthly hosting fees for use of Dyn@mic Seller and typically also enter into a revenue sharing arrangement with us. Service fees for implementation, systems integration, training and other consulting activities are charged separately. Current customers of Dyn@mic Seller include GE CapitalCommercial Equipment Financing (USA), and permanent TSB (Ireland).

RELATED SERVICES

Related Services
In connection with our software offerings, we provide the following services to our customers:

Consulting. A significant number of our customers request our advice regarding their business and technical processes, often in conjunction with a scoping exercise conducted both before and after the execution of a contract. This advice can relate to development or streamline of assorted business processes, such as sourcing or procurement activities, assisting in the development of technical specifications, and recommendations regarding internal workflow activities.

Customization and Implementation. Based generally upon the up-front scoping activities, we are able to customize our solutions as required to meet the customer’scustomer's particular needs. This process can vary in length depending on the degree of customization, the resources applied by the customer and the customer’scustomer's business requirements. We work closely with our customers to ensure that features and functionality meet their expectations. We also provide the professional services work required for the implementation of our customer solutions, including loading of data, identification of business processes, and integration to other systems applications.

Training. Upon completion of implementation (and often during implementation), we train customer personnel to utilize our Solutions through our administrative tools. Training can be conducted in one-on-one or group situations. We also conduct “train the trainer” sessions.



Maintenance and Support. We provide regular software upgrades and ongoing support to our customers.

THIRD PARTY OFFERINGS

We have been providing consulting, customization and implementation, training, maintenance and support services to our customers since 1988.
Third Party Offerings
In addition to the sale of our core solutions and services, we have entered into marketing or co-marketing agreements with a number of companies that offer services that are complementary to our offerings. We market

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these complementary services to our customers and prospects and can earn a referral fee if these services are purchased. In some cases our marketing partner has agreed to market our solutions to its customers and prospects and can earn a referral fee. Our marketing partners include:

Partner

Service or Offering

AMEC Services Limited

Engineering Services

RBT Consulting

Healthcare Consulting Services

Production Access, Inc.

Oil and Gas Data Management Solutions

SeasonalityBusiness Cycles

We experience some seasonality as a result of lower activity in European markets during the summer months.

In addition since many of our customers and our joint venture Asset Manager are large organizations or quasi-governmental entities, we may experience increasingly longer sales and collection cycles.

For additional information regarding business cycles, see Part I - Item 5 under the heading “OPERATING AND FINANCIAL REVIEW AND PROSPECTS - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS”.
STRATEGY

Our business strategy is to expand our customer base, particularly in the oil and gas, health,healthcare, public authorities, and financial services sectors, through superior software functionality and through the industry expertise of our employees. In particular, our strategy is comprised of the following key components:

Expand joint venture with GE and increase our customer base
Since the launch of GE’s Asset Manager, we have focused our efforts on increasing the number of joint venture customers and enhancing our portfolio of asset management technology. This focus will be a cornerstone of our efforts in 2005.
Strengthen our position as an EAM vendor and improve our visibility in other areasamong target sectors.
ADB has been ranked by a respected industry analyst as an emerging provider of enterprise asset management solutions. While we have expanded our customer base and increased the asset lifecycle.  Gartner Group ranked ADB within their ‘magic quadrant’number of sixteen leading asset intensive mid-market EAM vendors globally in April 2002.  Based on the relative pricing and functionalityusers of our productstechnology, ADB is committed to solidifying our position as compared with those of our competitors, we believe our procurementan EAM, particularly among oil and sourcing offerings are competitive,gas, healthcare, public authorities, and we will strive to improve our ranking and visibility in our core industryfinancial services sectors.

Maintain and Enhance Our Technology.
Based on the relative pricing and functionality of our products as compared with those of our competitors, we consider our proprietary software offerings to be competitive, however it is critical that we continue to maintain and enhance our technology.

Enter into and Maximize AlliancesAlliances.. 
We have marketing and other relationships with AMEC Services Limited, GE Capital, Production Access, RBT Consulting, Production Access, Inc. and a number of other leading companies in a broad range of industries. We believe that these and future relationships will help provide us with access to important industry participants and will help increase our brand awareness.



Seeking Acquisitions and Strategic Investments.
We plan to seek to expand by seeking technologies, products, and services that complement our existing business. If appropriate opportunities are available, we may acquire businesses, technologies or products or enter into strategic relationships that may further diversify revenue sources and product offerings, expand our customer base or enhance our technology platform.

CUSTOMERS


We provide our solutions to customers in a variety of industries, including: oil and gas, health,healthcare, public authorities, and financial services.

services sectors.

The revenue structures and particular services provided vary depending upon the needs of the customer and the solution concerned. For licensed offerings we generally collect a license fee based on number of users, service fees for implementation and training, and support and maintenance fees. For hosted offerings, we generally collect an up-front implementation fee, monthly hosting fee, and a share of revenue or transaction volumes.

The following is a representative list of some of the customers for whom we have implemented or are implementing our solutions:

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Customer

Solution(s)

Industry Segment

Geographic Location

BP Norway AS

ProcureMate;
WorkMate

Oil and Gas

Norway

Prosafe Drilling Company (Prosafe)

WorkMate

Oil and Gas

Norway

Halliburton Productos (Halliburton)

WorkMate

Oil and Gas

Brazil

AmecFluor

WorkMate

Oil and Gas

Korea

Talisman Energy

Inc.

WorkMate

Oil and Gas

Canada, UK

Hordaland fylkeskommune (HFK)

ProcureMate

Public Authority

Norway

GE Commercial Equipment Financing (GE)

Dyn@mic Seller

Financial Services

US

Healthcare Purchasing Consortium (The NHS)

National Health Services (UK)

ProcureMate

Health

UK

permanent TSB

Dyn@mic Seller

Financial Services

Ireland

Paramount ResourcesWorkMateOil and GasCanada
Kraft Foods Global, Inc.
Serviced by our joint venture, Asset Manager, providing Asset Tracker

For information regarding


The Company operates in three reportable geographic segments (North America, Ireland/United Kingdom, and Norway). The Company has in the principal market segmentspast earned revenue from both retail and non-retail customers. Currently all our revenue is derived from our current business of software licensing, and computer system support and implementation as described in which the Company competes, see Note 21 to the Financial Statements.

Item 4.(b) of this Report, and no revenue is derived from retail activity.

Net Revenue by Geographic Segment 2004 2003 
(in thousands Cdn$)     
North America $796 $1,211 
Ireland and U.K.  681  1,239 
Norway  3,453  3,403 
  $4,930 $5,853 

SALES AND MARKETING

We market our solutions primarily through our direct sales force. Our sales organization is regional with personnel located in our principal offices in Toronto (Canada), Dublin (Ireland), London Tampa(UK) and Stavanger.

Stavanger (Norway).



Our marketing efforts are focused on targeted marketing campaigns, rather than broad based “awareness”broad-based "awareness" campaigns. Potential customers are identified through direct contact, responses to requests for information, attendance at trade shows and through industry contacts. We principally focus on trade show participation, seminar series for specific industries or professionals and outgoingongoing lead generation.

generation through our sales force.

The GE sales force takes the lead in the sales and marketing efforts of the Asset Manager joint venture .
We use reference customers to assist us in our marketing efforts, both through direct contact with potential customers and through site branding and case studies. We also rely on our allianceco-marketing partners to assist in our marketing efforts.


TECHNOLOGY PLATFORM

ADB has devoted significant resources to developing its proprietary software technology. The technology platform is constructed using distributed software technologies which allow rapid redevelopment and deployment of new software technology in order to take advantage of emerging business opportunities.

Our company’scompany's technology platform is based on Microsoft core applications, including the Windows NT operating system and a SQL server relational database, all residing on scaleable hardware. The software is constructed using an advanced proprietary XML framework and resides on an N-tier architecture. The support of open systems allows integration with a large variety of existing commercial, proprietary and legacy applications.

RESEARCH AND DEVELOPMENT

Based on the relative pricing and functionality of our productsas compared with those of competitors, we believe that our proprietary software provides a competitive advantage, and that our future success depends, in part, on our ability to continue developing and enhancing that software. Therefore, we have focused our researchsoftware development and developmenttechnology efforts on the continued development of our proprietary software offerings. Presently, 1214 of our staff members are dedicated to product development.

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development and maintenance.

Our ongoing researchsoftware development and developmenttechnology efforts are aimed at the continued ‘productization’“productization” of specific elements of our software, enhancing the features and functionality of our existing software components, the development of new software components, and the integration of superior third party technology into our environment. Productization involves the development of ‘generic’reusable applications to reduce programming time and costs for customer implementations.

Our researchsoftware development and developmenttechnology expenditures were approximately $3.257 million for the year ended December 31, 2004, $2.817 million for the year ended December 31, 2003 and $4.101 million for the year ended December 31, 2002, and $3.691 million for the year ended December 31, 2001, including salaries and related expenses of our personnel engaged in research and development. Research and development activities in 20022004 included the development of version 2.0 of our DYNAMICDYN@MIC BUYER Solution and the development of a new materials tracking module within our WorkMate application.

Research

Our software development and developmenttechnology activities in 20032004 included the ongoing development of a new applications framework implemented in Microsoft .Net. The new framework will be used as the foundation all future Web based products. AThere was also a substantial amount of time was also devoted to the extension of our integration tool set, which allows us to connect our core product suite to pre-existing customer owned third party applications. In addition, version 1.0 of new asset tracking and document management products were released.

INTELLECTUAL PROPERTY

We rely on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and technical measures, to establish and protect our proprietary rights.

In March 1999 and July 2001, we received patents from the U.S. Patent and Trademark Office covering the process whereby we conduct Dutch auctions over electronic distribution channels. We have patent applications pending in Canada covering the same technology. We also continue to explore other patent opportunities, and may have other applications pending from time to time. We do not believe, however, that our ability to obtain patents is material to our success or results.



Our proprietary software is subject to common law copyright protection, but we do not have, and do not intend to pursue, any registered copyrights. Common law protection may be narrower than that which we could obtain under registered copyrights. As a result, we may experience difficulty in enforcing our copyrights against certain third party infringements. The source code for our proprietary software is protected as a trade secret.

Our major trademarks or tradenames include: ADB; POWERED BY ADB; PROCUREMATE, WORKMATE, DYNAMIC SELLER and DYNAMIC BUYER. Except for DYNAMIC SELLER and DYNAMIC BUYER, which are unregistered, all of these trademarks and tradenames are the subject of pending applications for registration in one or all of the United States, Canada and Norway. We also claim rights in other unregistered trademarks.

Our competitive position is also dependent upon our unpatented trade secrets. In an effort to protect our trade secrets, and as part of our confidentiality procedures, we generally enter into confidentiality and non-disclosure agreements with our employees and consultants and generally limit access to and distribution of our software, documentation and other proprietary information. Additionally, we limit physical access to our premises, software and hardware and employ security measures to protect against damage or theft.

The Company entered into a Patent License Agreement with NCR Corporation on April 29th, 2002. The agreement provides the Company with access to specific technology patents over a seven-year period for US$100,000 annually.
COMPETITION

The market for each solution comprising our asset lifecycle management suite is intensely competitive. Many of the companies we compete with have much greater financial, technical, research and development resources than us.

In order to

To remain and become more competitive, we will need to make continued investments in product development and improve our market visibility and financial situation.

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Although we offer a broad range of asset lifecycle management solutions, we face significant competition in each of the component product areas:

Sourcing – FreeMarkets, Inc., Procuri, Inc., B2E Markets, Inc., Emptoris, Inc., Moai Technologies, Inc.

Procurement – MRO Software, Inc., Ariba, Inc., Commerce One Operations, Inc. and broader ERP solution providers such as SAP AG, and Oracle Corporation

EAM – related solutions – Datastream, MRO Software, Inc., Indus International Inc., Mincom Ltd.,  (and broader ERP solution providers such as SAP AG, and Oracle Corporation)

Sales solutions – eBay inc.

areas from the following companies:

•Sourcing - Procuri, Inc., B2E Markets, Inc., Emptoris, Inc., Moai Technologies, Inc.
•Procurement - MRO Software, Inc., Ariba, Inc., and broader ERP solution providers such as SAP AG, and Oracle Corporation
•EAM - related solutions - Datastream Ltd., MRO Software, Inc., Indus International Inc., Mincom Ltd., (and broader ERP solution providers such as SAP AG, and Oracle Corporation)
•Sales solutions - eBay Inc.
In addition, manywe face competition from organizations that use in-house developers to develop solutions for certain elements of the asset lifecycle, or use third-party exchanges or industry-specific exchanges.

lifecycle.



C. ORGANIZATIONAL STRUCTURE

The Company has the following organizational structure, which include the subsidiaries set out below:
adborgchart
D. PROPERTY, PLANT AND EQUIPMENT


The table below lists the locations of our facilities, all of which are held by us pursuant to lease agreements, and summarizes certain information about each location.


Location

Use

Square Feet
(Approximate)

Term of Lease

6725 Airport Road,

302 The East Mall,
Suite 201
Mississauga,300
Toronto, Ontario

Executive, Administrative, Engineering and Marketing

10,165

5,435

Expires October 2004

Oct. 2009

Vingveien 2,
4050, Sola
Norway

Executive, Administrative, Engineering and Marketing

8,234 (1)

Expires July 2008

AS Kontorsenter 2
Tonsberg, Norway

Not in Use

2,851

Expires October 2005

52 Broomhill Rd.,
Suite 112 & 113
Broomhill Industrial Estate
Tallaght, Dublin 24
Ireland

Administrative, Engineering and Marketing

500

Expires December 2004

2005

3000 Cathedral Hill
Guildford, Surrey, England

Marketing

no dedicated space

Month-by-Month

3001 North Rocky Point
Drive East,
Tampa, Florida

Executive

143

Month-by-Month

(1) We have sublet a portion (consisting of approximately 1,272 square feet) of these premises to a third party.

We believe that we have adequate space for our current needs. As we expand, we expect that suitable additional space will be available on commercially reasonable terms. We do not own any real estate nor do we currently own or lease warehouse space.

ITEM 5 - OPERATING AND FINANCIAL REVIEW AND PROSPECTS

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 5 -
OPERATING AND FINANCIAL REVIEW AND PROSPECTS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

YOU SHOULD READ THE FOLLOWING DISCUSSION AND ANALYSIS IN CONJUNCTION WITH “ITEM"ITEM 3.A - SELECTED FINANCIAL DATA”DATA" AND OUR CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES INCLUDED ELSEWHERE IN THIS ANNUAL REPORT. IN ADDITION TO


HISTORICAL INFORMATION, THE FOLLOWING DISCUSSION CONTAINS CERTAIN FORWARD-LOOKING

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STATEMENTS THAT INVOLVE KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, SUCH AS STATEMENTS OF OUR PLANS, OBJECTIVES, EXPECTATIONS AND INTENTIONS. SEE “FORWARD-LOOKING STATEMENTS”"FORWARD-LOOKING STATEMENTS".

HistoryOverview

We develop and Overview

ADB Systems delivers asset lifecycle managementsell software solutions and services that help organizationsallow our customers to source, manage, and sell their capital assets and capital equipment. ADB works with a growing number ofWe refer to our product and services suite as asset lifecycle management solutions. Our solutions help our customers reduce sourcing, procurement and partnersmaintenance costs, improve asset utilization, reduce operational downtime, and generate higher yields for surplus equipment.

We operate in a variety of sectors including oilthree reportable geographic segments: North America, Ireland and gas, government, healthcarethe United Kingdom, and financial services. Current customersNorway. We have also in the past earned revenue from both retail and partners include BP, GE, Halliburton Energy Resources, National Health Service (U.K.), permanent TSB, Talisman Energy and Vesta Insurance.

In October 2001, ADB Systemer ASA (“ADB Systemer”) was acquired by Bid.Com International Inc. (“Bid.Com”), a provider of business-to-business software solutions for the on-line sourcing and disposition of assets.  Following the acquisition, the Company became known as ADB Systems International Ltd.

ADB Systemsnon-retail customers.

Our company is headquartered in MississaugaToronto (Canada), and maintains offices in Tampa (U.S.), Dublin (Ireland), London (U.K.), and StanvangerStavanger (Norway).


Our shares trade on both the Toronto Stock Exchange (TSX: ADY) and the OTC Bulletin Board (OTCBB:ADBY) ADBYF).


A. OPERATING RESULTS

Comparison of Years Ended December 31, 2004 and December 31, 2003

Net Loss. Our net loss for the year ended December 31, 2004 was $5.104 million, an increase of 81.3 percent over the net loss of $2.815 million reported for the year ended December 31, 2003. The net loss for 2003, however, included a gain of $2.195 million from the settlement of a demand loan and revenue from historic retail activities. Excluding these items outside of the normal course of operations (although not considered extraordinary items), our 2004 loss of $5.104 million represents a 0.5 percent increase over the 2003 loss of $5.077 million.

The loss before employee stock options, depreciation and amortization, interest expense and interest income (“EBITDA”) was $3.441 million for 2004 as compared to $2.710 million for 2003, an increase of 27.0 percent. The Company considers EBITDA to be a meaningful performance measure as it provides an approximation of operating cash flows. This increase was the result of a $923,000 decrease in revenue from $5.853 million in 2003 to $4.930 million in 2004, partially offset by a $192,000 improvement in the associated expenses of $8.563 million in 2003 to $8.371 million in 2004. The reduction in expenses of 2.2 percent in 2004 when compared to 2003 was achieved in the areas of general and administrative expenses by $283,000 and sales and marketing expenses by $349,000, partially offset by an increase in software development and technology expenses of $440,000.

Revenue. Revenue is comprised of software license sales, service fees for consulting, implementation, application hosting, training, maintenance and support activities and transaction fees from on-line activities performed for customers.

Revenue decreased to $4.930 million for the year ended December 31, 2004 from $5.853 million for the year ended December 31, 2003, representing a decline of 15.8 percent. This decline was attributable to reduced revenue in North America of $415,000 and reduced revenue in Ireland/U.K. of $557,000. Revenue from Norway increased by $50,000 in 2004 as compared to 2003.

In North America, re-targeting of resources towards the GE CEF joint venture efforts in 2004 resulted in a decline in development, hosting and transactional revenue of approximately $408,000.
In the Ireland/UK region we did not experience an increase in customer acquisitions and activity in 2004 as we did 2003. The year-over-year revenue decline was primarily the result of reduced sales by the amount of $532,000 to customers in non-healthcare industry sectors.

General and Administrative. General and administrative expenses include, primarily: all salaries and related expenses (including benefits and payroll taxes) other than technology staff compensation (which is included in software development and technology expenses), and sales and marketing staff compensation (which is included


in sales and marketing expenses), occupancy costs, foreign exchange gains or losses, professional fees, insurance, investor relations, regulatory filing fees, and travel and related costs.

General and administrative expenses decreased by $283,000 to $4.365 million for the year ended December 31, 2004, as compared to $4.648 million for the year ended December 31, 2003, representing a decline of 6.1 percent.

Year-over-year savings in the amount of $183,000 resulted from salary expense reductions arising from a smaller administrative workforce and favourable Canadian dollar exchange rates pertaining to US dollar-denominated salaries. Continued cost containment efforts resulted in $67,000 savings in travel expenses and the reduction of occupancy and connectivity costs in the amount of $65,000 associated with the change of North American office locations and decreased utility costs as the result of Norway office leases renegotiations. Reductions in foreign exchange losses of $59,000 and in insurance costs of $41,000 also added to the savings. Expense reductions were partially offset by increased investor relation costs in the areas of consulting ($68,000) and increased professional services expenses associated with regulatory filings ($29,000). The salary expense savings were also partially offset by increased professional services employed in Norway ($34,000).

Sales and Marketing. Sales and marketing costs include all salaries and related expenses of sales and marketing personnel as well as business development expenses such as advertising, sales support materials, and trade show costs.

Sales and marketing costs for the year ended December 31, 2004 amounted to $749,000, as compared to $1.098 million for 2003, a decrease of 31.8 percent. This decrease is attributable to lower staffing levels in the sales department combined with decreased advertising and tradeshow activities and related travel expenses throughout 2004.

Software Development and Technology. Software development and technology expenses consist of costs associated with acquired and internally developed software, and research and development expenses, including fees to independent contractors and salaries and related expenses of personnel engaged in these activities.

Software development and technology expenses increased to $3.257 million for the year ended December 31, 2004 from $2.817 million for the year ended December 31, 2003, an increase of 15.6 percent. This increase is attributable to increased salary expenses resulting largely from increases in the number of technology personnel in Ireland/UK and Norway.

Employee Stock Options. Effective January 1, 2003, the Company adopted the accounting recommendations contained in the CICA handbook Section 3870 - “Stock-based Compensation and Other Stock-based Compensation Payments”. As a result, the Company recorded an employee stock option expense of $39,000 for the year ended December 31, 2004 and $193,000 for the year ended December 31, 2003. No employee stock options were granted in 2004. The 2004 expense arises from the vesting of stock options that were granted in 2003. Prior to 2003, no accounting recognition was required for stock-based compensation expense however; the Company was required to disclose the impact of stock option related expenses for previous years on a pro-forma basis.

Depreciation and Amortization. Depreciation and amortization expense was $1.190 million for the year ended December 31, 2004 as compared to $1.901 million for the year ended December 31, 2003, a decrease of 37.4 percent. This decrease reflects a $499,000 reduction in the amortization of deferred charges as deferred financing charges relating to a demand loan were fully amortized in 2003. Additionally, software acquired in the acquisition of ADB Systemer was fully amortized by the end of the third quarter of 2004, resulting in an amortization expense for the year that was $282,000 lower than that for fiscal 2003.

Interest Expense. Interest expense reflects interest incurred from debt instruments and loans. Interest expense for the year ended December 31, 2004 was $439,000 compared to $289,000 for December 31, 2003. During 2004, cash interest expense of $173,000 and non-cash interest expense of $266,000 was incurred related to secured subordinated notes. Comparatively, cash interest expense of $50,000 and non-cash interest expense of $112,000 was recorded in 2003. The interest expense for fiscal 2003 also included interest related to a demand loan of $126,000.

Interest Income. Interest income reflects interest from investments in cash and marketable securities. Interest income was negligible for both years ended December 31, 2004 and 2003.



Realized Gain on Settlement of Demand Loan. On June 30, 2003, the Company settled an outstanding demand loan through the transfer of its investment in an associated company. The investment had a nominal carrying value and the transfer resulted in a gain on settlement of the demand loan in the amount of $2.195 million.

Retail Activities. During 2003, the Company received a $67,000 refund from a U.S.-based credit card institution formally engaged by the Company when it operated its on-line retail activities in the U.S. No similar refunds were received in 2004.

Comparison of Years Ended December 31, 2003 and December 31, 2002


Net Income (Loss). Our net loss for the year ended December 31, 2003 was $2.815 million, an improvement of 69.9 percent over the net loss of $9.364 million reported for the year ended December 31, 2002. Excluding items outside of the normal course of operations, our loss was $5.084 million, as compared to $9.241 million in 2002, an improvement of 45.0 percent. The improvement in expenses of more than $4.0 million was achieved in 2003 when compared to 2002 in the areas of general and administrative of $1.6 million, sales and marketing of $777,000, software development and technology of $1.3 million and $700,000 in depreciation and amortization. In addition, during 2003 the Company recorded a realized gain on the settlement of a demand loan of $2.2 million.


Revenue. Revenue is derived from software licensing and related services from consulting, implementation, application hosting, training, maintenance and support activities.

Revenue increased to $5.853 million for the year ended December 31, 2003 from $5.780 million for the year ended December 31, 2002, representing an increase of 1.3 percent.

Revenue outside North America was $4.642 million for the year ended December 31, 2003, compared to $3.598 million for the year ended December 31, 2002. The increase in revenue outside North America is primarily attributable to an increase in customer acquisitions and activity in our Ireland/UK region that resulted in year-over-year revenue improvement of almost $800,000.


General and Administrative. General and administrative expenses include, primarily: all salaries and related expenses (including benefits and payroll taxes) other than technology staff compensation (which is included in software development and technology expenses), and sales and marketing staff compensation (which is included in sales and marketing expenses); occupancy costs; foreign exchange gains or losses; professional fees; insurance; investor relations; regulatory filing fees; and travel and related costs.


General and administrative expenses decreased to $4.648 million for the year ended December 31, 2003, as compared to $6.288 million for the year ended December 31, 2002, representing a decline of 26.1 percent.


Year-over-year savings resulting from salary reductions and a smaller workforce totaled $401,000. Continued cost containment efforts and greater reliance on internal staff resulted in $503,000 savings in professional fees and $271,000 in investor relations costs. In addition, savings were achieved in rent and occupancy costs of $325,000 as office space was reduced in Norway as well as the closing of a U.K. office in 2002.

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Sales and Marketing. Sales and marketing costs include all salaries and related expenses of sales and marketing personnel as well as business development expenses such as advertising, sales support materials, and trade show costs.


Sales and marketing costs for the year ended December 31, 2003 amounted to $1.098 million, as compared to $1.875 million for 2002, a decrease of 41.4 percent. This decrease is attributable to lower staffing levels in the sales department combined with decreased advertising and tradeshow activities throughout 2003.


Software Development and Technology. Software development and technology expenses consist of costs associated with acquired and internally developed software, and research and development expenses, including fees to independent contractors and salaries and related expenses of personnel engaged in these activities.


Software development and technology expenses decreased to $2.817 million for the year ended December 31, 2003 from $4.101 million for the year ended December 31, 2002, a decrease of 31.3 percent. This decrease is attributable to government research and development claims made by the Company and a decrease in technology personnel.




Employee Stock Options. Effective January 1, 2003, the Company adopted the accounting recommendations contained in the CICA handbook Section 3870 –- “Stock-based Compensation and Other Stock-based Compensation Payments”. As a result, the Company recorded an employee stock option expense of $193,000 for the year ended December 31, 2003. Prior to 2003, no accounting recognition was required for stock-based compensation expense however; the Company was required to disclose the impact of stock option related expenses for previous years on a pro-forma basis. In 2002, a pro-forma impact of $244,000 and $141,000 in 2003 related to options granted prior to January 1, 2003 is disclosed (Note 9(j)).

Depreciation and Amortization. Depreciation and amortization expense was $1.901 million for the year ended December 31, 2003 as compared to $2.602 million for the year ended December 31, 2002, a decrease of 26.9 percent. This decrease reflects a maturing asset pool.


Interest Expense. Interest expense reflects interest incurred from debt instruments and loans.


Interest expense for the year ended December 31, 2003 was $289,000 compared to $200,000 for December 31, 2002. During 2003, cash interest expense of $50,000 and non-cash interest expense of $112,000 was incurred related to secured subordinated notes. Comparatively, cash interest expense of $23,000 and non-cash interest expense of $108,000 was recorded in 2002. Interest related to the demand loan was $126,000 in 2003 compared to $68,000 in 2002.


Interest Income. Interest income reflects interest from investments in cash and marketable securities.


Interest income was $9,000 for the year ended December 31, 2003, as compared to $45,000 for the year ended December 31, 2002, a decline of 80.0 percent. This decline was largely attributable to lower cash deposits and money market funds on hand throughout 2003.


Realized Gains and Losses on Disposal of Marketable Securities, Strategic Investments and Capital Assets, and Recovery of Assets. Realized gains on disposal of marketable securities and strategic investments amounted to $20,000 for the year ended December 31, 2003, compared to a loss of $108,000 for the year ended December 31, 2002. The gain recorded in 2003 resulted from the sale of shares of MegaWheels Technology Inc. These gains and losses are outside of the normal course of operations but are not considered extraordinary items.


During 2002, the Company disposed of its remaining shares in America Online Inc. (“AOL”) resulting in a realized loss of $143,000. Realized gains in 2002 included $41,000 from the sale of strategic investments in SCS Solars and MegaWheels. In 2003, the Company realized a loss from the disposal of surplus capital assets in the amount of $13,000 compared to a gain of $23,000 in 2002.

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Unrealized Gains and Losses on Revaluation of Strategic Investments, and Provision for Impairment of Assets. Unrealized gains and losses on strategic investments, and provisions for impairment of assets are the result of an assessment by management as to the recoverability of the value of certain assets and are not realized losses. Unrealized gains and losses are outside the normal course of operations but are not considered extraordinary.


Unrealized losses for the year ended December 31, 2002 were $24,000. We conduct an assessment of our strategic investment portfolio at the end of each fiscal period by analyzing the financial performance of the companies we invested in as well as general market conditions. In 2002, we recorded impairment provisions totaling approximately $24,000. As our investments were all in companies in the technology sector, the market performance of these holdings had been dramatically affected by economic conditions. In 2003, the Company did not record an impairment provision as a result of the assessment.

Goodwill Impairment. There was no goodwill impairment recorded in 2003 as compared to $14,000 at December 31, 2002. The goodwill impairment recorded in 2002 relates to a change in goodwill arising on purchase of shares from minority interests during the year.


Retail Activities. During 2003, the Company received a $67,000 refund from a U.S.-based credit card institution formally engaged by the Company when it operated its on-line retail activities in the U.S. No similar refunds were received in 2002.


Comparison of Years Ended December 31, 2002 and December 31, 2001

AcquisitionCritical Accounting Policies. We prepare the consolidated financial statements of ADB Systemer ASA. On October 11, 2001,in conformity with accounting principles generally accepted in Canada. As such, we acquired substantially allare required to make certain estimates, judgments and assumptions that we believe are reasonable based upon the information available. These estimates



and assumptions affect the reported amounts of assets, liabilities and shareholders’ equity at the date of the sharesfinancial statements and the reported amounts of revenue and expenses during the periods presented. The significant accounting policies employed by ADB Systemer,are described in our 2004 Annual Report within Notes 2 and 3 of the Notes to the Consolidated Financial Statements. The significant accounting policies which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

Continuation of the Business
The Company’s ability to continue as a Norway-based provider of enterprise asset management and electronic procurement software.

The acquisition of ADB Systemer resultedgoing concern will be dependent on management’s ability to successfully execute its business plan including a substantial increase in revenue as well as maintaining operating expenses at or near the same level as 2004. Our 2005 business plan includes a significant broadening of our product offerings, customer base, and ability to penetrate new markets. The cost of the acquisition was $13.762 million, including a $2.293 million cash outlay. Approximately 93 percent of the purchase price was attributed to software and related intellectual property and goodwill, valued at $3.383 million and $9.476 million respectively.

In 2001, the acquisition contributed $818,000increase in revenue and improved expense control throughoperating cash flow primarily from major new contracts in Norway, the integrationUK and restructuringNorth America. We cannot provide assurance that the actual operating results for 2005 will meet the estimates included in our 2005 business plan. A shortfall in revenue and/or increased in expenses will result in the necessity for non-operational funding. We believe that we have the ability to raise additional financing if required, but we cannot provide assurance that such efforts would be successful.


Revenue Recognition
The Company’s revenues are derived from software license fees, implementation, training and consulting services, product maintenance and customer support, and software development, and hosting fees. Fees for services are billed separately from licenses of worldwide operations.

the Company’s product. The Company recognizes revenue in accordance with Canadian GAAP, which in the Company’s circumstances, are not materially different from the amounts that would be determined under provisions of the American Institute of Certified Public Accountants Statements of Position (SOP) No. 97-2, “ Software Revenue Recognition”, and as amended by Statement of Position 98-9, “Modification of SOP 97-2, Software revenue Recognition, With Respect to Certain Transactions”. The Company also considers the adoptionprovisions of new standardsCICA EIC 141, which is analogous to Staff Accounting Bulletin (SAB) 104, “Revenue Recognition in Financial Statements”, and CICA EIC 142, which is analogous to the Emerging Issues Task Force consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Elements,” in determining the appropriate revenue recognition methodology.


Software License Revenue
The Company recognizes software license revenue in accordance with the terms of the license agreement and when the following criteria as set out in SOP No. 97-2 are met:
•persuasive evidence of an arrangement exists,
•delivery has occurred,
•the fee is fixed or determinable, and
•collectibility is probable.
Software license revenue consists of fixed license fee agreements involving perpetual licenses.

Software license agreements may be part of multiple element arrangements that include consulting and implementation services. When these services are considered essential to the functionality of the license, the associated revenue is recognized on the basis of the percentage of completion method as specified by contract accounting principles. When these services are not considered essential to the functionality of the license, the entire arrangement fee is allocated to each element in the arrangement based on the respective vendor specific objective evidence (“VSOE”) of the fair value of each element. VSOE used in determining the fair value of license revenues is based on the price charged by the Company when the same element is sold in similar quantities to a customer of a similar size and nature. VSOE used in determining fair value for business combinationsinstallation, implementation and goodwill,training based on the standard daily rates for the type of service being provided multiplied by the estimated time to complete each task. VSOE used in determining the fair value of maintenance and support is based on the annual renewal rates. The revenue allocable to the software license is recognized when the revenue criteria are met. The revenue allocable to the consulting services is recognized as the services are performed.

Implementation, Training & Consulting Service Fees
The Company receives revenue from implementation of its product offerings, consulting services and training services. Customers are charged a fee based on time and expenses. Revenue from implementation, consulting service and training fees is recognized as the services are performed or deferred until contractually defined milestones are achieved or until customer acceptance has occurred, as the case may be, for such contracts.

Product Maintenance & Customer Support Fees
The Company receives revenue from maintaining its products and the provision of on-going support services to customers. The maintenance and support fees are typically equal to a specified percentage of the customers’


license fee. If associated with the fixed fee license model, the maintenance revenues received are recorded as deferred revenue and recognized on a straight-line basis over the contract period.

Services revenue from maintenance and support is recognized when the services are performed. Maintenance and support revenues paid in advance are non-refundable and are recognized on a straight-line basis over the term of the agreement, which typically is 12 months.

Software Development Fees
Typically, development of software for our customers is provided based on a predetermined fixed rate basis. Revenue is recognized as time is incurred throughout the development process.

Hosting Fees
The Company earns revenue from the hosting of customer websites. Under our existing hosting contracts, we werecharge customers a recurring periodic flat fee. The fees are recognized as the hosting services are provided.

Secured Subordinated Notes
Under Canadian GAAP, financial instruments that contain both a liability and an equity element are required to testhave the instrument’s component parts classified separately. On the issuance date, the Company values the debt component of the instrument by calculating the present value of the associated cash flows and uses the Cox-Rubinstein binomial valuation model to determine the fair value of the goodwill against its carrying value. It was determined that a goodwill impairmentconversion feature of $9.476 million be recorded. This impairment charge representedconvertible secured subordinated notes. The calculated values of the liability and of equity components are disclosed separately in Consolidated Balance Sheets. The liability component is accreted to the face value of the subordinated notes over the term to maturity, or until the underlying notes are converted into common shares, through the recording of a non-cash interest expense. No future goodwill amortization expense will be requiredThese valuation methods incorporate estimates regarding the appropriate discount rate to be recorded.

Net Income (Loss). Our net lossused in the debt component valuation and the appropriate share-price volatility to be employed in the equity component valuation. The discount rates used were based upon our estimate of expected market yield rates on similarly secured debt instruments. Volatility rate estimates were based upon historical share-price volatility for the year ended December 31, 2002 was $9.364 million, an improvement of 50.0 percent overproceeding the net loss of $18.714 million reported for the year ended December 31, 2001. Excluding items outsideissuance of the normal course of operations, our loss was $9.241 million, as compared to $12.185 millionnotes. Changes in 2001, an improvement of 24.2 percent.

The 2002 year represented our first full year of operations as ADB Systems International Ltd.  Expenses for the combined entity for 2002 were substantially lower when compared to 2001 due to synergies achieved asassumptions underlying the discount rate and volatility estimates could result in a resultchange in the proportions of the acquisition of ADB Systemer in Norway along with significant cost reductionnotes that remained in effect since implementation in 2001.  In addition, the inclusion of the first full year of revenues generated from our acquisition of ADB Systemer in Norway resulted in increased revenue in 2002 when compared to 2001.

As compared to 2001, we experienced a net savings of $2.165 million in sales and marketing costs and $1.334 million in general and administrative expenses primarily dueare allocated to the impactdebt and equity components and a change in the amount of cost reductions for the full year that were implemented in 2001.

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Revenue. Revenue is derived from software licensing and related services from consulting, implementation, application hosting, training, maintenance and support activities. Revenue increased to $5.780 million for the year ended December 31, 2002 from $4.455 million for the year ended December 31, 2001, representing an increase of 29.7 percent.

As mentioned, the increase in revenue is primarily due to the inclusion of the first full year of revenue generated from our acquisition of ADB Systemer in Norway.  Revenues generated in Norway for 2002 accounted for $3.126 million compared to $741,000 in 2001. Revenue declined in both North America and Ireland and UK during 2002 compared to 2001 as these existing businesses refocused their marketing efforts on the new product offerings made available by the acquisition of ADB Systemer.

Revenue outside North America was $3.598 million for the year ended December 31, 2002, compared to $1.634 million for the year ended December 31, 2001.  As mentioned above the acquisition of ADB Systemer in Norway contributed to the significant increase in revenue outside North America.

Customer Acquisition Costs. Customer acquisition costs reflect non-cash expenses incurred in securing customer agreements. Specifically, these costs represent the calculated value of share purchase warrants issued to GE Capital in return for certain contracts using the Cox-Rubinstein binomial valuation model.

There were no customer acquisition costs recorded in 2002 compared to $60,000 for the year ended December 31, 2001.

General and Administrative. General and administrative expenses include, primarily: all salaries and related expenses (including benefits and payroll taxes) other than fees to independent contractors for research and development, technology staff compensation (which is included in software development and technology expenses), and sales and marketing staff compensation (which is included in sales and marketing expenses); occupancy costs; foreign exchange gains or losses; professional fees; insurance; investor relations; regulatory filing fees; and travel and related costs.

General and administrative expenses decreased to $6.288 million for the year ended December 31, 2002, as compared to $7.622 million for the year ended December 31, 2001, representing a decline of 17.5 percent.

As indicated previously, the organization-wide restructuring plan implemented during the 2001 year resulted in substantial reductions that were maintained throughout the entire 2002 year. Savingsinterest expense resulting from the reduction in our workforce totaled $860,000. Cost containment efforts and greater reliance on internal staff resulted in $437,000 savings in professional fees. Rent and occupancies costs were also reduced by $136,000 as offices were closedaccretion of the liability component to its face value.


U.S. GAAP does not permit separate disclosure of different elements of a financial instrument in the financial statements. Under U.S. andGAAP, upon issuance, the U.K.

Sales and Marketing. Sales and marketing costs include all salaries and related expenses of sales and marketing personnel as well as business development expenses such as advertising, sales support materials, and trade show costs. For the year ended December 31, 2002, sales and marketing costs amounted to $1.875 million, as compared to $4.040 million for 2001, a decrease of 53.6 percent. This decrease is attributable to lower  staffing levels in the sales department combined with decreased advertising, tradeshow and lead generation activities throughout 2002.

Software Development and Technology. Software development and technology expenses consist of costs associated with acquired and internally developed software, and research and development expenses, including fees to independent contractors and salaries and related expenses of personnel engaged in these activities.

Software development and technology expenses increased to $4.101 million for the year ended December 31, 2002 from $3.691 million for the year ended December 31, 2001, an increase of 11.1 percent. The increase in software development expenses was largely attributable to the acquisition of ADB Systemer ASA in 2001.  A large portion of the Norwegian subsidiary’s expenses related to software development and technology even after staff reductions and budget cuts were implemented.

Depreciation and Amortization. Depreciation and amortization expense was $2.602 million for the year ended December 31, 2002 as compared to $1.572 million for the year ended December 31, 2001, an increase of 65.5 percent. This increase was primarily due to the continued depreciation of certain software acquiredsecured subordinated notes would have been recorded as a resultliability and reclassified to equity only upon conversion. Further, under U.S. GAAP, the beneficial conversion feature represented by the excess of the ADB Systemer acquisition.

29


Interest Expense. Interest expense reflects interest incurred from debt instruments and loans.

Interest expense for the year ended December 31, 2002 was $200,000. Accrued interest of $68,000 was recorded during the year related to a demand loan while $132,000 related to interest charges on secured subordinated notes.

Interest Income. Interest income reflects interest from investments in cash and marketable securities.

Interest income was $45,000 for the year ended December 31, 2002, as compared to $345,000 for the year ended December 31, 2001, a decline of 87.0 percent. This decline was largely attributable to lower cash deposits and money market funds on hand throughout 2002.

Realized Gains and Losses on Disposal of Marketable Securities, Strategic Investments and Capital Assets, and Recovery of Assets. Realized losses on disposal of marketable securities and strategic investments amounted to $85,000 for the year ended December 31, 2002, compared to a gain of $6.722 million for the year ended December 31, 2001. These losses are outside of the normal course of operations but are not considered extraordinary items.

Realized gains generated in 2001 resulted from the disposal of equity interest in Point2 Internet Systems Inc. and disposal of most of our shares in America Online Inc. (AOL). During 2002, the Company disposed of its remaining shares in AOL resulting in a realized loss of $143,000. Realized gains in 2002 included $41,000 from the sale of strategic investments in SCS Solars and MegaWheels and $23,000 from the sale of capital assets.

Unrealized Gains and Losses on Revaluation of Marketable Securities and Strategic Investments, and Provision for Impairment of Assets. Unrealized gains and losses on marketable securities and strategic investments, and provisions for impairment of assets are the result of an assessment by management as to the recoverability of the value of certain assets and are not realized losses. Unrealized gains and losses are outside the normal course of operations but are not considered extraordinary.

Unrealized losses for the year ended December 31, 2002 were $24,000 , compared to a loss of $2.435 million for the year ended December 31, 2001. We conduct an assessment of our strategic investment portfolio at the end of each fiscal period by analyzing the financial performance of the companies we invested in as well as general market conditions. In 2002, we recorded impairment provisions totaling approximately $24,000 compared to $1.510 million 2001. As our investments are all in companies in the technology sector, the market performance of these holdings has been dramatically affected by economic conditions.

Goodwill Impairment. Goodwill impairment in 2002 was $14,000 compared to $9.476 million in 2001. The goodwill impairment recorded in 2001 was a result of our acquisition of ADB Systemer for a total consideration of $13.762 million. Of this amount, we attributed $9.476 million to goodwill. With the adoption of new accounting standards for business combinations and goodwill, we were required to test the fair value of the goodwill against its carrying value. It was determined that a goodwill impairment lossshares issuable on conversion of $9.476 million be recorded. This impairment charge is a non-cash expense, and no future goodwill amortization expense will be recorded relating to this transaction.

The goodwill impairment recorded in 2002 relates to a change in goodwill arising on purchase of shares from minority interests during the year.

Restructuring Charges. In April and September, 2001 we implemented cost-reduction measures intended to ensure future viability. The $959,000 in restructuring charges for 2001 relate to these staff reductions and associated measures. As there was no formal restructuring announcement in 2002, these charges were minimal and therefore included in general and administrative expenses.

Retail Activities Settlement. The Company ceased its on-line retail activities in October 2000, however, in 2001 it was required to settle certain amounts payable relating to product sales of previous years. These amounts, which totaled $381,000, were not previously anticipated and did not reoccur in 2002.

The Company’s non-consolidated subsidiary, Bid.Com Ltd., recommenced on-line retail activities in 2002.

30


Critical Accounting Policies. The accounting policies followed by the Company have a critical effectsubordinated notes, measured on the financial reporting of the Company. These policies involve complex judgments and estimates which affectcommitment date, over the amount of revenue recognized, the recognition and amortization of assets and liabilities andloan proceeds to be allocated to the recoverability of assets. The valuation and recoverability of assets is generally basedcommon shares upon conversion would be allocated to contributed surplus. This results in a discount on the projected cash flows from these assets. These significant accounting policies are discussed in Notes 2, 3 and 20subordinated notes that is recognized as additional interest expense over the term of the financial statements. The Company does not havesubordinated notes and any off-balance sheet special purpose entities.

unamortized balance is expensed immediately upon conversion of the subordinated notes.


B. LIQUIDITY AND CAPITAL RESOURCES

Liquidity and Capital ResourcesLIQUIDITY

Liquidity.

The Company has been funded to date primarily through a series of private placements of equity and convertible debentures, sales of equity to and investments from strategic partners, gains from investments and option exercises. Since inception, the Company has received aggregate net proceeds of $84.2$87.7 million from debt and equity financing and has realized $23.7 million in gains on investment disposals.

Cash, cash equivalents and marketable securities decreased by $912,000 to $445,000 as at December 31, 2003 from $1.357 million as at December 31, 2002.

Current assets of $1.947 million exceeded current liabilities (excluding deferred revenue) of $1.370 million in the current fiscal year by $577,000.  Current assets of $3.363 million exceeded current liabilities (excluding deferred revenue and demand loan) of $2.288 million by $1.075 million in the prior year.  Deferred revenue and demand loan have been excluded from current liabilities as they are expected to be settled by resources other than cash.

31


i) Operating:

Cash outflows from operating activities were $3.4 million in the current fiscal year compared to cash outflows from operating activities of $6.4 million in the prior year.  The primary factor in the reduction was the decrease in expenses related to general and administrative, sales and marketing and software development and technology from the prior year.

Non-cash working capital resulted in outflows of $728,000 in fiscal 2003 versus cash inflows of $61,000 in the prior year, a decrease of $789,000, as summarized in the following table:

 

 

2003

 

2002

 

Working capital
inflows (outflows)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

424

 

$

(522

)

$

946

 

Deposits and prepaid expenses

 

56

 

(45

)

101

 

Accounts payable

 

(63

)

224

 

(287

)

Accrued liabilities

 

(453

)

427

 

(880

)

Deferred revenue

 

(692

)

(23

)

(669

)

 

 

$

(728

)

$

61

 

$

(789

)

ii) Investing:

No significant cash flows were generated from investing activities in 2003.  Cash flows generated in the prior year from investing activities were $1.8 million, including $1.3 million in proceeds received from the disposition of shares held in America Online Inc. (“AOL”).

iii) Financing:

Cash flows generated in financing activities were $2.5 million for 2003, including an equity private placement and a convertible debt private placement.  Cash flows generated in financing activities for fiscal 2002 were $3.4 million included a equity private placement, a demand loan and a convertible debt private placement.

Capital Resources.  There were no significant additions to capital assets for the year ended December 31, 2003.  Redundant capital assets were liquidated to improve the Company’s working capital position.  Net proceeds from disposal of capital assets totaled $34,000 for the year ended December 31, 2003 as compared to $167,000 for the year ended December 31, 2002.

During 2002, the Company incurred $1,024,000 of costs associated with obtaining a demand loan and convertible debenture, which were recorded to deferred financing charges.  The deferred financing charges were fully amortized by June 30, 2003 on a straight-line basis to coincide with the maturing of the demand loan.  No additional deferred charges were incurred in 2003.

Funding

Funding - Overview.  The Company has been funded to date primarily through a series of private placements of equity and convertible debentures, sales of equity to and investments from strategic partners, gains from investments and option exercises.  Since inception, the Company has received aggregate net proceeds of $84.2 million from debt and equity financing and has realized $23.7 million in gains on investment disposals.

Funding - 2003.  During the period from January 1 to June 26, 2003, the Company issued 4,879,000 common shares at a price of $0.24 per share and 2,733,000 common share-purchase warrants exercisable into one common share at $0.40 for net proceeds of $1.148 million.  The warrants expire on June 26, 2005.  Included in this private placement were 2,146,000 shares issued to a director and officer of the Company for total net proceeds of $505,000.  None of the 2,733,000 warrants had been converted into common shares at December 31, 2003.

32


On August 19, 2003 the Company issued Series E secured subordinated notes with a face value of $1.0 million for net proceeds of $994,000.  The Series E notes have an annual rate of interest of 11 percent that is paid quarterly in arrears, mature in August 2006 and are convertible into equity units at a price of $0.35 per unit.  Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50.  The Series E secured subordinated notes will automatically convert into units when the share price of the Company closes above $0.70 for five consecutive trading days during the term.  The holders of this Series E may convert at anytime following a four-month hold period.  If the holder does not convert and no automatic conversion takes place, the Company must repay the principle amount to the holders of the Series E secured subordinated notes in cash.  As part of this private placement, the Company issued 30,000 common share-purchase warrants to an associate of Stonestreet Limited Partnership (“Stonestreet”) in consideration for professional fees.  Each such warrant entitles the holder to purchase one common share of the Company for $0.50 at any time up to and including August 18, 2006.  The Series E notes were issued to private investors including an amount totaling $100,000 issued to directors and/or senior officers of the Company.

Funding – 2002.  On April 25, 2002, the Company entered into an agreement with Stonestreet for a $1.1 million private placement.  The Company issued 3.3 million common shares at US $0.21 per share and warrants exercisable into 1 million common shares at US $0.35 per share.  The warrants were exercised on December 17, 2002, providing an additional $550,000 in gross proceeds to the Company.

On August 30, 2002, the Company entered into a private placement agreement of secured subordinated notes (Series A, B and D notes) with Stonestreet and a group of private investors for total gross proceeds of  $1 million.

Pursuant to the agreement with Stonestreet dated April 25, 2002, on August 30, 2002, the Company also issued a $120,000 secured subordinated note (Series C note) in exchange for the waiver of certain US registration rights granted to Stonestreet.

On August 30, 2002, ADB entered into a series of agreements with a lender, an unrelated party, whereby the lender granted to ADB and ADB Systems International Inc. (“Old ADB”) a secured loan in the aggregate principal amount of $2,000,000 and bearing interest at the rate of 12 percent per annum.  As part of this transaction, ADB and Old ADB implemented the Arrangement  (as defined below).

ADB Systems International Ltd. was created on August 30, 2002.  Upon implementation of a plan of arrangement approved by the shareholders of ADB on October 22, 2002 and approved by the Ontario Superior Court of Justice effective October 31, 2002 (the Arrangement), the shareholders of ADB exchanged their shares for shares of the Company on a one-for-one basis.  All assets and liabilities of ADB, other than those related to its retail activities, were transferred to the Company as of that date in the form of a return of capital.  Old ADB subsequently changed its name to Bid.com International Ltd. (“Bid.Com Ltd.”)

The Company and the lender entered into an arrangement whereby online retail operations utilizing the online retail technology, experience and expertise of ADB developed and operated under the name “Bid.Com International Inc.” in the on-line selling of consumer products to be supplied by the lender would be conducted by Bid.Com Ltd.  The loan matured on June 30, 2003 or upon earlier demand and the Company had the right after the earlier of June 1, 2003 and demand for payment to repay the loan in cash or to transfer to the lender 100 percent of the issued shared of Bid.Com Ltd. acquired by the Company as a consequence of the Arrangement for proceeds equal to the outstanding principal amount and accrued interest then owing to the lender.  The obligations of the Company and Bid.Com Ltd. were secured by a general security agreement delivered by the Company to the lender and a pledge of the shares of the Company’s Norwegian subsidiary.

On December 31, 2002 the Company owned 100 percent of the issued and outstanding shares of Bid.Com Ltd., but had determined that, for accounting purposes, consolidation of Bid.Com Ltd. was not appropriate.  This determination was based upon the Company’s evaluation of its continuing ability to determine the strategic operating policies of Bid.Com Ltd. without the cooperation of others, its ability to obtain future economic benefits from the resources of Bid.Com Ltd., and its exposure to the related risks of ownership.  Therefore, the Company accounted for its investment in Bid.Com Ltd. on the equity basis.  On October 22, 2002, after obtaining shareholder approval, the above-noted debt instruments became convertible into units at $0.12 per unit at the option of the holder.  Each Series A, B, and D unit consists of one common share and one-half common share purchase warrant.  Series C notes also

33


became convertible into common shares at a conversion price of $0.12 per share at the option of the holder or at the option of the Company.  Upon conversion, the Company will issue 9.333 million common shares for no additional consideration and 4.167 million warrants exercisable into an equal number of common shares at $0.14 per share.

On June 30, 2003, the Company exercised its put option to transfer 100 percent of the issued shares of Bid.Com Ltd. in full settlement of the outstanding principal and accrued interest owed to the lender.

Funding – 2001.  During 2001, the Company continued to liquidate its AOL position to fund operations.  In addition, the Company disposed of its equity position in Point2 for $2.6 million and recovered an $811,000 receivable from Point2 that had been provided for in 2000.

In October 2001, with the acquisition of ADB Systemer, the Company paid $2.293 million in cash to the shareholders of ADB Systemer in connection with the acquisition.  As a result of that acquisition, cash of  $814,000 held by ADB Systemer was acquired.

Trending Into Fiscal 2004

The Company has not earned profits to date and, at December 31, 2003,2004, has an accumulated deficit of $99.762$104.866 million. The Company expects to incur losses in 2004into 2005 and there can be no assurance that it will ever achieve profitability. Operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of the Company’s control.


The Company has incurred negative annual cash flows from operations since inception and expects to continue to expend substantial funds to continue to develop technology, build an infrastructure to support business development efforts and expand other areas of the business including the acquisition of, or strategic investments in, complementary products, businesses or technologies. Although theThe Company achieved positive cash flows from operations for the three months ended March 31, 2004, we estimate that additional working capital in the amounthas historically relied on non-operational sources of $3.7 millionfinancing to fund its operations. The Company’s ability to continue as a going concern will be required fordependent on management’s ability to successfully execute its business plan including a substantial increase in revenue as well as maintaining operating expenses at or near the same level as 2004. The Company expectsManagement’s 2005 business plan includes a significant increase in revenue and operating cash flow primarily from major new


contracts in Norway, the UK and North America. Management believes that it has the ability to obtain theraise additional working capital through additional debt or equity financings such as issuance of loans or debentures, issuance of shares, conversion of warrants and exercise options.  However, thefinancing if required. The Company cannot provide assurance that it will be able to execute on its business plan or assure that efforts to raise such additional financings willwould be successful.  The actual amount of funds that will be required during the interim period will be determined
Cash and cash equivalents increased slightly by many factors, some of which are beyond the Company’s control.  As a result, it may require funds sooner or in greater amounts than currently anticipated.

Aggregate Contractual Obligations

As$8,000 to $453,000 as at December 31, 2004 from $445,000 as at December 31, 2003.


Current assets of $2.196 million exceeded current liabilities (excluding deferred revenue) of $1.680 million in the current fiscal year by $516,000. Current assets of $1.947 million exceeded current liabilities (excluding deferred revenue) of $1.370 million by $577,000 in the prior year. Deferred revenue has been excluded from current liabilities as it is expected to be settled by resources other than cash.
As of May 31, 2005, we had cash on hand and marketable securities of approximately $610,000. Management believes that it has the ability to raise additional financing if required.
Cash Flows
Operating:
Cash outflows from operating activities remained relatively unchanged at $3.3 million in the current fiscal year compared to cash outflows from operating activities of $3.4 million in the prior year. Non-cash working capital resulted in inflows of $322,000 in fiscal 2004 as compared to outflows of $728,000 in fiscal 2003, an increase of $1.05 million, as summarized in the following table:

  
2004
 
2003
 
Difference
 
  
(in thousands)
 
Accounts receivable $(151)$444 $(595)
Deposits and prepaid expenses  (8) 60  (68)
Accounts payable  288  (87) 375 
Accrued liabilities  139  (491) 630 
Deferred revenue  44  (741) 785 
Effect of currency translation  10  87  (77)
  $322 $(728)$1,050 

Investing:
No significant cash flows resulted from investing activities in fiscal 2004. In 2004, $40,000 was spent on capital asset acquisitions as compared to $45,000 in expenditures for 2003. In 2003, proceeds in the amount of $62,000 were earned from the disposal of capital assets, strategic investments and marketable securities. No such proceeds were earned in 2004.

Financing:
Cash flows generated as the result of financing activities totaled $3.3 million in fiscal 2004. The sources of cash included an equity private placement and the issuance of convertible debt, which was slightly offset by deferred financing costs related to the convertible debt issuance. Cash flows generated in financing activities were $2.5 million for 2003, including an equity private placement and a convertible debt private placement.

CAPITAL RESOURCES
There were minor additions to capital assets during the years ended December 31, 2004 and 2003. In 2003, the Company’s contractual obligations, including payments due by periodsliquidation of redundant capital assets resulted in net proceeds of $34,000.
During 2004, the Company incurred $167,000 of costs associated with the issuance of secured subordinated notes, which were recorded as deferred financing charges. The deferred financing charges are being amortized on a straight-line basis over the next six years, are as follows:

 

 

Total

 

2004

 

2005

 

2006

 

2007

 

2008

 

2009

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating leases

 

$

436

 

$

232

 

$

113

 

$

43

 

$

24

 

$

24

 

—

 

License agreements

 

677

 

129

 

129

 

129

 

129

 

129

 

32

 

Secured subordinated notes(a)

 

715

 

115

 

—

 

600

 

—

 

—

 

—

 

 

 

$

1,828

 

$

476

 

$

242

 

$

772

 

$

153

 

$

153

 

$

32

 

term of the underlying notes. No deferred charges were incurred in 2003.

Funding
Overview. The Company has been funded to date primarily through a series of private placements of equity and convertible debentures, sales of equity to and investments from strategic partners, gains from investments and option exercises. Since inception, the Company has received aggregate net proceeds of $87.7 million from debt and equity financing and has realized $23.7 million in gains on investment disposals.



(a)Funding - 2005          These amounts do not include interest
On February 23, 2005, the Company completed a transaction resulting in the issuance of 2.5 million equity units at a price of $0.23 per unit for gross proceeds of $575,000. Each equity unit consists of one common share and one common share-purchase warrant with an exercise price of $0.40 each. The warrants expire on February 22, 2009.

Funding - 2004
On May 19, 2004, the Company issued Series F secured subordinated notes are assumed to be held to maturity.  Subsequent to December 31, 2003, Notes with a face value of $400,000 were converted$500,000 for net proceeds of $474,000. The Series F notes have an annual rate of interest of 7 percent paid quarterly in arrears, mature May 19, 2007 and are convertible into equity units at a price of $0.31 per unit. Each equity unit consists of one common share and accordinglyone half of a share-purchase warrant with an exercise price of $0.50. The share-purchase warrants expire on May 19, 2007. The Series F secured subordinated notes will automatically convert into units when the share price of the Company closes above $0.70 for five consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. The Series F notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes. 
On June 15, 2004, the Company issued Series G secured subordinated notes with a face value of $1,710,000 for net proceeds of $1,624,000. The Series G notes mature June 15, 2007, have an annual rate of interest of 7 percent payable upon the earlier of maturity and conversion and are convertible into equity units at a price of $0.31 per unit. Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50. The share-purchase warrants expire on June 15, 2008. The Series G secured subordinated notes will automatically convert into units when the volume-weighted average share price of the Company closes above $0.70 for 20 consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. The Series G notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

On October 21, 2004, the Company issued Series H secured subordinated notes with a face value of $520,000 for net proceeds of $500,000. The Series H notes mature October 21, 2007, have an annual rate of interest of 11 percent payable upon the earlier of maturity and conversion and are convertible into equity units at a price of $0.20 per unit. Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.40. The share-purchase warrants expire on October 21, 2008. The Series H secured subordinated notes will automatically convert into units when the share price of the Company closes at or above $0.45 for 10 consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. In order to obtain the required approvals to issue the Series H notes, the Company retroactively increased the interest rate on the Series G notes from an annual rate of 7 percent to an annual rate of 11 percent. The Series H notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

On December 6, 2004, the Company completed a transaction resulting in the issuance of 5,000,000 shares at a price of $0.20 per share and 5,000,000 common share-purchase warrants exercisable into one common share at a price of $0.35 for gross proceeds of $1,000,000. The warrants expire on December 6, 2008. Gross proceeds were comprised of $800,000 in cash and $200,000 in services. Issuance costs in the amount of $61,000 were incurred, including $19,000 representing the fair value of 150,000 compensation options issued to First Associates. The compensation options are exercisable into 150,000 equity units at a price of $0.20 per unit. Each equity unit consists of one common share and one common share-purchase warrant with an exercise price of $0.35 and an expiry date of December 6, 2008. The compensation options expire on December 6, 2006. Included in this amount is excluded from table above.

private placement were 100,000 shares issued to a director of the Company for net proceeds of $20,000.

C. RESEARCH AND DEVELOPMENT

For a discussion of the Company’s research and development policies for the last three years, see Item 4 - B. BUSINESS OVERVIEW under the heading “RESEARCH AND DEVELOPMENT”.

D. TREND INFORMATION

For trend information, see the section above entitled “LIQUIDITY AND CAPITAL RESOURCES”.



Foreign Currency Rate Fluctuations. While
The Company’s revenue from software licensing and related services and e-commerce enabling agreements is transacted in various currencies including the Company’s financial statements are in Canadian dollars, revenue is also generated in Norwegian krone, US dollars and other currencies.  The Company incurs the majority of its expenses in Canadian dollarsdollar, U.S. dollar, UK pound, EURO, and Norwegian krone. As a result,Correspondingly, operating expenses related to these activities are transacted in the above-denoted currencies. The Company may suffer losses due to fluctuations in exchange rates between the Canadian dollar or Norwegian krone and currencies of other countries. The Company does not currently engage inuse derivative instruments to manage exposure to foreign exchange hedging activities or use other financial instruments in this regard.

34

fluctuations.


Interest Rate and Investment Risk.

The primary objectiveCompany has limited exposure to fluctuations in interest rates. The Company does not use derivative instruments to reduce its exposure to interest rate risk.

Credit Risk.
Credit risk arises from the potential that a customer will fail to meet its contractual obligations under a software licensing and related services agreement or an e-commerce enabling agreement.

At December 31, 2004, there were three customers that accounted for 18 percent, 13 percent and 11 percent, respectively, of the Company’s investment activities is to preserve principal while at the same time maximizing income received from investments without significantly increasing risk.  The investment portfolio is primarily comprisedtotal accounts receivable. At December 31, 2003, three customers accounted for 25 percent, 19 percent and 14 percent, respectively, of cash, marketable securities, and short-term interest bearing certificates.

total accounts receivable.


Net Operating Losses for Tax Purposes.Purposes.
We have available an aggregate of approximately $13.5$20.9 million of net operating losses for tax purposes that may be used to reduce taxable income in future years, of which $3.157$1.659 million expires in 2009, 3.4248.418 million expires in 2010, $1.116$981,000 expires in 2011, and $3.569 million expires in 2011, $966,000 expires in 2012, and $282,000 expires in 2013.2014. In addition, there is $4.581$6.242 million that do not expire related to tax losses in Ireland. Our net operating losses are subject to assessment of our tax returns by taxation authorities.


E. OFF-BALANCE SHEET ARRANGEMENTS

The Company does not have any off-balance sheet special purpose entities or other off-balance sheet arrangements.

F. TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS

As at December 31, 2004 the Company's contractual obligations, including payments due by periods over the next five years, are as follows:

(C$000’s) Total 
2005
 
2006
 
2007
 
2008
 
2009
 
2010
and
thereafter
 
Operating leases $1,867 $416 $369 $339 $310 $279 $154 
License agreements  510  120  120  120  120  30  - 
Secured subordinated notes -principal repayment(a)
  2,605  -  375  2,230  -  -  - 
Secured subordinated notes - interest payment (a)
  800  41  26  733  -  -  - 
  $5,782 $577 $890 $3,422 $430 $309 $154 

(a) Assumes secured subordinated notes are held to maturity and not converted. Conversion may take place at the option of the holder or as a result of automatic conversion provisions contained within the term of the notes. No principal repayment is required for converted notes. In the case of Series G and H notes, conversion will result in the earlier payment of interest. Conversion will also result in the reduction of the aggregate dollar amount of interest payments.
The Company does not have any material commitments for capital expenditures.



ITEM 6 - DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

A.                                    DIRECTORS AND SENIOR MANAGEMENT


A.
DIRECTORS AND SENIOR MANAGEMENT
The following table sets forth the name, age and position of each of our directors and executive officers. This information is supplied based on our records and information furnished by our executive officers and directors.

Name

Age

Position

Directors

Jeffrey Lymburner(1)

Lymburner(1)

47

48

Director and Chief Executive Officer

T. Christopher Bulger(2)Bulger(2),(3)

,(4)

47

48

Director

Paul Godin,(2),(3)

51

52

Director

Jim Moskos

41

42

Director and President, ADB Technology Group

Darroch (Rick) Robertson (4)(2)

52

53

Director

Jan Pedersen(4)

Pedersen

46

47

Director and President, Norwegian Operations

Glen Whyte

Duncan G. Copeland(2),(3),(4)

47

Director

Glen Whyte(5)

48

Former Director

Executive Officers
(other than Messrs. Lymburner,
Pedersen and Moskos)

Michael Robb

41

42

Chief Financial Officer and Corporate Secretary

Aidan Rowsome

(6)

43

44

Former Vice-President, Global Sales

_______________________

(1) Mr. Lymburner is acting Chairman of the Board of Directors.

(2) Member of Audit Committee.

(3) Member of the Management Resources and Compensation Committee

(4) Nominee of certain of the prior shareholders of ADB Systemer ASA pursuant to a Board Representation Agreement.  See “Board Practices” below.

(1)
Mr. Lymburner is acting Chairman of the Board of Directors.
(2)
Member of the Management Resources and Compensation Committee.
(3)
Member of the Corporate Governance Committee.
(4)
Member of Audit Committee.
(5)
Resigned on June 23, 2004
(6)
Resigned on February 25, 2005
The business experience of each of our directors and executive officers for at least the last five years is as follows:

35


Directors

Directors Jeffrey Lymburner

JEFFREY LYMBURNER, Oldsmar, Florida

Director since May 28, 1996

Acting Chairman

Mr. Lymburnerhas been our Chief Executive Officer since August 1, 1999 and was a founding shareholder of our company. He was President of our company from its founding in 1995 to October 11, 2001. Prior to the founding of our company, Mr. Lymburner was President of Completely Mobile Inc., a cellular and wireless data company, from 1990 to 1995.


T. CHRISTOPHER BULGERChristopher Bulger, Toronto, Ontario

Director since May 28, 1996

Chairman of the Management Resources and Compensation, CommitteeCorporate Governance and Member of the Audit CommitteeCommittees


Mr. Bulger is the Chairman and CEO of Megawheels Technologies Inc., a web-centricweb-based classified advertising platform provider for newspapers,the newspaper and real estate sectors, with enterprise systems for retailers in the automotive and real estate sectors.auto dealerships. Mr. Bulger served as Executive Vice President of our company from September 1998 to December 1999 and Chief Financial Officer of our company from April 1996 to September 1998.




PAUL GODINPaul Godin, Kleinburg, Ontario

Director since May 28, 1996

Member of the Management Resources and Compensation Committee and Member of the Audit CommitteeCorporate Governance Committees

Mr. Godin is a private investor.  From September 1999 to March 2001, Mr. Godin was the Chairman of The Art Vault International Limited. Aside from being one of the founding shareholders of our company in 1995, Mr. Godinwas Chief Executive Officer of our company from our company’s inceptionits founding in 1995 to August 1, 1999, and Chairman of the Board of Directors from June 17, 1996 to June 14, 2000. PriorFrom September 1999 to the founding of our company in September, 1995,March 2001, Mr. Godin was Senior Vice-President, Corporate SalesChairman of The Art Vault International Limited. In March 2001, The Art Vault made an assignment in bankruptcy under the laws of the Province of Ontario, due to economic conditions and Marketing for Completely Mobile Inc., a Canadian company which designed and implemented wireless data systems.lack of available funding.


JIM MOSKOSJim Moskos, Toronto, Ontario

Director since June 7, 1999


Mr. Moskoshas been President of the ADB Technology Group since October 19, 1999. Mr. Moskos served as Vice President - Technology of our company from September 1997 to October 19, 1999. From September 1994 to August 1997, Mr. Moskos was Senior Technology Manager for the Canadian Department of Indian Affairs and Northern Development responsible for setting the technical direction for all aspects of application development.


JAN PEDERSENJan Pedersen, Stavanger, Norway

Director since June 12, 2002

Mr. Pedersen has been a director of our company since June 2002 and President of our Norwegian Operations since October 11, 2001. Prior to that, Mr. Pedersen founded and acted as CEO of ADB Systemer ASA since 1988.

Mr. Pedersen has broad software experience with clients such as Saga Petroleum, Statoil, BP Norway, Elf Petroleum and the Norwegian Petroleum Directorate. He holds a Master Science degree in Civil Engineering, the technical university in Trondheim, Norway.

DARROCH (RICK) ROBERTSONDarroch (Rick) Robertson, London, Ontario

Director since June 25, 2003

Chairman of the Audit Committee

Mr. Robertson has been an Associate Professor of BuisnessBusiness at the Richard Ivey School of Business, The University of Western Ontario, for the past five years. He is alsowas the Director of the undergraduate HBA program at the Ivey School. Mr. Robertson iswas also a director and chair of the audit committee of Stackpole Limited, a TSX listed company. Mr. Robertson is also an elected member of the council for the Institute of Chartered Accountants of Ontario, where he currently serves on the audit committee and by-laws committee.

36


Duncan Copeland
Member of the Audit Committee, Corporate Governance Committee, Management Resources and Compensation Committee

GLEN WHYTE, Toronto, Ontario

Mr. Copeland is President of Copeland and Company, a consultancy based in Potomac, Maryland. He has been a Director of the Corporation since April 16, 2003

its inception, except for the period from 2001-2004. Mr. Whyte is Associate Dean, Curriculum, RotmanCopeland has been a member of the faculties of the Richard Ivey School of Management,Business, The University of Toronto -Western Ontario and Georgetown University. He is a position he was appointed to in 2001. In 2000,trustee of the Charles Babbage Foundation. Mr. Whyte wasCopeland holds a doctorate from the Conway Chair inHarvard Business Ethics, Rotman School of Management.  From 1998 to 1999, Mr. Whyte was the Simon Reisman Chair at the Treasury Board of Canada Secretariat.  In 1998, Mr. Whyte was Full Professor, Organizational Behaviour and Human Resource Management, Rotman School of Management.

School.

Executive OfficersOfficer

(other than Messrs. Lymburner, Moskos, and Pedersen)

Michael Robb,joined the Company in November 2002 and was appointed asis Chief Financial Officer on August 19, 2003for ADB Systems, responsible for all of the Company's financial and Corporate Secretary on October 21, 2003.  From June 2001 to June 2002,administrative activities. He brings more than 15 years of finance experience, including venture capital activities, private equity transactions and mergers and acquisitions. Most recently, Mr. Robb served as Vice President of Finance for Westaim Partners, a Toronto venture capital firm. Mr. Robb wasPreviously, he served as Director of Finance for Classwave Wireless Inc. fromOctober 2000 to June 2001 and Director of Finance for Bid.Com. from January 1999 to October 2001.

Aidan Rowsome, our Vice-President, Global Sales, has been with our company since August 1999 when he joined as Managing Director, Europe. From June 1998 to July 1999, Mr. Rowsome was Chief Operations Officer for Nua Internet Consultancy, responsible for all project operations. Prior to that, Mr. Rowsome spent 8 years as General Manager, European Operations for Quarterdeck Corporation, now partRobb is a Certified Management Accountant and a member of the Symantec Group.

Society of Management Accountants of Ontario.



For a discussion of certain transactions involving directors and executive officers, see Item 7 –- MAJOR SHAREHOLDERS and RELATED PARTY TRANSACTIONS and Note 1923 to Consolidated Financial Statements.

B.
COMPENSATION

B.                                    COMPENSATION

Summary Compensation Table

The following table provides a summary of compensation earned during the most recently completed fiscal year by our Chief Executive Officer and our four highest paid executives, other than the Chief Executive Officer, who earned in excess of $100,000.

 

 

 

 

 

 

 

 

 

 

Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted

 

 

 

 

 

 

 

 

 

Annual Compensation

 

Options/

 

Shares or

 

Payouts

 

 

 

 

 

 

 

 

 

 

 

Other Annual

 

SARs

 

Restricted

 

LTIP

 

All Other

 

 

 

 

 

Salary

 

Bonus

 

Compensation

 

Granted

 

Share Units

 

Payout

 

Compensation

 

Name And Principal Position

 

Year

 

($)

 

($)

 

($)(1)

 

(#) (2)

 

($)

 

($)

 

($)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jeffrey Lymburner

 

2003

 

140,150

 

3,503

 

16,818

 

Nil

 

Nil

 

Nil

 

Nil

 

CEO (3)

 

2002

 

157,760

 

Nil

 

25,242

 

110,000

 

Nil

 

Nil

 

Nil

 

 

 

2001

 

317,987

 

Nil

 

12,720

 

271,875

 

Nil

 

Nil

 

Nil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Wallace

 

2003

 

181,846

 

Nil

 

7,731

 

Nil

 

Nil

 

Nil

 

Nil

 

President (4)

 

2002

 

200,000

 

Nil

 

22,800

 

226,667

 

Nil

 

Nil

 

Nil

 

 

 

2001

 

250,000

 

Nil

 

12,000

 

115,625

 

Nil

 

Nil

 

Nil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

James Moskos

 

2003

 

193,333

 

15,000

 

12,000

 

220,202

 

Nil

 

Nil

 

Nil

 

President, Technology Group

 

2002

 

200,000

 

Nil

 

12,000

 

214,167

 

Nil

 

Nil

 

Nil

 

 

 

2001

 

250,000

 

Nil

 

12,000

 

115,625

 

Nil

 

Nil

 

Nil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Jan Pedersen

 

2003

 

181,843

 

40,358

 

Nil

 

Nil

 

Nil

 

Nil

 

Nil

 

President, Norwegian Operations (5)

 

2002

 

165,500

 

47,000

 

Nil

 

214,167

 

Nil

 

Nil

 

Nil

 

 

 

2001

 

205,276

 

2,953

 

4,000

 

37,500

 

Nil

 

Nil

 

Nil

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Aidan Rowsome

 

2003

 

173,430

 

10,033

 

17,747

 

122,580

 

Nil

 

Nil

 

Nil

 

Vice-President, Global Sales (6)

 

2002

 

168,000

 

5,500

 

16,500

 

163,125

 

Nil

 

Nil

 

Nil

 

 

 

2001

 

200,140

 

75,163

 

15,595

 

44,530

 

Nil

 

Nil

 

Nil

 

37



  
Awards
Payouts
 
 
Annual Compensation
 
Restricted
  
  
Options/
Shares or
  
    
Other
    
    
Annual
SARs
Restricted
LTIP
All Other
  
Salary
Bonus
Compensation
Granted
Share Units
Payout
Compensation
Name And Principal Position
Year
($)
($)
($)(1)
(#)(2)
($)
($)
($)
Jeffrey Lymburner2004130,130Nil15,616NilNilNilNil
CEO (3)
2003140,150$3,50316,818NilNilNilNil
 2002157,760Nil25,242110,000NilNilNil
         
Mike Robb2004144,583Nil6,600NilNilNilNil
CFO (4)
200376,250Nil5,362NilNilNilNil
         
James Moskos2004190,000Nil12,000NilNilNilNil
President, Technology Group2003193,33315,00012,000220,202NilNilNil
 2002200,000Nil12,000214,167NilNilNil
         
Jan Pedersen2004201,657NilNilNilNilNilNil
President, Norwegian Operations2003181,84340,358Nil22,378NilNilNil
 2002165,50047,000Nil214,167NilNilNil
         
Aidan Rowsome2004205,1661,02016,955NilNilNilNil
Vice-President, Global Sales2003173,43010,03317,747122,580NilNilNil
 2002168,0005,50016,500163,125NilNilNil

1.               Received on account of car reimbursement expenses, income derived from the exercise of options and automobile leases.

2.               All numbers have been adjusted to reflect the two for one consolidation of our shares in October, 2001.

3.               Mr. Lymburner’s salary is U.S. $100,000.  He also served as President from August, 1998 to October, 2001.

4.               Joined our company on May 17, 1999.  Mr. Wallace was Executive Vice President, General Counsel and Corporate Secretary from May 1999 to November 1999 and Chief Operating Officer from November 1999 to October, 2001. Mr. Wallace resigned from our company on August 22, 2003.

5.               Joined our company on October 11, 2001, upon  the acquisition of ADB Systemer.

6.Joined our company as Managing Director, Europe in August 1999. Became our Vice-President, Global Sales in October 2001.

(1)Other compensation reflects our company’s provision of automotive related expenses and options.
(2)All numbers have been adjusted to reflect the two for one consolidation of our shares in October, 2001.
(3)Mr. Lymburner’s salary is U.S. $100,000.
(4)Mike Robb joined our company on February 26, 2003 as Director of Finance and was appointed as CFO and Corporate Secretary on August 12, 2003.
Messrs. Lymburner, Moskos, Pedersen and Rowsome have volunteered salary reductions in the 2002, 2003, and 20032004 calendar years, ranging from fifteen percent to fifty percent. In exchange for the foregone salary, the executives were granted stock options, vesting quarterly in arrears, in an amount equal to the amount of foregone salary divided by the exercise price of the options (being the market price of the Company’sour company’s shares on the day prior to the date of the grant). These salary reductions took effect January 1, 2002 and the options were granted during 2002. The salary reductions will not affect any severance entitlement for the individuals concerned.

The following table sets forth details

Our company has a stock option plan which provides for the issuance of stock options to employees, which may expire as much as 10 years from the date of grant, at prices not less than the fair market value of the option grantscommon shares on the date of grant. The Management Resources and Compensation Committee of the Board of Directors reserves the right to attach vesting periods to stock options granted. No options or stock appreciation rights were granted to employees, officers or directors of our Chief Executive Officer and our four highest paid executives, other than the Chief Executive Officer, who earned in excess of $100,000company during the fiscal year ended December 31, 2003.

Name

 

Securities Under
Options/SARs
Granted
(#)

 

% of Total
Options/SARs
Granted to
Employees in
Financial Year

 

Exercise or Base
Price
($/Security)

 

Market Value of
Securities
Underlying
Options/SARs on
the Date of Grant
($/Security)

 

Expiration
Date

 

Jeffrey Lymburner

 

Nil

 

Nil

 

Nil

 

Nil

 

Nil

 

 

 

 

 

 

 

 

 

 

 

 

 

Mark Wallace

 

Nil

 

Nil

 

Nil

 

Nil

 

Nil

 

 

 

 

 

 

 

 

 

 

 

 

 

James Moskos

 

20,202

(1)

1.8

%

0.33

 

0.33

 

7/03/06

 

 

 

100,000

(2)

9.1

%

0.35

 

0.35

 

8/15/06

 

 

 

100,000

 

9.1

%

0.35

 

0.35

 

8/15/06

 

 

 

 

 

 

 

 

 

 

 

 

 

Jan Pedersen

 

22,378

(1)

2.0

%

0.33

 

0.33

 

7/03/06

 

 

 

 

 

 

 

 

 

 

 

 

 

Aidan Rowsome

 

22,580

(1)

2.1

%

0.33

 

0.33

 

7/03/06

 

 

 

100,000

 

9.1

%

0.35

 

0.35

 

8/15/06

 

2004.

(1) These options were granted in respect of the salary reductions on the terms described above.

(2) These options were performance incentive options, most of which vest only upon the attainment of specified business and financial results and some of which vested and became exercisable the date of their grant.

During 2003,2004, we did not provide any pension, retirement or similar benefits to our directors and officers as a group. Our employees based in Ireland and the United Kingdom participate in a retirement savings arrangement where employee contributions to personal retirement savings accounts are matched by the Company


to a maximum

38


of six percent of salary. This arrangement does not represent a future pension obligation to the Company. Mr. Rowsome participates in this plan.

Jeff Lymburner has entered into a non-competition and salary protection agreement with our company, dated February 21, 1997, which provides, among other things, that he (i) will not compete with our company for a period of 12 months, which may be extended by us to 24 months, following the termination of his employment with our company, in consideration of which we will pay his full annual salary during such period; and (ii) if his employment with us is terminated other than by reason of death, disability or cause (as such terms are defined in such agreements), we will continue to pay his full annual salary for 12 months (or 24 months if we exercise our option to extend the non-competition restrictions for 24 months) following the date of termination.

Jan Pedersen entered into a new employment agreement with our company in 2003 which sets out his salary and benefits as the Company’s President of Norwegian operations, as described in Item 6. The new agreement does not provide for termination payments or retention bonuses.

Compensation of Directors


Our directors presently receive no fees or other compensation for acting as directors, attending meetings of the Board or committees of the Board orwhich they attend, and no fee for the signing of any resolution of directors or documents on behalf of the Company.   our company.

All directors are reimbursed for reasonable out-of-pocket travel and other expenses incurred by them in attending Board meetings of the Board or committees of the Board.

Committee meetings.


C.
BOARD PRACTICES
C.                                    BOARD PRACTICES

Our articles of incorporation currently provide for a Board of Directors consisting of not less than 3 and not more than 15 directors, to be elected annually. The Ontario Business Corporations Act (Ontario) provides that, where a minimum and maximum number of directors is provided for in the articles of a company, the directors of that company may, if empowered by special resolution of the shareholders, by a resolution determine the number of directors to be elected at each annual meeting of the shareholders. Our Board of Directors has the authority to fix the number of directors to a number within the minimum and maximum number of directors as set forth in the articles, and has determined by resolution that the size of the Board is 7 directors.

On September 7, 2001, we entered into an agreement (the “Board Representation Agreement”) with LimeRock Partners LLC (“LR”), Jan Pedersen (“Pedersen”), and Sandnes Investering, Rogaland Investering, AIG Private Bank Ltd. and Karstein Gjersvik (together, the “Other Nominating Shareholders”) in connection with the acquisition of ADB Systemer ASA of Sola, Norway.  LR, Pedersen and the Other Nominating Shareholders were the largest shareholders of ADB Systemer.

Pursuant to the Board Representation Agreement, LR and Pedersen were entitled, immediately following the acquisition of ADB Systemer, to nominate one person each to our Board of Directors.  Also pursuant to the Board Representation Agreement, the Other Nominating Shareholders as a group were entitled to nominate one person to our Board of Directors effective at our 2002 annual shareholders meeting on June 12, 2002.

The Board representation rights conferred on LR, Pedersen and the Other Nominating Shareholders are subject to their continued ownership of at least 50% of the shares received by them upon the acquisition of ADB Systemer.  These rights are also subject to the satisfaction of Canadian residency and other regulatory issues.

LR has sold all of its shareholdings in ADB and, therefore, pursuant to the Board Representation Agreement, no longer has a right to nominate a person to the Board of Directors.


Our Board of Directors presently consists of 7 directors. Under Canadian law, a majority of our Board of directors and of each of our Board Committees must be residents of Canada, subject to certain exceptions. Each of our directors holds office until the next annual meeting of shareholders, until his successor has been elected and qualified, or his earlier resignation or removal. Our executive officers are appointed by our Board of directors and serve at the discretion of our Board of Directors.

39



Except for Jeff Lymburner’sJeffrey Lymburner's salary protection agreements, no director has any contract or arrangement with us entitling them to benefits upon termination of their directorship.


The three committees of the Board are the Audit Committee, Management Resources and Compensation Committee, and the Corporate Governance Committee.


The Audit Committee, all of whose members are unrelated as defined by the TSX Corporate Governance Guidelines, meets with our management and our auditors on a periodic basis, before the release of quarterly results and before submission of our annual financial statements to the Board. The committee is responsible for the review and assessment of our audit practices, financial reporting and internal controls, inquiry of the auditors as to cooperation in access and disclosure by our management and the ultimate approval of our annual financial statements for submission to the Board and to the shareholders. The committee is also responsible for the appointment, compensation and oversight of the work of our auditors (including resolution of disagreements between management and our auditors regarding financial reporting).

Our Audit Committee consists of Darrock Robertson (Chairman), Chris Bulger and Duncan Copeland. The composition of the committee changed during fiscal 2004 due to the resignation of Glen Whyte from the board of directors effective June 30, 2004. Mr. Copeland was appointed in Mr. Whyte’s place.


The Management Resources and Compensation Committee, all of whose members are unrelated as defined by the TSX Corporate Governance Guidelines, is responsible for recommendations to the Board regarding the appointment or removal of executive officers, reviewing the performance of the executive officers and fixing their compensation. The committee is also responsible for administering our stock option plan and ensuring that


salary and benefit programs are continuously suitable for acquiring,attracting, retaining and motivatingencouraging the development of knowledgeable, experienced and capable management and employees.

The Management Resources and Compensation Committee of our company consists of Christopher Bulger (Chairman), Paul Godin and Duncan Copeland, all of whom are directors of our company. The composition of the committee changed during fiscal 2004 due to the resignation of Glen Whyte from the board of directors effective June 30, 2004. Mr. Copeland was appointed in Mr. Whyte’s place.


The Corporate Governance Committee, all of whose members are unrelated as defined by the TSX Corporate Governance Guidelines, oversees the implementation of our governance guidelines described above and, where it deems appropriate, will develop modifications to such guidelines.practices. The committee also oversees the process for nominations to the Board and assesses the overall effectiveness of the Board.

The Corporate Governance Committee consists of Paul Godin (Chairman), Chris Bulger, and Duncan Copeland, all of whom are directors of our company. The composition of the committee changed during fiscal 2004 due to the resignation of Glen Whyte from the board of directors effective June 30, 2004. Mr. Copeland was appointed in Mr. Whyte’s place.


D.
EMPLOYEES
D.    As of December 31, 2004 we employed a total of 46 full-time employees and one part-time employee as follows:                                    EMPLOYEES

  North America Ireland and UK Norway 
Sales and Marketing  4  1  2 
Technical Services  4  2  9 
Product Group  4  0  10 
Finance and Admin  3  1  2 
Executive  3  1  1 
TOTAL  18  5  24 
None of our employees are represented by a labor union, and we consider our employee relations to be good.
As of December 31, 2003 we employed a total of 50 full-time employees and no part-time employees as follows:

  North America Ireland and UK Norway 
Sales and Marketing  5  1  1 
Technical Services  5  2  12 
Product Group  2  0  10 
Finance and Admin  4  1  2 
Executive  3  1  1 
TOTAL  19  5  26 

As of December 31, 2002 we employed a total of 49 full-time employees and no part-time employees as follows:

  North America Ireland and UK Norway 
Sales and Marketing  5  1  2 
Technical Services  5  1  9 
Product Group  3  Nil  10 
Finance and Admin  5  1  2 
Executive  3  1  1 
TOTAL  21  4  24 

40


As of December 31, 2001 we employed a total of 68 full-time employees and no part-time employees as follows: 

 

 

North America

 

Ireland and UK

 

Norway

Sales and Marketing

 

6

 

4

 

2

Technical Services

 

9

 

2

 

12

Product Group

 

6

 

Nil

 

12

Finance and Admin

 

6

 

1

 

2

Executive

 

4

 

1

 

1

TOTAL

 

31

 

8

 

29

The number of our employees as of December 31, 20032004 represents a 27.9% decrease in our workforce of approximately 6% as compared with the number of our employees as of December 31, 2001.

None of our employees is represented by a labor union, and we consider our employee relations to be good.

E.              SHARE OWNERSHIP

2003.




E.
SHARE OWNERSHIP
The following table sets forth certain information concerning share and option ownership of each of our current directors and officers as of May 7, 2004:

Name

 

Number of Common
Shares Owned (1)

 

Number of Common
Underlying Options
(2)

 

Range ofexercise
prices of options

 

Range of
Expiration Dates of
Options

 

Percentage of
Common  Shares
Beneficially
Owned (3)

 

Christopher Bulger

 

15,000

 

 

62,000

 

 

$0.36-$0.48

 

05/10/04-07/03/06

 

*

 

 

Paul Godin

 

232,667

 

 

25,000

 

 

$0.36 - $0.48

 

05/10/04-07/03/06

 

*

 

 

Jeffrey Lymburner

 

3,211,975

 

 

50,000

 

 

$0.36-$0.48

 

05/10/04/11/27/04

 

5.2

%

 

Jim Moskos

 

21,375

 

 

434,369

 

 

$0.33-$0.48

 

05/10/04-08/15/09

 

*

 

 

Rick Robertson

 

5,000

 

 

30,000

 

 

$0.37-

 

07/03/06

 

*

 

 

Glen Whyte

 

208,333

 

 

Nil

 

 

N/A

 

N/A

 

*

 

 

Michael Robb

 

Nil

 

 

43,250

 

 

$0.22-$0.48

 

11/27/04-08/15/06

 

*

 

 

Jan Pedersen

 

767,019

 

 

206,545

 

 

$033-$0.48

 

05/10/04-07/03/06

 

1.6

%

 

Aidan Rowsome

 

Nil

 

 

255,705

 

 

$0.33 - $0.48

 

05/10/04-08/15/06

 

*

 

 

June 1, 2005:



Name
 
Number of
Common
Shares
Owned (1)(2)
 
Number of
Common Shares
Underlying
Options (3)
 
Range of
Exercise
Prices of
Options
 
Range of
Expiration
Dates of
Options
 
Percentage of
Common
Shares
Beneficially
Owned (4)
T. Christopher Bulger 265,000 75,000 $0.22-$0.37 07/03/06-01/25/10 *
           
Paul Godin 332,667 70,000 $0.22 01/25/10 *
           
Jeffrey Lymburner 3,211,975 153,300 $0.22 01/25/10 4.44%
           
Jim Moskos 21,375 370,202 $0.22-$0.35 07/03/06 - 01/25/10 *
           
Darroch Robertson 5,000 110,000 $0.22-$0.37 07/03/06-01/25/10 *
           
Michael Robb Nil 138,750 $0.22-$0.35 02/26/06-01/25/10 *
           
Jan Pedersen 767,019 442,292 $0.22-$ 0.33 07/03/06-01/25/10 1.06%
           
Duncan Copeland 87,050 70,000 $0.22 01/25/10 *
           
Aidan Rowsome 62,500 122,580 $0.33-$0.35 07/03/06-08/15/06 *

*Represents less than 1%.
(1)All numbers adjusted to reflect the two for one consolidation of our shares in October 2001.
(2)Represents shares owned beneficially by the named individual other than those shares which may be acquired under our Corporation's option plans. Unless otherwise noted, all persons referred to above have sole voting and sole investment power.
(3)Includes all shares which the named individual has the right to acquire under all vested and unvested options and warrants granted to such individual under our company's option plan.
(4)This information is based on 72,370,131 common shares outstanding as of May 31, 2005. Common shares subject to options exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person.

* Represents less than 1%.

(1)All numbers adjusted to reflect the two for one consolidation of our shares in October 2001.

(2)Represents shares owned beneficially by the named individual other than those shares which may be acquired under our company’s option plans.  Unless otherwise noted, all persons referred to above have sole voting and sole investment power.

(3)Includes all shares which the named individual has the right to acquire under all vested and unvested options and warrants granted to such individual under our company’s option plan.

(4)This information is based on 61,420,621 common shares outstanding as of May 7, 2004. Common shares subject to options exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person.

41


ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS

A.MAJOR SHAREHOLDERS


A.
MAJOR SHAREHOLDERS

To our knowledge, no person other than Jeffrey Lymburner beneficially owns, directly or indirectly, or exercises control or direction over more than 5%5.0% of our issued and outstanding common shares.

This information is based on our records, information provided to us by directors and executive officers and a review of any Schedules 13D and 13G filed prior to June 14, 2004, by our shareholders with the Securities and Exchange Commission prior to June 1, 2005, and insider reports filed with the Ontario Securities Commission. The Company’s major shareholders do not have any voting rights that differ from the rights of our other shareholders.

As of May 7, 2004, we had 1,210at April 18, 2005, the shareholders of record holding 61,420,621held 72,370,131 common shares, of which 765793 shareholders holding 3,743,124 common shares had an address of record in the United States. Common shares held by CEDE & Co. in the United States on such date amounted to 3,612,2364,289,060 or 5.88%5.9% of our issued common shares, which shares are held for participants’ accounts.



We are not aware of any other corporation, foreign government, or other person or entity that directly or indirectly owns or controls our company, severally or jointly. We are not aware of any arrangements which may at a later date result in a change in control of our company.

B.RELATED PARTY TRANSACTIONS

On April 4, 2000, we completed a transaction with The Art Vault International Limited, a company previously listed on the Canadian Venture Exchange, under which we agreed to provide our online auction technology and related services to enable the implementation of The Art Vault’s online auction of art and antiquities.  In consideration for our license and services, we received 2,500,000 shares of The Art Vault and a share of future profits. Paul Godin, a director of our company, was the founding shareholder, an executive officer and a director of The Art Vault. Azim Fancy, then one of our directors, was a director and shareholder of The Art Vault. Charles Walker and James Moskos, also directors of our company, were shareholders of The Art Vault.  In March 2001, The Art Vault made an assignment in bankruptcy under the laws of the Province of Ontario, due to economic conditions and a lack of available funding.  As their license and services agreements were fully paid up, the assignment had no material economic effect on these agreements.  Our investment in The Art Vault was written down to zero.


B.
RELATED PARTY TRANSACTIONS
On August 30, 2002, the Company entered into a private placement agreement of secured subordinated notes (Series A, B and D notes) with a group of private investors for total gross proceeds of $1.12 million. The notes are secured by a general security agreement on the property and assets of ADB.

The following officers and directors purchased the Series D notes: Chris Bulger, a director of the Company, purchased $20,000 of Series D notes that have not yet been converted. Paul Godin, a director of the Company, purchased $25,000 of Series D notes that were converted on December 13, 2002 to 208,333 common shares and 104,167 share purchase warrants. Jeff Lymburner, CEO and a director of the Company, purchased $75,000 of Series D notesofnotes of which $54,750 were converted on April 1, 2004 to 456,250 shares and 228,125 share purchase warrants The 228,125 common share purchase warrants were exercised into an equal number of common shares by April 19, 2004. The remaining $20,250 of Series D notes have yet to be converted as of June 18, 2004. Aidan Rowsome, VPwho was then Vice President - Global Sales of the Company, purchased $15,000 of Series D notes that were converted on February 3, 2003 to 125,000 common shares and 62,500 share purchase warrants.

On May 9, 2003, the Company issued 666,666 common shares to Jeff Lymburner, CEO of the Company, in consideration of gross proceeds of $200,000 as part of a private placement financing.

42


On August 19, 2003, the Company entered into a private placement agreement of secured subordinated notes (Series E notes) with a group of private investors for total gross proceeds of $1.0 million. The notes are secured by a general security agreement on the property and assets of ADB.

The following officers and directors purchased the Series E notes: Paul Godin, a director of the Company, purchased $50,000 of Series E notes that have not yet been converted. Jim Moskos, President Technology Group and a director of the Company, purchased $35,000 of Series E notes that have not yet been converted. Michael Robb, CFO and Corporate Secretary of the Company, purchased $15,000 of Series E notes that have not yet been converted.

On June 15, 2004 the Company issued to private investors Series G secured subordinated notes in the aggregate principal amount of $1.71 million for net proceeds of $1.48 million. The following officers and directors purchased Series G notes: Jeff Lymburner, CEO of the Company, purchased $100,000 of Series G notes that have not yet been converted; Jan Pedersen, President, European NorwegianOperations and a director of the Company, purchased $60,000 of Series G notes that have not yet been converted; and Jim Moskos, President Technology Group and a director of the Company, purchased $10,000 of Series G notes that have not yet been converted.

On October 21, 2004 the Company issued to private investors Series H secured subordinated notes in the aggregate principal amount of $520,000 for net proceeds of $477,000. A total of $270,000 of the principal amount of Series H notes was issued to the following directors and/or senior officers of the Company: Jeffrey Lymburner, an officer and director of the Company, purchased Series H notes in the principal amount of $200,000; Paul Godin, a director of the Company purchased Series H notes in the principal amount of $50,000; and James Moskos, an officer and director of the Company purchased Series G notes in the principal amount of $20,000.
On December 6, 2004, the Company completed a private placement resulting in the issuance of 5,000,000 shares at a price of $0.20 per share and 5,000,000 common share-purchase warrants exercisable into one common share at a price of $0.35 for gross proceeds of $1.0 million. Included in this private placement were 100,000 shares issued to Paul Godin, a director of the Company for gross proceeds of $20,000. The warrants were issued for a four year term and will expire on December 6, 2008.
For additional information regarding related party transactions, see Part I - Item 5 under the heading “OPERATING AND FINANCIAL REVIEW AND PROSPECTS –- MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and see Note 7(b)6(d) to Notes Consolidated Financial Statements.

For additional information regarding related party transactions, see Part I – Item 4 under the heading “MAJOR DEVELOPMENTS” and Note 19 to Notes to Consolidated Financial Statements.

ITEM 8 - FINANCIAL INFORMATION


See the Consolidated Financial Statements and notes thereto accompanying this Annual Report beginning on page F-1.

All contingencies and commitments set out in the Financial Statements have been reviewed and updated as at the date of filing this Annual Report.



LEGAL PROCEEDINGS

Neither we, nor any of our subsidiaries, is a party to, or the subject of, any material legal proceedings.

DIVIDEND POLICY

We have not declared or paid any cash dividends on our common shares. We currently intend to retain any future earnings for use in the operation and expansion of our business. We do not anticipate paying any cash dividends on our common shares in the foreseeable future.

We have not issued any preference shares. The dividend entitlement of any preference shares issued will be determined by our Board of Directors.

SIGNIFICANT CHANGES

None.

ITEM 9 - THE OFFER AND LISTING

Our common shares are listed on The Toronto Stock Exchange and are quoted for trading on the OTCBB. Our common shares were quoted on the Nasdaq National Market from April 20, 1999 until June 3, 2002 and were quoted on the Nasdaq SmallCap Market from June 3, 2002 until August 21, 2002 at which time they were delisted because we did not satisfy the minimum bid price per share requirement for continued listing on that market. The shares were listed on the Nasdaq exchanges from April 20, 1999 until October 17, 2001 under the symbol “BIDS” and from October 18, 2001 until August 21, 2002 under the symbol “ADBI”. Our common shares have been quoted for trading on the OTCBB since August 22, 2002 under the symbol “ADBY”.

43

Effective November 15, 2004 our stock symbol on the Over the OTCBB was changed to “ADBYF”. The addition of the F to the symbol was a requirement of the OTCBB to signify that we are a foreign issuer.

From June 6, 1996 to February 8, 1998, our common shares were quoted for trading on the Canadian Dealing Network under the symbol “ILII.” Our common shares were traded on The Toronto Stock Exchange from February 9, 1998 to July 17, 1998 under the symbol “ILI” and from July 18, 1998 to October 17, 2001 under the symbol “BII”. Since October 18, 2001, our common shares have been traded on the Toronto Stock Exchange under the symbol “ADY”.

For additional information about the trading of our common shares, see Item 3-D - Risk Factors - YOUR ABILITY TO BUY OR SELL OUR COMMON SHARES ON THE OTCBB MAY BE LIMITED.

The following tables set forth the range of high and low sales prices (rounded to the nearest hundredth) as reported by The Toronto Stock Exchange, the OTCBB (beginning June 4, 2002) and Nasdaq (beginning April 20, 1999)(until June 3, 2002) during the calendar years and quarters indicated. Note that all numbers have been adjusted to reflect the two-for-one share consolidation completed in October 2001.



THE TORONTO STOCK EXCHANGE

 

 

High

 

Low

 

 

 

(Cdn $)

 

(Cdn $)

 

ANNUAL MARKET PRICES

 

 

 

 

 

 

 

 

 

 

 

1999 Calendar Year

 

67.30

 

7.30

 

2000 Calendar Year

 

26.20

 

1.94

 

2001 Calendar Year

 

3.40

 

0.29

 

2002 Calendar Year

 

0.93

 

0.07

 

2003 Calendar Year

 

0.85

 

0.17

 

 

 

 

 

 

 

QUARTERLY MARKET PRICES

 

 

 

 

 

2002 CALENDAR YEAR

 

 

 

 

 

First Quarter

 

0.50

 

0.28

 

Second Quarter

 

0.45

 

0.22

 

Third Quarter

 

0.25

 

0.09

 

Fourth Quarter

 

0.93

 

0.07

 

2003 CALENDAR YEAR

 

 

 

 

 

First Quarter

 

0.85

 

0.17

 

Second Quarter

 

0.41

 

0.19

 

Third Quarter

 

0.55

 

0.31

 

Fourth Quarter

 

0.54

 

0.37

 

2004 CALENDAR YEAR

 

 

 

 

 

First Quarter

 

0.52

 

0.34

 

 

 

 

 

 

 

MONTHLY MARKET PRICES

 

 

 

 

 

November 2003

 

0.53

 

0.37

 

December 2003

 

0.48

 

0.39

 

January 2004

 

0.45

 

0.39

 

February 2004

 

0.52

 

0.39

 

March 2004

 

0.42

 

0.34

 

April 2004

 

0.38

 

0.32

 

May 2004

 

0.38

 

0.25

 

44

  High Low 
  (Cdn $) (Cdn $) 
ANNUAL MARKET PRICES
       
2000 Calendar Year  26.20  1.94 
2001 Calendar Year  3.40  0.29 
2002 Calendar Year  0.93  0.07 
2003 Calendar Year  0.85  0.17 
2004 Calendar Year  0.52  0.16 
QUARTERLY MARKET PRICES
       
2003 CALENDAR YEAR
       
First Quarter  0.85  0.17 
Second Quarter  0.41  0.19 
Third Quarter  0.55  0.31 
Fourth Quarter  0.54  0.37 
2004 CALENDAR YEAR
       
First Quarter  0.52  0.34 
Second Quarter  0.38  0.25 
Third Quarter  0.36  0.19 
Fourth Quarter  0.28  0.16 
2005 CALENDAR YEAR
       
First Quarter  0.36  0.19 
MONTHLY MARKET PRICES
       
November 2004  0.22  0.16 
December 2004  0.28  0.19 
January 2005  0.25  0.19 
February 2005  0.36  0.23 
March 2005  0.34  0.26 
April 2005  0.29  0.25 
May 2005  0.28  0.15 



NASDAQ AND OTCBB

 

 

High

 

Low

 

High

 

Low

 

 

 

(Cdn $)

 

(Cdn $)

 

(U.S. $)

 

(U.S. $)

 

ANNUAL MARKET PRICES

 

 

 

 

 

 

 

 

 

1999 Calendar Year

 

57.12

 

11.18

 

38.62

 

7.50

 

2000 Calendar Year

 

26.60

 

1.60

 

19.26

 

1.06

 

2001 Calendar Year

 

3.30

 

0.30

 

2.18

 

0.19

 

2002 Calendar Year

 

0.93

 

0.06

 

0.59

 

0.04

 

2003 Calendar Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

QUARTERLY MARKET PRICES

 

 

 

 

 

 

 

 

 

2002 CALENDAR YEAR

 

 

 

 

 

 

 

 

 

First Quarter

 

0.53

 

0.27

 

0.34

 

0.17

 

Second Quarter

 

0.42

 

0.22

 

0.27

 

0.16

 

Third Quarter

 

0.25

 

0.06

 

0.16

 

0.04

 

Fourth Quarter

 

0.93

 

0.08

 

0.59

 

0.05

 

2003 CALENDAR YEAR

 

 

 

 

 

 

 

 

 

First Quarter

 

0.79

 

0.16

 

0.54

 

0.11

 

Second Quarter

 

0.39

 

0.16

 

0.29

 

0.12

 

Third Quarter

 

0.57

 

0.27

 

0.42

 

0.20

 

Fourth Quarter

 

0.58

 

0.34

 

0.45

 

0.26

 

2004 CALENDAR YEAR

 

 

 

 

 

 

 

 

 

First Quarter

 

0.54

 

0.34

 

0.41

 

0.26

 

 

 

 

 

 

 

 

 

 

 

MONTHLY MARKET PRICES

 

 

 

 

 

 

 

 

 

November 2003

 

0.52

 

0.38

 

0.40

 

0.29

 

December 2003

 

0.45

 

0.36

 

0.35

 

0.28

 

January 2004

 

0.48

 

0.40

 

0.36

 

0.28

 

February 2004

 

0.55

 

0.40

 

0.41

 

0.30

 

March 2004

 

0.42

 

0.34

 

0.32

 

0.26

 

April 2004

 

0.44

 

0.34

 

0.32

 

0.25

 

May 2004

 

0.38

 

0.27

 

0.28

 

0.20

 

  High Low High Low 
  (Cdn $) (Cdn $) (U.S. $) (U.S. $) 
ANNUAL MARKET PRICES
             
2000 Calendar Year  26.60  1.60  19.26  1.06 
2001 Calendar Year  3.30  0.30  2.18  0.19 
2002 Calendar Year  0.93  0.06  0.59  0.04 
2003 Calendar Year  0.79  0.16  0.54  0.11 
2004 Calendar Year  0.54  0.14  0.41  0.12 
QUARTERLY MARKET PRICES
             
2003 CALENDAR YEAR
             
First Quarter  0.79  0.16  0.54  0.11 
Second Quarter  0.39  0.16  0.29  0.12 
Third Quarter  0.57  0.27  0.42  0.20 
Fourth Quarter  0.58  0.34  0.45  0.26 
2004 CALENDAR YEAR
             
First Quarter  0.54  0.34  0.41  0.26 
Second Quarter  0.39  0.24  0.29  0.18 
Third Quarter  0.35  0.19  0.27  0.15 
Fourth Quarter  0.27  0.14  0.22  0.12 
2005 CALENDAR YEAR
             
First Quarter  0.36  0.18  0.29  0.15 
MONTHLY MARKET PRICES
             
November 2004  0.21  0.14  0.18  0.12 
December 2004  0.27  0.19  0.22  0.15 
January 2005  0.25  0.18  0.20  0.15 
February 2005  0.36  0.22  0.29  0.18 
March 2005  0.33  0.24  0.27  0.20 
April 2005  0.28  0.24  0.23  0.19 
May 2005  0.32  0.23  0.25  0.18 
United States dollar amounts are converted to Canadian dollars at the noon buying rate in New York City for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York for the date of such sales prices.

ITEM 10 - ADDITIONAL INFORMATION

A.                                    Share Capital

A.
Share Capital
Not applicable.

B.                                    Memorandum and Articles of Association

B.
Memorandum and Articles of Association
The Articles of Arrangement for ADB are on file with the Ministry of Consumer and Commercial Relations for the Province of Ontario under Ontario Corporation Number 1539169. Our articles do not include a stated purpose.

45


Directors

Directors

Directors of our company need not be shareholders. In accordance with our by-laws and the Ontario Business Corporations Act (Ontario), a majority of our directors must be residents of Canada, subject to certain exceptions. In addition, directors must be at least 18 years of age, of sound mind, and not bankrupt. Neither our articles or by-laws, nor the Ontario Business Corporations Act (Ontario), impose any mandatory retirement age for directors.



A director who is a party to, or who is a director or officer of or has a material interest in any person who is a party to, a material contract or transaction or proposed material contract or transaction with our company shall disclose to our company the nature and extent of his interest at the time and in the manner provided by the Ontario Business Corporations Act. The Ontario Business Corporations Act (Ontario). The Business Corporations Act (Ontario) prohibits such a director from voting on any resolution to approve the contract or transaction unless the contract or transaction:

•                                          is  an arrangement by way of security for money lent to or obligations undertaken by the director for the benefit of our company or an affiliate;

•                                          relates primarily to his or her remuneration as a director, officer, employee or agent of our company or an affiliate;

•                                          is for indemnity or insurance; or

•                                          is with an affiliate.


•is an arrangement by way of security for money lent to or obligations undertaken by the director for the benefit of our company or an affiliate;
•relates primarily to his or her remuneration as a director, officer, employee or agent of our company or an affiliate;
•is for indemnity or insurance; or
•is with an affiliate.

Our Board of Directors may, on behalf of our company and without authorization of our shareholders:


•borrow money upon the credit of our company;
•issue, reissue, sell or pledge bonds, debentures, notes or other evidences or indebtedness or guarantees of our company, either secured or unsecured;
•
subject to certain disclosure requirements of the Business Corporations Act (Ontario), give, directly or indirectly, financial assistance to any person by means of a loan, a guarantee or otherwise on behalf of our company to secure performance or any present or future indebtedness, liability or obligation of any person; and
•mortgage, hypothecate, pledge or otherwise create a security interest in all or any currently owned or subsequently acquired real or personal property of our company, movable or immovable, including without limitation book debts, rights, powers, franchises and undertakings, to secure any bonds, debentures, notes or other evidences of indebtedness or guarantee or any other obligation of our company.

•                                          borrow money upon the credit of our company;

•                                          issue, reissue, sell or pledge bonds, debentures, notes or other evidences or indebtedness or guarantees of our company, either secured or unsecured;

•                                          subject to certain disclosure requirements of the Ontario Business Corporations Act, give, directly or indirectly, financial assistance to any person by means of a loan, a guarantee or otherwise on behalf of our company to secure performance or any present or future indebtedness, liability or obligation of any person; and

•                                          mortgage, hypothecate, pledge or otherwise create a security interest in all or any currently owned or subsequently acquired real or personal property of our company, movable or immovable, including without limitation book debts, rights, powers, franchises and undertakings, to secure any bonds, debentures, notes or other evidences of indebtedness or guarantee or any other obligation of our company.

Common Shares


Our articles authorize the issuance of an unlimited number of common shares. The holders of the common shares of our company are entitled to receive notice of and to attend all meetings of the shareholders of our company and have one vote for each common share held at all meetings of the shareholders of our company, except for meetings at which only holders of another specified class or series of shares of our company are entitled to vote separately as a class or series. Subject to the prior rights of the holders of preference shares of our company and to any other shares ranking senior to the common shares with respect to priority in the payment of dividends, the holders of common shares are entitled to receive dividends and our company will pay dividends, as and when declared by our Board of Directors, out of moneys properly applicable to the payment of dividends, in such amount and in such form as our Board of Directors may from time to time determine, and all dividends which our Board of Directors may declare on the common shares shall be declared and paid in equal amounts per share on all common shares at the time outstanding. In the event of the dissolution, liquidation or winding-up of our company, whether voluntary or involuntary, or any other distribution of assets of our company among its shareholders for the purpose of winding up its affairs, subject to the prior rights of the holders of preference shares and to any other shares ranking senior to the common shares with respect to priority in the distribution of assets upon dissolution, liquidation or winding-up, the holders of the common shares will be entitled to receive the remaining property and assets of our company. There

46


are no redemption or sinking-fund provisions that attach to the common shares, nor are there any provisions that discriminate against existing or prospective holders of common shares as a result of owning a substantial number of shares. The holders of our common shares are not liable to further capital calls by our company.


Preference Shares


Our articles of incorporation authorize the issuance of an unlimited number of preference shares, in one or more series. The Ontario Business Corporations Act does not impose restrictions upon our Board of Directors issuing preference shares of the type authorized by our articles of incorporation. Our Board of Directors may fix, before


issuing, the number of preference shares of each series, the designation, rights, privileges, restrictions and conditions attaching to the preference shares of each series, including any voting rights, any right to receive dividends (which may be cumulative or non-cumulative and variable or fixed) or the means of determining the dividends, the dates of payment, any terms and conditions of redemption or purchase, any conversion rights, and any rights on the liquidation, dissolution or winding-up of our company, any sinking fund or other provisions, the whole to be subject to the issue of a Certificate of Amendment setting forth the designation, rights, privileges, restrictions and conditions attaching to the preference shares of the series. Our articles of incorporation require that preference shares of each series must, with respect to the payment of dividends and the distribution of assets or the return of capital in the event of the liquidation, dissolution or winding-up of our company, whether voluntary or involuntary, rank on a parity with the preference shares of every other series and be entitled to preference over the common shares and over any other shares ranking junior to the preference shares. The preference shares of one series shall participate ratably with the preference shares of every other series in respect of all dividends and similar amounts. The holders of our preference shares are not liable to further capital calls by our company. None of our preference shares are currently issued or outstanding.


Action Necessary to Change the Rights of Shareholders


In order to change the rights of our shareholders, we would need to amend our articles of incorporation to effect the change. Such an amendment would require the approval of holders of two-thirds of the shares cast at a duly called special meeting. If we wish to amend the rights of holders of a specific class of shares, such approval would also be required from the holders of that class. A shareholder is entitled to dissent in respect of such a resolution and, if the resolution is adopted and our company implements such changes, demand payment of the fair value of its shares.


Meetings of Shareholders


An annual meeting of shareholders is held each year for the purpose of considering the financial statements and reports, electing directors, appointing auditors and for the transaction of other business as may be brought before the meeting. The President, the Chairman of the Board or the Board of Directors has the power to call a special meeting of shareholders at any time. Notice of the time and place of each meeting of shareholders must be given not less than 21 days, nor more than 50 days, before the date of each meeting to each director, to the auditor and to each shareholder who at the close of business on the record date for notice is entered in the securities register as the holder of one or more shares carrying the right to vote at the meeting. Notice of a meeting of shareholders called for any other purpose other than consideration of financial statements and auditors’ report, election of directors and reappointment of the incumbent auditor, must state the nature of the business in sufficient detail to permit the shareholder to form a reasoned judgment on, and must state the text of, any special resolution or by-law to be submitted to the meeting. The only persons entitled to be present at a meeting of shareholders are those entitled to vote thereat, the directors of our company, the auditor of our company and others who although not entitled to vote are entitled or required to be present at the meeting. Any other person may be admitted only on the invitation of the chairman of the meeting or with the consent of the meeting. If a corporation is winding-up, the Ontario Business Corporations Act (Ontario) permits a liquidator appointed by the shareholders, during the continuance of a voluntary winding-up, to call and attend meetings of the shareholders. In circumstances where a court orders a meeting of shareholders, the court may direct how the meeting may be held, including the parties entitled, or required, to attend the meeting.


Limitations on Rights to Own Securities


There is no limitation imposed by Canadian law or by the articles or other charter documents on the right of a non-resident to hold or vote common shares or preference shares with voting rights, other than as provided in the

47


Investment Canada Act, as amended by the World Trade Organization Agreement Implementation Act. The Investment Canada Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a “Canadian,” as defined in the Investment Canada Act (a “non-Canadian”), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be a net benefit to Canada.

An investment in our voting shares by a non-Canadian (other than a “World Trade Organization Investor,” as defined below) would be reviewable under the Investment Canada Act if it were an investment to acquire direct control of our company, and the value of our assets were $5.0 million or more. An investment in our voting shares by a World Trade Organization Investor would be reviewable under the Investment Canada Act if it were an investment to acquire direct control of our company, and the value of our assets equaled or exceeded $209 million. A non-Canadian, whether a World Trade Organization Investor or otherwise, would acquire control of us


for purposes of the Investment Canada Act if he or she acquired a majority of our voting shares. The acquisition of less than a majority, but at least one-third of our voting shares, would be presumed to be an acquisition of control of our company, unless it could be established that we were not controlled in fact by the acquirer through the ownership of voting shares. In general, an individual is a World Trade Organization Investor if he or she is a “national” of a country (other than Canada) that is a member of the World Trade Organization (“World Trade Organization Member”) or has a right of permanent residence in a World Trade Organization Member. A corporation or other entity will be a World Trade Organization investor if it is a “World Trade Organization investor-controlled entity” pursuant to detailed rules set out in the Investment Canada Act. The United States is a World Trade Organization Member.

Certain transactions involving our voting shares would be exempt from the Investment Canada Act, including: (a) an acquisition of our voting shares if the acquisition were made in connection with the person’s business as a trader or dealer in securities; (b) an acquisition of control of our company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Canada Act; and (c) an acquisition of control of our company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of our company, through the ownership of voting interests, remains unchanged.

Change of Control


Our authorized capital consists of an unlimited number of common shares and an unlimited number of preference shares. The Board of Directors, without any further vote by the common shareholders, has the authority to issue preference shares and to determine the price, preferences, rights and restrictions, including voting and dividend rights, of these shares. The rights of the holders of common shares are subject to the rights of holders of any preference shares that the Board of Directors may issue in the future. That means, for example, that we can issue preference shares with more voting rights, higher dividend payments or more favorable rights upon dissolution, than the common shares. If we issued certain types of preference shares in the future, it may also be more difficult for a third-party to acquire a majority of our outstanding voting shares.


Our articles do not contain any provisions that govern the ownership threshold above which shareholder ownership must be disclosed.

C.                                    Material Contracts

The following is a summary of our company’s material contracts entered into since January 1, 2002.

1.  Subscription Agreement, dated as of April 25, 2002, between ADB Systems International Inc. and Stonestreet Limited Partnership, whereby we agreed to issue 3.3 million common shares at a purchase price of US $0.21 per share, and warrants exercisable into 1,050,000 common shares at an exercise price of US $0.35 per share. The warrants have a term of three years.  We agreed to register the shares and warrants with the Securities and Exchange Commission. The purchase price was determined in the context of the market.

48


C.
Material Contracts
The following is a summary of our company’s material contracts entered into since January 1, 2003.
1.SERIES E NOTES: During the year ended December 31, 2003, the Company issued Series E secured subordinated notes with a face value of $1.0 million for net proceeds of $994,000. The Series E notes have an annual rate of interest of 11 percent that is paid quarterly in arrears, mature August 19, 2006 and are convertible into equity units at a price of $0.35 per unit. Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50. The Series E secured subordinated notes will automatically convert into units when the share price of the Company closes above $0.70 for five consecutive trading days during the term. Note holders may convert into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount to the holders of the Series E secured subordinated notes in cash. As part of this private placement, the Company issued 30,000 common share-purchase warrants to an associate of Stonestreet Limited Partnership (“Stonestreet”) in consideration for professional fees. Each such warrant entitles the holder to purchase one common share of the Company for $0.50 at any time up to and including August 18, 2006. The Series E notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.
The Series E notes were issued to private investors including an amount totaling $100,000 issued to directors and/or senior officers of the Company. Costs in the amount of $6,000 associated with the issuance of the Series E secured subordinated notes were recorded as a reduction of the equity component of these notes.
2.On June 26, 2003, the Company completed a transaction resulting in the issuance of 4,879,000 common shares at a price of $0.24 and 2,733,000 common share-purchase warrants exercisable into one common share at $0.40 for net proceeds of $1.148 million. The warrants expire on June 26, 2005. This private placement included the issuance of 693,000 common shares and 347,000 common share-purchase warrants in settlement of an account payable in the amount of $166,000. Included in this private placement were 2,146,000 shares issued to a director and officer of the Company for total net proceeds of $505,000.

2.                                       Warrant issued April 25, 2002 to Stonestreet Limited Partnership by ADB Systems International Inc.  entitling the holder to acquire 1 million common shares of ADB at an exercise price of US $0.35 per share. The warrant had a term of three years and was exercised in full on December 17, 2002.

3.                                       Warrant issued April 25, 2002 to Stonestreet Limited Corporation by ADB Systems International Inc. entitling the holder to acquire 50,000 common shares of ADB at an exercise price of US $0.35 per share. The warrant has a term of three years and as of June 18, 2004 have not been exercised.

4.                                       As part of the Arrangement and pursuant to a general conveyance and assumption agreement (the “General Conveyance and Assumption Agreement”) dated as of August 30, 2002 between Old ADB and ADB, Old ADB transferred all of its assets (excluding only the assets of the Retail Business) to ADB and ADB assumed all of the liabilities of Old ADB (excluding only specified liabilities in connection with the Retail Business), including Old ADB’s liabilities under the Loan Agreement.

5.                                       Under the terms of a supply, services and licensing agreement (the “Supply Services and Licensing Agreement”) dated as of August 23, 2002 between ADB Systems International Inc. (“Bid.Com”) and The Brick Warehouse Corporation (“The Brick”), ADB will provide administrative and technical services to Old ADB for the Bid.Com  online retailing activities.

6.                                       Pursuant to subscription agreements dated August 30, 2002, ADB issued a total of CDN$1,120,000 principal amount of secured subordinated convertible notes in four series, Series A, B, C, and D. For a description of the material terms and conditions attaching to each series, see part I – Item 5 under the heading ‘OPERATING AND FINANCIAL REVIEW AND PROSPECTS – MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” and see Note 7(b) to Notes to Consolidated Financial Statements.

7.                                       On  May 19, 2004, the Company issued Series F secured subordinated notes with a face value of C$500,000 to a private investor.  The Series F notes mature May 19, 2007, have an annual rate of interest of 7% paid quarterly in arrears, and are convertible into equity units at a price of $0.31 per unit.  Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50.  The warrants have an expiry date of May 19, 2007.  The Series F notes are secured by a general security agreement granting a security interest in all of the Company’s property and assets and by a direction to pay proceeds under the Company’s receivable insurance policy with Export Development Canada.  Holders may convert the notes into units at anytime following a four-month hold period.  These notes will automatically convert into units when the share price of the Company closes above $0.70 for five consecutive trading days during the term, following the hold period.  If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash.

8.                                       On May 11, 2004, ADB entered into an Agreeement with First Associates Investments Inc. (“FAI”) as sole agent and exclusive financial advisor for an offering of securities of ADB of up to C$5 million on a best efforts basis. If an offering is completed with gross proceeds of C$1 million or more, ADB will grant a right of first refusal to provide services to lead any future Canadian-led financing for a period set out as follows; a) one year if gross proceeds are at least C$1 million but less than $2 million and b) two years if gross proceeds are at least C$2 million.

9.                                       On June 15, 2004, the Company issued Series G secured subordinated notes with a face value of $1,600,000 through their agent, First Associates Investments Inc. (“FAI”).  The Series G notes mature June 15, 2007 and have an interest rate of 7% calculated annually and paid on the earlier of conversion or maturity.  The notes are convertible into equity units at a price of $0.31 per unit.  Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50.  The warrants have an expiry date of May 19, 2008.  The Series G notes are secured by a general security agreement granting a security interest in all of the Company’s property and assets.  Holders may convert the notes into units at anytime following a four-month hold period.  These notes will automatically convert into units when the weighted average trading price of the Company’s common shares reaches $0.70 for ten consecutive trading days during the term, following the hold period.  If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash.

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Issuance costs associated with the Series G notes include a commission payable to FAI equal to eight percent of the gross proceeds from non-designated purchasers and four percent of the gross proceeds from designated purchasers.  Additionally, FAI received an option to purchase 139,500 equity units, as described above, at a price of $0.31 per unit.

The Series G notes were issued to private investors, including an amount totaling $170,000 issued to directors and/or senior officers of the Company.

D.                                    Exchange Controls



3.SERIES F NOTES: On May 19, 2004, the Company issued Series F secured subordinated notes with a face value of $500,000 for net proceeds of $474,000. The Series F notes have an annual rate of interest of 7 percent paid quarterly in arrears, mature May 19, 2007 and are convertible into equity units at a price of $0.31 per unit. Each equity unit consists of one common share and one half of a common share purchase warrant with an exercise price of $0.50. The warrants expire on May 19, 2007. The Series F secured subordinated notes will automatically convert into units when the share price of the Company closes above $0.70 for five consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. The Series F notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.
4.SERIES G NOTES: On June 15, 2004, the Company issued Series G secured subordinated notes with a face value of $1,710,000 for net proceeds of $1,624,000. The Series G notes mature June 15, 2007, have an annual rate of interest of 11 percent (as amended October 21, 2004) payable upon the earlier of maturity and conversion and are convertible into equity units at a price of $0.31 per unit. Each equity unit consists of one common share and one half of a common share purchase warrant with an exercise price of $0.50. The warrants expire on June 15, 2008. The Series G secured subordinated notes will automatically convert into units when the volume-weighted average share price of the Company closes above $0.70 for 20 consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. The Series G notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.
5.
SERIES H NOTES: On October 21, 2004, the Company issued Series H secured subordinated notes with a face value of $520,000 for net proceeds of $500,000. The Series H notes mature October 21, 2007, have an annual rate of interest of 11 percent payable upon the earlier of maturity and conversion and are convertible into equity units at a price of $0.20 per unit. Each equity unit consists of one common share and one half of a common share purchase warrant with an exercise price of $0.40. The warrants expire on October 21, 2008. The Series H secured subordinated notes will automatically convert into units when the share price of the Company closes at or above $0.45 for 10 consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. In order to obtain the required approvals to issue the Series H notes, the Company retroactively increased the interest rate on the Series G notes from an annual rate of 7 percent to an annual rate of 11 percent. The Series H notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.
6.EQUITY PRIVATE PLACEMENT: On November 25 and December 6, 2004, the Company completed a transaction resulting in the issuance of 5,000,000 shares at a price of $0.20 per share and 5,000,000 common share-purchase warrants exercisable into one common share at a price of $0.35 for gross proceeds of $1,000,000. The warrants expire on December 6, 2008. Gross proceeds were comprised of $800,000 in cash and $200,000 in past services. Issuance costs in the amount of $61,000 were incurred, including $19,000 representing the fair value of 150,000 compensation options issued to First Associates Investments Inc. The compensation options are exercisable into 150,000 equity units at a price of $0.20 per unit. Each equity unit consists of one common share and one common share-purchase warrant with an exercise price of $0.35 and an expiry date of December 6, 2008. The compensation options expire on December 6, 2006. Included in this private placement were 100,000 shares issued to a director of the Company for net proceeds of $20,000.
7.EQUITY PRIVATE PLACEMENT: On February 23, 2005, the Company competed a transaction resulting in the issuance of 2,500,000 units (“Units”) of the Company, each Unit consisting of one common share of the Company and one half of one non-transferable Common Share purchase Warrant, at a price of $0.23 per Unit, each whole Warrant entitling the holder to acquire one Common Share at an exercise price of $0.40. The Warrants comprising part of the Units were issued for a term of 4 years and will expire on February 23, 2009. The aggregate consideration in money received by our company from the subscribers for Units was $575,000.




D.
Exchange Controls
There is no law, government decree or regulation in Canada restricting the export or import of capital or affecting the remittance of dividends, interest or other payments to a non-resident holder of common shares, other than withholding tax requirements.

E.                                      Taxation

Canadian Federal Income Tax Considerations

E.
Taxation
The following summary describes material Canadian federal income tax consequences generally applicable to a holder of our common shares who is not a resident of Canada, and who, for purposes of the Income Tax Act (Canada), (i) holds such shares as capital property and (ii) deals at arm’s length with us. Generally, common shares will be considered capital property to a holder provided that such holder does not hold such securities in the course of carrying on a business and has not acquired such securities in a transaction or transactions considered to be an adventure or concern in the nature of trade which includes a transaction or transactions of the same kind and carried on in the same manner as a transaction or transactions of an ordinary trader or dealer in property of the same kind.

This summary is based upon the current provisions of the Income Tax Act and the regulations thereunder and on an understanding of the published administrative practices of the Canadian Customs and Revenue Agency. This summary does not take into account or anticipate any possible changes in law, or the administration thereof, whether by legislative, governmental or judicial action, except proposals for specific amendment thereto which have been publicly announced by the Canadian Minister of Finance prior to the date hereof.

This summary does not address all aspects of Canadian federal income tax law that may be relevant to shareholders based upon their particular circumstances, and does not deal with provincial, territorial or foreign income tax consequences, which might differ significantly from the consequences under Canadian federal income tax law.

Shareholders are advised to consult their tax advisors regarding the application of the Canadian federal income tax law to their particular circumstances, as well as any Canadian provincial, territorial or other tax consequences or any U.S. federal, state or local tax consequences or other foreign income tax consequences of the acquisition, ownership and disposition of our common shares.

Taxation of Dividends.

A holder of a common share who is not resident in Canada for purposes of the Income Tax Act will be subject to Canadian withholding tax on dividends paid or credited, or deemed under the Income Tax Act to be paid or credited, to the holder of the common share. The rate of withholding tax under the Income Tax Act on dividends is 25% of the amount of the dividend. Such rate may be reduced under the provisions of an applicable international tax treaty to which Canada is a party. Under the tax treaty that Canada has entered into with the United States, the rate of Canadian withholding tax applicable in respect of dividends paid or credited by a Canadian corporation to a shareholder resident in the United States, is generally reduced to 15%, or 5% in the case of a corporate holder which owns 10% or more of the voting shares. A foreign tax credit for the tax withheld may be available under applicable US tax law to a US holder against U.S. federal income tax liability. Moreover, pursuant to Article XXI of the Canada-U.S. Treaty, an exemption from Canadian withholding tax generally is available in respect of dividends

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received by certain trusts, companies and other organizations whose income is exempt from tax under the laws of the United States.

Disposition of common shares.

A non-resident holder of a common share will not be subject to tax under the Income Tax Act in respect of a capital gain realized on the disposition of a common share unless the common share constitutes or is deemed to constitute “taxable Canadian property” as defined in the Income Tax Act. Shares of a corporation that are listed on a prescribed stock exchange (which includes shares traded on certain U.S. stock exchanges, including the Nasdaq National Market), are generally not considered to be taxable Canadian property. However, such shares are considered taxable Canadian property in the hands of a non-resident holder if, at any time during the 60-month period immediately preceding disposition by the holder, 25% or more of our issued shares of any class were owned by the non-resident holder together with persons with whom the non-resident did not deal at arm’s length.



An interest in or option in respect of common shares or other securities convertible into or exchangeable for common shares could constitute taxable Canadian property if the common shares that could be acquired upon the exercise of the option, the conversion or exchange rights or in which there is such interest are themselves taxable Canadian property. Taxable Canadian property also includes any common share held by a non-resident if the non-resident used the common share in carrying on a business (other than an insurance business) in Canada, or, if the non-resident is a non-resident insurer, any common share that is its “designated insurance property” for the year. A non-resident whose common shares constitute or are deemed to constitute taxable Canadian property will realize upon the disposition or deemed disposition of a common share, a capital gain (or a capital loss) to the extent that the proceeds of disposition are greater than (or less than) the aggregate of the adjusted cost base to the holder of a common share and any reasonable costs of disposition.

One-half of any capital gain realized by a holder (a taxable capital gain) will be included in computing the holder’s income. One-half of any capital loss realized by a holder may, subject to certain restrictions applicable to holders that are corporations, normally be deducted from the holder’s taxable capital gains realized in the year of disposition, the three preceding taxation years or any subsequent taxation years, subject to detailed rules contained in the Income Tax Act.

A purchase by us of our common shares (other than a purchase of our common shares on the open market in a manner in which shares would normally be purchased by any member of the public in the open market) will give rise to a deemed dividend under the Income Tax Act equal to the difference between the amount we paid on the purchase and the paid-up capital of such shares determined in accordance with the Income Tax Act. The paid-up capital of such shares may be less than the cost of such shares to the holder. Any such dividend deemed to have been received by a non-resident holder will be subject to non-resident withholding tax as described above. The amount of any such deemed dividend will reduce the proceeds of disposition of the common share to the non-resident holder for the purpose of computing the amount of the non-resident holder’s capital gain or loss under the Income Tax Act.

Even if the common shares constitute taxable Canadian property to a non-resident holder and their disposition would give rise to a capital gain, an exemption from tax under the Income Tax Act may be available under the terms of an applicable international tax treaty to which Canada is a party. A holder resident in the United States for purposes of the Canada-U.S. Treaty will generally be exempt from Canadian tax in respect of a gain on the disposition of common shares provided that the value of the common shares is not derived principally from real property situated in Canada. Our common shares would qualify for this exemption, however Article XIII paragraph 5 of the Canada-U.S. Treaty provides that the treaty exemption does not apply where the U.S. resident holder was an individual who was a Canadian resident for 120 months during any period of 20 consecutive years preceding the time of the sale and was resident in Canada at any time during the ten years immediately preceding the sale and owned the shares at the time he/she ceased to be resident in Canada. If the exemption from such Canadian tax in respect of such gain is not available under the Canada-U.S. Treaty, a foreign tax credit may be available under applicable US tax law for U.S. federal income tax purposes. Non-residents are advised to consult their tax advisers with regard to the availability of a treaty exemption.

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U.S. Federal Income Tax Considerations


The following summary describes material United States federal income tax consequences arising from the purchase, ownership and sale of common shares. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended, final, temporary and proposed United States Treasury Regulations and therevenue rulings and administrative and judicial interpretationspronouncements of the regulations,Internal Revenue Service and court decisions, all as in effect as of the date of this Annual Report and all of which are subject to change, possibly on a retroactive basis. The consequences to any particular shareholder may differ from those described below by reason of that shareholder’sshareholder's particular circumstances. This summary does not address the considerations that may be applicable to any particular shareholder based on such shareholder’sshareholder's particular circumstances (including potential application of the alternative minimum tax), to particular classes of shareholders (including financial institutions, broker-dealers, insurance companies, shareholders who have elected mark-to-market accounting, tax-exempt organizations, shareholders who hold ordinary shares as part of a straddle, “hedge”"hedge" or “conversion transaction”"conversion transaction" with other investments, shareholders who own (directly, indirectly or through attribution) 10% or more of our company’scompany's outstanding voting shares, shareholders whose functional currency is not the U.S. dollar, persons who are not citizens or residents of the United States, or persons which are foreign corporations, foreign partnerships or foreign estates or trusts as to the United States, or any aspect of state, local or non-United States tax laws.laws and shareholders who acquired their common shares pursuant to the exercise of employee stock options or rights or otherwise as compensation. Additionally, the discussion does not consider the tax treatment of persons who hold common shares through a partnership or other pass-through entity or the possible application of United States


federal gift or estate tax. This summary is addressed only to a holder of common shares who is (i) a citizen or resident of the United States who owns less than 10% of our company’scompany's outstanding voting shares, (ii) a corporation organized in the United States or under the laws of the United States or any state thereof, (iii) an estate, the income of which is includable in gross income for United States federal income tax purposes regardless of source, or (iv) a trust, if (1) a court within the United States is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust or (2) has a valid election in effect under applicable United States Treasury Regulations to be treated as a U.S. person (a “U.S. Holder”(each, a "U.S. Holder"). This summary is for general information purposes only and does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a decision to purchase common shares. This summary generally considers only U.S. Holders that will own their common shares as capital assets.


Each shareholder should consult with such shareholder’sshareholder's own tax advisor as to the particular tax consequences to such shareholder of the purchase, ownership and sale of their common shares including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws.


Treatment of Dividend Distributions


Subject to the discussion below under “Tax"Tax Status Of The Company – - Passive Foreign Investment Companies,”" a distribution by our company to a U.S. Holder in respect of the common shares (including the amount of any Canadian taxes withheld thereon) will generally be treated for United States federal income tax purposes as a dividend to the extent of our company’scompany's current and accumulated earnings and profits, as determined under United States federal income tax principles. To the extent, if any, that the amount of any such distribution exceeds our company’scompany's current and accumulated earnings and profits, as so computed, it will first reduce the U.S. Holder’sHolder's tax basis in the common shares owned by him, and to the extent it exceeds such tax basis, it will be treated as capital gain from the sale of common shares.


While it is not anticipated that our company will pay dividends in the foreseeable future, the gross amount of any distribution from our company received by a U.S. Holder which is treated as a dividend for United States federal income tax purposes (before reduction for any Canadian tax withheld at source) will be included in such U.S. Holder’sHolder's gross income as ordinary income and generally will not qualify for the dividends received deduction applicable in certain cases to United States corporations. Pursuant to recently enacted legislation, ifIf you are an individual, dividends that we pay you through 2008 will be subject to tax at long-term capital gain rates, provided certain holding period and other requirements are satisfied and provided that in the year such dividends are paid, or the preceding taxable year, we are not a foreign personal holding company, a foreign investment company or a passive foreign investment company. For United States federal income tax purposes, the amount of any dividend paid in Canadian dollars by our company to a U.S. Holder will equal the U.S. dollar value of the amount of the dividend paid in Canadian dollars, at the exchange rate in effect on the date of the distribution, regardless of whether the Canadian dollars are actually converted into United States dollars at that time. Canadian dollars received by a U.S. Holder will have a tax basis equal to the U.S. dollar value thereof determined at the exchange rate on the date of the distribution. Currency exchange gain or loss, if any, recognized by a U.S. Holder on the conversion of

52


Canadian dollars into U.S. dollars will generally be treated as U.S. source ordinary income or loss to such holder. U.S. Holders should consult their own tax advisors concerning the treatment of foreign currency gain or loss, if any, on any Canadian dollars received which are converted into dollars subsequent to distribution.


A U.S. Holder generally will be entitled to deduct any Canadian taxes withheld from dividends in computing United States taxable income, or to credit such withheld taxes against the United States federal income tax imposed on such U.S. Holder’sHolder's dividend income. No deduction for Canadian taxes may be claimed, however, by an individual (noncorporate) U.S. Holder that does not itemize deductions. The amount of foreign taxes for which a U.S. Holder may claim a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder. Distributions with respect to common shares that are taxable as dividends will generally constitute foreign source income for purposes of the foreign tax credit limitation. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by our company with respect to the common shares will generally constitute “passive"passive income.”" Foreign income taxes exceeding a shareholder’sshareholder's credit limitation for the year of payment or accrual of such tax can be carried back for two taxable years and forward for five taxable years, subject to the credit limitation applicable in each of such years. Additionally, the foreign tax credit in any taxable year may not offset more than 90% of a shareholder’sshareholder's liability for United States individual or corporate alternative minimum tax. The total amount of allowable foreign tax credits in any year generally cannot exceed regular U.S. tax liability for the year attributable to foreign source taxable income. A U.S. Holder will be denied a foreign tax credit with respect to Canadian income tax withheld from dividends received on the common shares to


the extent such U.S. Holder has not held the ordinary shares for at least 16 days of the 30-day period beginning on the date which is 15 days before the ex-dividend date or to the extent such U.S. Holder is under an obligation to make certain related payments with respect to substantially similar or related property. Any days during which a U.S. Holder has substantially diminished its risk of loss on the common shares are not counted toward meeting the 16 day holding period required by the statute.


Sale or Exchange of a Common Share


Subject to the discussion below under “Tax"Tax Status Of The Company – - Passive Foreign Investment Companies,”" the sale or exchange by a U.S. Holder of a common share generally will result in the recognition of gain or loss by the U.S. Holder in an amount equal to the difference between the amount realized and the U.S. Holder’sHolder's basis in the common share sold. Such gain or loss will be capital gain or loss provided that the common share is a capital asset in the hands of the holder. The gain or loss realized by an individual (noncorporate) U.S. Holder on the sale or exchange of a common share will be long-term capital gain or loss subject to a reduced rate of tax if the common share had been held for more than one year. If the common share had been held by such individual U.S. Holder for not more than one year, such gain will be short-term capital gain. Gains recognized by a U.S. Holder on a sale, exchange or other disposition of common shares generally will be treated as United States source income for United States foreign tax credit purposes. A loss recognized by a U.S. Holder on the sale, exchange or other disposition of common shares generally is allocated to U.S. source income. However, such loss must be allocated to foreign source income to the extent certain dividends were received by the U.S. Holder within the 24-month period preceding the date on which the U.S. Holder recognized the loss. The deductibility of a capital loss recognized on the sale, exchange or other disposition of common shares is subject to limitations. A U.S. Holder that receives foreign currency upon disposition of common shares and subsequently converts the foreign currency into U.S. dollars generally will have foreign exchange gain or loss based on any appreciation or depreciation in the value of the foreign currency against the U.S. dollar. U.S. Holders should consult their own tax advisors regarding treatment of any foreign currency gain or loss on any Canadian dollars received in respect of the sale, exchange or other disposition of common shares.


Tax Status of the Company


Personal Holding Companies. A non-U.S. corporation may be classified as a personal holding company for United States federal income tax purposes if both of the following two tests are satisfied: (i) if at any time during the last half of the company’scompany's taxable year, five or fewer individuals (without regard to their citizenship or residency) own or are deemed to own (under certain attribution rules) more than 50% of the stock of the corporation by value and (ii) 60% or more of such non-U.S. corporation’scorporation's gross income derived from U.S. sources or effectively connected with a U.S. trade or business, as specifically adjusted, is from certain passive sources such as dividends

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and royalty payments. Such a corporation generally is taxed on the amounts of such passive source income, after making adjustments such as deducting dividends paid and income taxes, that are not distributed to shareholders. We believe that our company was not a personal holding company in 20032004 and is not currently a personal holding company. However, no assurance can be given that either test will not be satisfied in the future.


Foreign Personal Holding Companies. A non-U.S. corporation will be classified as a foreign personal holding company for United States federal income tax purposes if both of the two following tests are satisfied: (i) five or fewer individuals who are United States citizens or residents own or are deemed to own (under certain attribution rules) more than 50% of all classes of the corporation’scorporation's stock measured by voting power or value and (ii) the corporation receives at least 60% (50% if previously ana foreign personal holding company) of its gross income (regardless of source), as specifically adjusted, from certain passive sources. If such a corporation is classified as a foreign personal holding company, a portion of its “undistributed"undistributed foreign personal holding company income”income" (as defined for United States federal income tax purposes) would be imputed to all of its shareholders who are U.S. Holders on the last taxable day of the corporation’scorporation's taxable year, or, if earlier, the last day on which it is classifiable as a foreign personal holding company. Such income would be taxable as a dividend, even if no cash dividend is actually paid. U.S. Holders who dispose of their shares prior to such date would not be subject to tax under these rules. We believe that our company was not a foreign personal holding company in 20032004 and is not currently a foreign personal holding company. However, no assurance can be given that our company will not qualify as a foreign personal holding company in the future.


Passive Foreign Investment Companies. A company will be a passive foreign investment company if 75% or more of its gross income (including the pro rata share of the gross income of any company (United States or foreign) in which the company is considered to own 25% or more of the shares (determined by market value)) in a taxable year is passive income. Alternatively, the company will be considered to be a passive foreign


investment company if at least 50% of the value of the company’scompany's assets (averaged over the year) (including the pro rata share of the value of the assets of any company in which the company is considered to own 25% or more of the shares (determined by market value)) in a taxable year are held for the production of, or produce, passive income. For these purposes, the value of our assets is calculated based on our market capitalization. Passive income generally includes, among others, interest, dividends, royalties, rents and annuities.


If our company is a passive foreign investment company for any taxable year, a U.S. Holder, in the absence of an election by such U.S. Holder to treat our company as a “qualified"qualified electing fund”fund" (a “QEF election”"QEF election"), as discussed below, would, upon certain distributions by our company and upon disposition of the common shares at a gain, be liable to pay tax at the highest tax rate on ordinary income in effect for each period to which the income is allocated, plus interest on the tax, as if the distribution or gain had been recognized ratably over the days in the U.S. Holder’sHolder's holding period for the common shares during which our company was a passive foreign investment company. Additionally, if our company is a passive foreign investment company, U.S. Holders who acquire ordinary shares from decedents would be denied the normally available step-up of the income tax basis for such common shares to fair market value at the date of death and instead would have a tax basis equal to the decedent’sdecedent's basis, if lower.


If our company is treated as a passive foreign investment company for any taxable year, U.S. Holders should consider whether to make a QEF election for United States federal income tax purposes. If a U.S. Holder has a QEF election in effect for all taxable years that such U.S. Holder has held the common shares and our company was a passive foreign investment company, distributions and gain will not be recognized ratably over the U.S. Holder’sHolder's holding period or subject to an interest charge, gain on the sale of common shares will be characterized as capital gain and the denial of basis step-up at death described above would not apply. Instead, each such U.S. Holder is required for each taxable year that our company is a qualified electing fund to include in income a pro rata share of the ordinary earnings of our company as ordinary income and a pro rata share of the net capital gain of our company as long-term capital gain, subject to a separate election to defer payment of taxes, which deferral is subject to an interest charge. Consequently, in order to comply with the requirements of a QEF election, a U.S. Holder must receive from our company certain information. We intend to supply U.S. Holders with the information needed to report income and gain pursuant to a QEF election in the event our company is classified as a passive foreign investment company. The QEF election is made on a shareholder-by-shareholder basis and can be revoked only with the consent of the Internal Revenue Service. A shareholder makes a QEF election by attaching a completed IRS Form 8621 (including the passive foreign investment company annual information statement) to a timely filed

54


United States federal income tax return and by filing such form with the IRS Service Center in Philadelphia, Pennsylvania. Even if a QEF election is not made, a shareholder in a passive foreign investment company who is a U.S. Holder must file a completed IRS Form 8621 every year.


As an alternative to making a QEF election, a U.S. Holder may elect to make a mark-to-market election with respect to the common shares owned by him.him if such stock qualifies as “marketable stock.” To qualify as “marketable stock,” the stock must be regularly traded on a qualified exchange. Under applicable Treasury regulations, a “qualified exchange” includes a national securities exchange that is registered with the SEC or the national market system established under the Securities Exchange Act of 1934 and certain foreign securities exchanges. Under applicable Treasury Regulations, PFIC stock traded on a qualified exchange is regularly traded on such exchange for any calendar year during which such stock is traded, other than in deminimis quantities, on at least 15 days during each calendar quarter. We cannot assure U.S. Holders that our common shares will be treated as regularly traded stock on a qualified exchange. If the mark-to-market election were made, then the rules set forth above would not apply for periods covered by the election. Under such election, a U.S. Holder includes in income each year an amount equal to fair market value of the common shares owned by such U.S. Holder as of the close of the taxable year over the U.S. Holder’sHolder's adjusted basis in such shares. The U.S. Holder would be entitled to a deduction for the excess, if any, of such U.S. Holder’sHolder's adjusted basis in his common shares over the fair market value of such shares as of the close of the taxable year; provided however, that such deduction would be limited to the extent of any net mark-to-market gains with respect to the common shares included by the U.S. Holder under the election for prior taxable years. The U.S. Holder’sHolder's basis in his common shares is adjusted to reflect the amounts included or deducted pursuant to this election. Amounts included in income pursuant to the mark-to-market election, as well as gain on the sale or exchange of the common shares, will be treated as ordinary income. Ordinary loss treatment applies to the deductible portion of any mark-to-market loss, as well as to any loss realized on the actual sale or exchange of the common shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such common shares.


The mark-to-market election applies to the tax year for which the election is made and all later tax years, unless the common shares cease to be marketable or the IRS consents to the revocation of the election.




We do not believe our company was a passive foreign investment company during 2003.2004. However, there can be no assurance that our company will not be classified as a passive foreign investment company in 20042005 or thereafter because the tests for determining passive foreign investment company status are applied annually and it is difficult to make accurate predictions of future income and assets, which are relevant to this determination. U.S. Holders who hold common shares during a period when our company is a passive foreign investment company will be subject to the foregoing rules, even if our company ceases to be a passive foreign investment company, subject to certain exceptions for U.S. Holders who made a QEF election. U.S. Holders are urged to consult with their own tax advisors about making a QEF election or mark-to-market election and other aspects of the passive foreign investment company rules.


Back-Up Withholding and Information Reporting


U.S. Holders generally are subject to information reporting requirements and back-up withholding with respect to dividends paid in the United States on common shares, or proceeds paid from the disposition of common shares, unless the U.S. Holder provides an IRS Form W-9 or otherwise establishes an exemption.


The amount of any back-up withholding will be allowed as a credit against a U.S. Holder’s federal income tax liability and may entitle such holder to a refund, provided that certain required information is furnished to the IRS.

F.                                      Dividends and Paying Agents


F.
Dividends and Paying Agents
Not applicable.

G.                                    Statements by Experts

G.
Statements by Experts
Not applicable.

H.                                    Documents on display.

H.
Documents on Display.
We have filed this Annual Report on Form 20-F with the Securities and Exchange Commission under the Securities Exchange Act of 1934. Statements made in this Annual Report as to the contents of any contract, agreement or other document referred to are not necessarily complete. With respect to each such contract, agreement or other document filed as an exhibit to this Annual Report, reference is made to the exhibit for a more complete

55


description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.

We are subject to the informational requirements of the Exchange Act and file reports and other information with the Securities and Exchange Commission. Reports and other information which we file with the Securities and Exchange Commission, including this Annual Report on Form 20-F, may be inspected and copied at the public reference facilities of the Securities and Exchange Commission at:

450 Fifth Street N.W.
Room 1024
Washington D.C.  20549

500 West Madison Street

Room 1024Suite 1400
Washington D.C. 20549Chicago, Illinois 60661

You can also obtain copies of this material by mail from the Public Reference Section of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Additionally, copies of this material may also be obtained from the Securities and Exchange Commission’s Internet site at http://www.sec.gov. The Commission’s telephone number is 1-800-SEC-0330.

I.                                         Subsidiary Information.

I.
Subsidiary Information.

Not applicable.

ITEM 11 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

(a)Quantitative Information about Market Risk
(a)          Quantitative Information about Market Risk

See Item 5 - Operating and Financial Review and Prospects - Liquidity and Capital Resources - - Foreign Currency Rate Fluctuations; Interest Rate and Investment Risk.



(b)Qualitative Information about Market Risk

(b)         Qualitative Information about Market Risk

See Item 5 - Operating and Financial Review and Prospects - Liquidity and Capital Resources - - Foreign Currency Rate Fluctuations; Interest Rate and Investment Risk.

ITEM 12 - DESCRIPTION OF SECURITIES OTHER THAN DEBT SECURITIES


Not applicable.


PART II


ITEM 13 - - DEFAULT, DIVIDEND ARREARAGES AND DELINQUENCIES


None.


ITEM 14 - MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS


There were no material modifications to the rights of our security holders during the fiscal year ended December 31, 2003.

2004.


ITEM 15 – - CONTROLS AND PROCEDURES


The Company’s management, with the participation of the Company’s Chief Executive Officer and its Chief Financial Officer has evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2003.March 22, 2005. Based on that evaluation, the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, concluded that the Company’s disclosure controls and procedures were effective.

The Company’sCompany's management did not identify any change in the Company’sCompany's internal control over financial

56


reporting that occurred during the Company’sCompany's last fiscal year that has materially affected, or is reasonably likely to materially affect, the Company’sCompany's internal control over financial reporting.


ITEM 16A –- AUDIT COMMITTEE FINANCIAL EXPERT


The Company’s Board of Directors has determined that it has at least one audit committee financial expert serving on its audit committee. The Board of Directors has determined that Darroch Robertson is an audit committee financial expert. The Board of directors has determined that Mr. Robertson is independent, as that term is defined under Rule 4200-1(a)(14) of the Nasdaq Stock Market Rules.Mr. Robertson has been an Associate Professor of Business at the Richard Ivey School of Business, The University of Western Ontario, for the past five years. He is alsowas the Director of the undergraduate HBA program at the Ivey School. Mr. Robertson iswas also a director and chair of the audit committee of Stackpole Ltd., a TSX-listed company. Mr. Robertson is also an elected member of council for the Institute of Chartered Accountants of Ontario, where he currently serves on the audit committee and by-laws committee

committee.


ITEM 16B –- CODE OF ETHICS


The Company has adopted a Code of Ethics that applies to its principal executive officer, principal financial officer, principal accounting officer, controller and persons performing similar functions. The Code of Ethics is attached as an exhibit to this report.

We did not amend, modify or grant any waiver from any provision of our Code of Ethics during the last fiscal year.


ITEM 16C –- PRINCIPAL ACCOUNTANT FEES AND SERVICES


The following table sets forth the aggregate fees billed for each of the last two fiscal years for professional services rendered by our auditors for the audit of our annual financial statements and other services.


FEES OF AUDITORS

Year

 

Audit Fees(1)

 

Review Fees(2)

 

Tax Fees(3)

 

Other Fees(4)

 

2002

 

$

184,500

 

$

54,000

 

$

31,203

 

$

18,190

 

2003

 

$

160,000

 

$

66,000

 

$

71,450

 

$

18,750

 


(1)

Year
 
Audit Fees(1)
 
Audit-Related Fees(2)
 
Tax Fees(3)
 
Other Fees(4)
 
2003 $160,000 $66,000 $
71,450(5
)
$18,750 
2004 $243,000 $60,000 $36,000 $9,000 
(1)Audit Fees represent costs associated with the audit of our company’s financial statements including U.S. GAAP and U.S. GAAS.
(2)Audit-Related Fees represent costs associated with reviews of our company’s quarterly financial press releases and shareholders reports.
(3)Tax Fees represent costs associated with the preparation of our company’s annual tax filings, tax planning & advice.
(4)Other fees represent costs associated with the review and recommended accounting treatment related to complicated contracts or arrangements.
(5)$28,500 of this amount represents a fee that was recovered by the company.

Before the Company’s auditor is engaged by the Company to render audit or non-audit services, the engagement is approved by the Audit Committee. All of the audit ofand non-audit services provided by the Company’s financial statements including U.S. GAAP and U.S. GAAS.

(2)          Review Fees represent costs associated with reviews ofauditor were approved by the Company’s quarterly financial press releases and shareholders reports.

(3)          Tax Fees represent costs associated withAudit Committee pursuant to the preparation of the Company’s annual tax filings.

Audit Committee’s pre-approval policy.


(4)          Other fees represent costs associated with the review and recommended accounting treatment related to complicated contracts or arrangements.

ITEM 16D –- EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES


Not applicable.


ITEM 16E - PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

During the last fiscal year, there were no purchases by or on behalf of the Company or any affiliated purchaser of any class of the Company’s equity securities registered under Section 12 of the Exchange Act.
PART III


ITEM 17- FINANCIAL STATEMENTS17

Not applicable.

ITEM 18 - FINANCIAL STATEMENTS


Not applicable.

ITEM 18

- FINANCIAL STATEMENTS


See the Index to Consolidated Financial Statements accompanying this report on page F-1.

57



ITEM 19 - - EXHIBITS


Exhibits filed as part of this Annual Report.


1.1

1.1

Articles of Arrangement of the Company filed with the Ontario Ministry of Consumer and Business Services on October 31, 2002.(1)

1.2

1.2

By-laws of the Company.(2)

2.1

2.1

Form of Series DConvertible Secured Note.(6)

2.2

2.2

Registration Rights Agreement, dated as of June 16, 2000, between Bid.Com International and Acqua Wellington Value Fund Ltd.(4)

2.3

2.3

Form of Series G Convertible Secured Note.*

2.4

Warrant issued April 25, 2002 to Stonestreet Limited Partnership by ADB Systems International Inc. (5)

2.5

Warrant issued April 25, 2002 to Stonestreet Corporation by ADB Systems International Inc. (5)

2.6

Form of Warrant issued or issuable upon the exercise of the Series A Notes, Series B Notes, Series C Notes and Series D Notes. (6)

2.7

Series F Convertible Secured Note dated May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership.*

2.8

Form of Warrant issued or issuable upon exercise of the Series FConvertible Secured Notes.*

(6)

4.1

4.1

Salary Protection Letter, dated February 12, 1997, between the Company and Jeffrey Lymburner.(3)

4.2

4.2

Option Agreement dated February 19, 2001 between Bid.Com International Inc. and Wendell Willick.(5)

4.3

4.3

Amendment to Option Agreement dated May 2, 2001 between Bid.Com International Inc. and Wendell Willick.(5)

4.4

4.4

Board Support Agreement, dated as of September 7, 2001 between Bid.Com International Inc. and ADB Systemer ASA.(5)




4.5

4.5

Board Representation Agreement, dated as of September 7, 2001 between Bid.Com International Inc. and LimeRock Partners LLC, Jan Pedersen, Sandnes Investering, Rogaland Investering, AIG Private Bank Ltd. and Karstein Gjersvik.(5)

4.6

4.6

Employment Agreement, dated as of September 18, 2001 between Bid.Com International Inc. and Jan Pedersen.(5)

4.7

4.7

Subscription Agreement, dated as of April 25, 2002, between ADB Systems International Inc. and Stonestreet Limited Partnership.(5)

4.8

4.8

Arrangement Agreement, dated as of August 23, 2002, between ADB Systems International Inc. and ADB Systems International Ltd.(1)

4.9

4.9

General Conveyance and Assumption Agreement, dated August 23, 2002, between ADB Systems International Inc. and ADB Systems International Ltd.(2)

4.10

4.10

Loan Agreement, dated August 23, 2002, and Loan Agreement Amending Agreement entered into as of August 30, 2002 among The Brick Warehouse Corporation, ADB Systems International Inc., and ADB Systems International Ltd.(6)

4.11

4.11

Form of Supply Services and Licensing Agreement, dated August 23, 2002, among The Brick Warehouse Corporation, ADB Systems International Inc., and ADB Systems International Ltd.(6)

4.12

4.12

Form of General Security Agreement, dated as of April 30, 2002, between ADB Systems International Inc. and each of Stonestreet Limited Partnership and Greenwich Growth Fund Ltd.(6)

58


4.13

4.13
Form of Subscription Agreement, dated August 30, 2002, between ADB Systems International Inc. and Stonestreet Limited Partnership.(6)

4.14

4.14

Form of Subscription Agreement, dated August 30, 2002, between ADB Systems International Inc. and Greenwich Growth Fund Ltd.(6)

4.15

4.15

Co-operation Agreement made as of August 23, 2002 between ADB Systems International Inc., ADB Systems International Ltd. and The Brick Warehouse Corporation.(6)

4.16

4.16

Agency Agreement dated June 15, 2004 between ADB Systems International Ltd. and First Associates Investments Inc.*

(7)

4.17

4.17

General Security Agreement dated as of May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership.*

(7)

4.18

4.18

Form of Subscription Agreement dated June 3, 2004, between ADB Systems International Ltd. and First Associates Investments Inc.*

(7)

4.19

4.19

Subscription Agreement, dated June 1, 2004, between ADB Systems International and First Associates Investments Inc.*

4.20

Subscription Agreement dated May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership.*

(7)

8.1

4.20

Formof Subscription Agreement for Equity Private Placements.*
8.1
List of Subsidiaries.*

10.1

10.1

Certification pursuant to 18 U.S.C. Section 1350.*

11.1

11.1

Code Ofof Ethics forof ADB Systems International Ltd.*

(7)

*

*

Filed herewith

(1)

(1)

Incorporated by reference from Exhibit 1 to the Company’s Current Report on Form 6-K, Filing No. 1 for the Month of November 2002, filed with the Securities and Exchange Commission on November 5, 2002.

(2)

(2)

Incorporated by reference from Exhibit 1.2 of Amendment No. 1 to the Company’s Registration Statement on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on March 30, 1999.




(3)

(3)

Incorporated by reference from Exhibit 3.27 of Amendment No. 1 to the Company’s Registration Statement on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on March 30, 1999.

(4)

(4)

Incorporated by reference from the Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on May 23, 2001.

(5)

(5)

Incorporated by reference from the Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on May 17, 2002.

(6)

(6)

Incorporated by reference from Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on May 20, 2003.

(7)Incorporated by reference from Exhibits to the Company’s Annual Report on Form 20-F, File No. 001-14835, filed with the Securities and Exchange Commission on June 30, 2004.


SIGNATURES


The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and has duly caused and authorized the undersigned to sign this Annual Report on its behalf.

59


ADB SYSTEMS INTERNATIONAL INC.

By:

/s/ Jeffrey Lymburner

Name:

Jeffrey Lymburner

Title:

Chief Executive Officer

Dated: June 29, 2004

24, 2005

By:

/s/ Michael Robb

Name:

Michael Robb

Title:

Chief Financial Officer and

Corporate Secretary

60




Certification

Certification

I, Jeffrey Lymburner, certify that:


1. I have reviewed thethis annual report on Form 20-F of ADB Systems International Ltd.;


2. Based on my knowledge, this 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 report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;


4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) not applicable;

c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) not applicable;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and

5. The company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’scompany's auditors and the audit committee of the company’scompany's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.


Dated: June 29, 2004

24, 2005

/s/ Jeffrey Lymburner

Jeffrey Lymburner

Chief Executive Officer

61



Certification

Certification

I, Michael Robb, certify that:


1. I have reviewed this annual report on Form 20-F of ADB Systems International Ltd.;


2. Based on my knowledge, this 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 report;


3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;


4. The company’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the company and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) not applicable;

c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and


a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) not applicable;
c) Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting; and
5. The company’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company’scompany's auditors and the audit committee of the company’scompany's board of directors (or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company’s ability to record, process, summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control over financial reporting.


a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting.

Dated: June 29, 2004

24, 2005

/s/ Michael Robb

Michael Robb

Chief Financial Officer

62









INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Audited Consolidated Financial Statements for the years ended December 31, 2004, 2003, 2002

Audited Consolidated Financial Statements for the years ended December 31, 2003, 2002 and 2001

Report of Independent Registered Chartered Accountants

F-1

Consolidated Balance Sheets as at December 31, 20032004 and 2002

2003

F-3

Consolidated Statements of Operations for the years ended December 31, 2004, 2003 2002 and 2001

2002

F-5

F-4

Consolidated Statements of Deficit for the years ended December 31, 2004, 2003 2002 and 2001

2002

F-6

F-5

Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, 2002 and 2001

2002

F-7

F-6

Notes to Consolidated Financial Statements

F-8

F-7


Management’s Report


Preparation of the consolidated financial statements accompanying this annual report and the presentation of all other information in this report is the responsibility of management. The financial statements have been prepared in accordance with appropriate and generally accepted accounting principles and reflect management’s best estimates and judgments. All other financial information in the report is consistent with that contained in the financial statements. The Company maintains appropriate systems of internal control, policies and procedures which provide management with reasonable assurance that assets are safeguarded and that financial records are reliable and form a proper basis for preparation of financial statements.


The Board of Directors ensures that management fulfills its responsibilities for financial reporting and internal control through an Audit Committee which is composed of non-executive directors. The Audit Committee reviewed the consolidated financial statements with management and external auditors and recommended their approval by the Board of Directors. The consolidated financial statements have been audited by Deloitte & Touche LLP, Chartered Accountants. Their report stating the scope of their audit and their opinion on the consolidated financial statements is presented below.

Jeff Lymburner

jlsig

Michael Robb

mrsig

CEO

Jeff Lymburner

Michael Robb

CEOChief Financial Officer


Report of Independent Registered Chartered Accountants

To the Shareholders of ADB Systems International Ltd.
We have audited the consolidated balance sheets of ADB Systems International Ltd. as at December 31, 20032004 and 2002,2003, and the consolidated statements of operations, deficit and cash flows for each of the three years in the three year period ended December 31, 2003.2004.  These financial statements are the responsibility of the Company’sCompany's management.  Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States).  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.  We believe that our audits provide a reasonable basis for our opinion.

In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 20032004 and 20022003 and the results of its operations and its cash flows for each of the three years in the three year period ended December 31, 20032004 in accordance with Canadian generally accepted accounting principles.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly we express no such opinion.
dtsig
ADB Systems International Ltd. F-1


Independent Registered Chartered Accountants

Toronto, Ontario, Canada

February

March 6, 2004 (except for Notes 2 and 23 which are as of May 11, 2004)

F-1

2005

Comments by AuditorsIndependent Registered Chartered Accountants on Canada –- United States Reporting DifferencesDifference

United States reporting

The standards for auditorsof the Public Company Accounting Oversight Board (United States) require the addition of an explanatory paragraph following the opinion paragraph when the financial statements are affected by conditions and events that cast substantial doubt on the Company’s ability to continue as a going concern, such as those described in Note 2 to the financial statements.  Although we conducted our audits in accordance with both Canadian and United States generally accepted auditing standards and the Standards of the Public Company Accounting Oversight Board (United States), our report to the Shareholders dated FebruaryMarch 6, 20042005 is expressed in accordance with Canadian reporting standards which do not permit a reference to such conditions and events in the auditors’ report when these are adequately disclosed in the financial statements.

dtsig
Independent Registered Chartered Accountants
Toronto, Ontario, Canada
March 6, 2005

ADB Systems International Ltd. F-2


Consolidated Balance Sheets
December 31, 2004 and 2003
(in thousands ofCanadian dollars)


  
2004
 
2003
 
ASSETS
     
CURRENT       
Cash
 $440 $432 
Marketable securities
  13  13 
Accounts receivable
  1,535  1,384 
Deposits and prepaid expenses
  208  118 
   2,196  1,947 
CAPITAL ASSETS (Note 4)  142  266 
ACQUIRED SOFTWARE (Note 20)  -  846 
DEFERRED CHARGES (NET) (Note 5)  155  - 
ACQUIRED AGREEMENTS (Note 21)  -  150 
TRADEMARKS AND INTELLECTUAL PROPERTY (NET)
  -  2 
  $2,493 $3,211 
LIABILITIES
       
CURRENT       
Accounts payable
 $870 $700 
Accrued liabilities
  810  670 
Deferred revenue
  135  91 
   1,815  1,461 
SECURED SUBORDINATED NOTES (Note 6)  1,684  721 
   3,499  2,182 
NON-CONTROLLING INTEREST  3  3 
COMMITMENTS AND CONTINGENCIES (Notes 2 and 14)       
SHAREHOLDERS’ DEFICIENCY
       
Share capital (Note 8)
  100,052  97,674 
Contributed surplus (Note 9)
  1,282  1,289 
Warrants (Note 10)
  405  324 
Stock options (Note 11)
  936  898 
Other options (Note 12)
  78  - 
Conversion feature on secured subordinated notes (Note 6)
  992  497 
Cumulative translation account
  112  106 
Deficit
  (104,866) (99,762)
   (1,009) 1,026 
  $2,493 $3,211 
On behalf of the Board:

director1sigdirector2sig
DirectorDirector

See notes to consolidated financial statements.
ADB Systems International Ltd. F-3

Consolidated Statements of Operations
Years ended December 31, 2004, 2003 and 2002
(in thousands ofCanadian dollars, except per share amounts)

 

 

2004

 

2003

 

2002

 

Revenue

 

$

4,930

 

$

5,853

 

$

5,780

 

 

 

 

 

 

 

 

 

General and administrative

 

4,365

 

4,648

 

6,288

 

Sales and marketing

 

749

 

1,098

 

1,875

 

Software development and technology

 

3,257

 

2,817

 

4,101

 

 

 

8,371

 

8,563

 

12,264

 

Loss before employee stock options, depreciation and amortization, interest expense and interest income

 

(3,441

)

(2,710

)

(6,484

)

Employee stock options (Note 11)

 

39

 

193

 

—

 

Depreciation and amortization

 

1,190

 

1,901

 

2,602

 

Interest expense

 

439

 

289

 

200

 

Interest income

 

(6

)

(9

)

(45

)

 

 

1,662

 

2,374

 

2,757

 

Loss before the undernoted

 

(5,103

)

(5,084

)

(9,241

)

 

 

 

 

 

 

 

 

Realized gain on settlement of demand loan (Note 19)

 

—

 

2,195

 

—

 

Realized gains and losses on disposal of marketable securities, strategic investments and capital assets (Note 17)

 

(1

)

7

 

(85

)

Unrealized gains and losses on revaluation of strategic investments
(Note 18)

 

—

 

—

 

(24

)

Goodwill impairment (Note 22)

 

—

 

—

 

(14

)

Retail activities (Note 16)

 

—

 

67

 

—

 

 

 

(1

)

2,269

 

(123

)

 

 

 

 

 

 

 

 

NET LOSS FOR THE YEAR

 

$

(5,104

)

$

(2,815

)

$

(9,364

)

LOSS PER SHARE (Note 8(d))

 

$

(0.08

)

$

(0.05

)

$

(0.22

)

 

See notes to consolidated financial statements.

Chartered Accountants

Toronto, Ontario, Canada

ADB Systems International Ltd. F-4
February 6, 2004 (except for Notes 2 and 23 which are asConsolidated Statements of May 11, 2004)Deficit

F-2


Consolidated Balance Sheets

Years ended December 31, 2004, 2003 and 2002

(in thousands of Canadian dollars)

 

 

2003

 

2003

 

2002

 

 

 

 

 

Convenience
Translation into
U.S. $ (Note
24)

 

 

 

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT

 

 

 

 

 

 

 

Cash

 

$

432

 

$

335

 

$

1,337

 

Marketable securities

 

13

 

10

 

20

 

Accounts receivable

 

1,384

 

1,073

 

1,828

 

Deposits and prepaid expenses

 

118

 

91

 

178

 

 

 

1,947

 

1,509

 

3,363

 

 

 

 

 

 

 

 

 

CAPITAL ASSETS (Note 4)

 

266

 

206

 

443

 

ACQUIRED SOFTWARE (Note 16)

 

846

 

656

 

1,974

 

DEFERRED CHARGES (NET) (Note 5)

 

—

 

—

 

513

 

ACQUIRED AGREEMENTS (Note 17(a))

 

150

 

116

 

57

 

TRADEMARKS AND INTELLECTUAL PROPERTY (NET)

 

2

 

1

 

5

 

 

 

$

3,211

 

$

2,488

 

$

6,355

 

 

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CURRENT

 

 

 

 

 

 

 

Accounts payable

 

$

700

 

$

543

 

$

1,059

 

Accrued liabilities

 

670

 

519

 

1,229

 

Current portion of deferred revenue

 

91

 

71

 

832

 

Demand loan (Notes 6 and 19(a))

 

—

 

—

 

2,000

 

 

 

1,461

 

1,133

 

5,120

 

 

 

 

 

 

 

 

 

SECURED SUBORDINATED NOTES (Note 7)

 

721

 

559

 

34

 

 

 

2,182

 

1,692

 

5,154

 

 

 

 

 

 

 

 

 

NON-CONTROLLING INTEREST

 

3

 

2

 

3

 

COMMITMENTS AND CONTINGENCIES (Notes 2 and 11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

Share capital (Note 9(b))

 

97,674

 

75,716

 

95,633

 

Contributed surplus (Note 9(d))

 

1,289

 

999

 

—

 

Warrants (Note 9(d))

 

324

 

251

 

1,599

 

Stock options (Note 9(c))

 

898

 

696

 

706

 

Conversion feature on secured subordinated notes (Note 7)

 

497

 

385

 

175

 

Cumulative translation account

 

106

 

82

 

32

 

Deficit

 

(99,762

)

(77,335

)

(96,947

)

 

 

1,026

 

794

 

1,198

 

 

 

$

3,211

 

$

2,488

 

$

6,355

 

F-3


ON BEHALF OF THE BOARD

/s/ T. Christopher Bulger

Director

/s/ Darroch Robertson

Director

F-4

 

 

2004

 

2003

 

2002

 

DEFICIT, BEGINNING OF YEAR

 

$

(99,762

)

$

(96,947

)

$

(87,583

)

NET LOSS FOR THE YEAR

 

(5,104

)

(2,815

)

(9,364

)

DEFICIT, END OF YEAR

 

$

(104,866

)

$

(99,762

)

$

(96,947

)


Consolidated Statements of Operations

Years ended December 31, 2003, 2002 and 2001

(in thousands of Canadian dollars, except per share amounts)

 

 

2003

 

2003

 

2002

 

2001

 

 

 

 

 

Convenience
translation into
U.S. $ (Note
24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

$

5,853

 

$

4,537

 

$

5,780

 

$

4,455

 

Less: Customer acquisition costs

 

—

 

—

 

—

 

(60

)

Net revenue (Note 21)

 

5,853

 

4,537

 

5,780

 

4,395

 

 

 

 

 

 

 

 

 

 

 

General and administrative

 

4,648

 

3,603

 

6,288

 

7,622

 

Sales and marketing

 

1,098

 

851

 

1,875

 

4,040

 

Software development and technology

 

2,817

 

2,183

 

4,101

 

3,691

 

Employee stock options (Note 9(j))

 

193

 

150

 

—

 

—

 

Depreciation and amortization

 

1,901

 

1,474

 

2,602

 

1,572

 

Interest expense

 

289

 

224

 

200

 

—

 

Interest income

 

(9

)

(7

)

(45

)

(345

)

 

 

 

 

 

 

 

 

 

 

 

 

10,937

 

8,478

 

15,021

 

16,580

 

 

 

 

 

 

 

 

 

 

 

Loss before the undernoted

 

(5,084

)

(3,941

)

(9,241

)

(12,185

)

 

 

 

 

 

 

 

 

 

 

Realized gain on settlement of demand loan (Note 6)

 

2,195

 

1702

 

—

 

—

 

Realized gains and losses on disposal of marketable securities, strategic investments and capital assets and recovery of assets (Note 14)

 

7

 

5

 

(85

)

6,722

 

Unrealized gains and losses on revaluation of marketable securities and strategic investments, and provision for impairment of assets (Note 15)

 

—

 

—

 

(24

)

(2,435

)

Goodwill impairment (Note 18)

 

—

 

—

 

(14

)

(9,476

)

Restructuring charges

 

—

 

—

 

—

 

(959

)

Retail activities settlement (Note 13)

 

67

 

52

 

—

 

(381

)

 

 

2,269

 

1,759

 

(123

)

(6,529

)

 

 

 

 

 

 

 

 

 

 

NET LOSS FOR THE YEAR

 

$

(2,815

)

$

(2,182

)

$

(9,364

)

$

(18,714

)

 

 

 

 

 

 

 

 

 

 

LOSS PER SHARE (Note 9(i))

 

$

(0.05

)

$

(0.04

)

$

(0.22

)

$

(0.64

)

F-5


Consolidated Statements of Deficit

Years ended December 31, 2003, 2002 and 2001

(in thousands of Canadian dollars)

 

 

2003

 

2003

 

2002

 

2001

 

 

 

 

 

Convenience Translation into
U.S. $ (Note 24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

DEFICIT, BEGINNING OF YEAR

 

$

(96,947

)

$

(75,153

)

$

(87,583

)

$

(68,869

)

 

 

 

 

 

 

 

 

 

 

NET LOSS FOR THE YEAR

 

(2,815

)

(2,182

)

(9,364

)

(18,714

)

 

 

 

 

 

 

 

 

 

 

DEFICIT, END OF YEAR

 

$

(99,762

)

$

(77,335

)

$

(96,947

)

$

(87,583

)

F-6


Consolidated Statements of Cash Flows

Years ended December 31, 2003, 2002 and 2001

(in thousands of Canadian Dollars)

 

 

2003

 

2003

 

2002

 

2001

 

 

 

 

 

Convenience
Translation
into
U.S. $ (Note
24)

 

 

 

 

 

NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING

 

 

 

 

 

 

 

 

 

Net loss for the year

 

$

(2,815

)

$

(2,182

)

$

(9,364

)

$

(18,714

)

Items not affecting cash

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

1,901

 

1,474

 

2,602

 

1,572

 

Non cash customer acquisition costs

 

38

 

29

 

—

 

60

 

Non cash interest expense

 

239

 

185

 

108

 

—

 

Employee stock options

 

193

 

150

 

—

 

—

 

Stock compensation to third parties

 

—

 

—

 

25

 

115

 

Realized gain on settlement of demand loan (Note 6)

 

(2,195

)

(1,702

)

—

 

—

 

Realized gains and losses on disposal of marketable securities, strategic investments and capital assets, and recovery of assets (Note 14)

 

(7

)

(5

)

85

 

(6,722

)

Unrealized gains and losses on revaluation of marketable securities and strategic investments, and provision for impairment of assets (Note 15)

 

—

 

—

 

24

 

2,435

 

Goodwill impairment (Note 18)

 

—

 

—

 

14

 

9,476

 

 

 

(2,646

)

(2,051

)

(6,506

)

(11,778

)

Changes in non cash operating working capital (Note 12)

 

(728

)

(564

)

61

 

(2,917

)

 

 

(3,374

)

(2,615

)

(6,445

)

(14,695

)

 

 

 

 

 

 

 

 

 

 

INVESTING

 

 

 

 

 

 

 

 

 

Capital assets

 

(45

)

(35

)

(43

)

(317

)

Strategic investments

 

—

 

—

 

—

 

(328

)

Capitalized software, trademarks and intellectual property

 

—

 

—

 

(7

)

(5

)

Marketable securities

 

8

 

6

 

1,556

 

10,142

 

Proceeds from disposal of capital assets

 

34

 

26

 

167

 

—

 

Acquisition of ADB Systemer ASA (Note 16)

 

—

 

—

 

—

 

(2,244

)

Proceeds from disposal of joint venture and strategic investments (Note 14(a) and (e))

 

20

 

16

 

126

 

2,706

 

Purchase of non-controlling interest

 

—

 

—

 

(14

)

—

 

 

 

17

 

13

 

1,785

 

9,954

 

 

 

 

 

 

 

 

 

 

 

FINANCING

 

 

 

 

 

 

 

 

 

Issuance of common shares for cash (Note 9(d) and (e)(i))

 

1,458

 

1,130

 

1,506

 

—

 

Repayment of capital lease

 

—

 

—

 

(42

)

(65

)

Secured subordinated notes (Note 7)

 

994

 

770

 

1,000

 

—

 

Deferred charges (Note 5)

 

—

 

—

 

(1,024

)

—

 

Demand loan (Note 6)

 

—

 

—

 

2,000

 

—

 

 

 

2,452

 

1,900

 

3,440

 

(65

)

 

 

 

 

 

 

 

 

 

 

NET CASH OUTFLOW DURING THE YEAR

 

(905

)

(702

)

(1,220

)

(4,806

)

 

 

 

 

 

 

 

 

 

 

CASH, BEGINNING OF YEAR

 

1,337

 

1,037

 

2,557

 

7,363

 

CASH, END OF YEAR

 

$

432

 

$

335

 

$

1,337

 

$

2,557

 

 

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE

 

 

 

 

 

 

 

 

 

Interest expense

 

$

48

 

$

37

 

$

24

 

$

—

 

Income taxes

 

$

—

 

$

—

 

$

—

 

$

—

 

 

See notes to consolidated financial statements.

ADB Systems International Ltd. F-5

Consolidated Statements of Cash Flows
Years ended December 31, 2004, 2003 and 2002
(in thousands of Canadian Dollars)

 

 

2004

 

2003

 

2002

 

 

 

 

 

 

 

 

 

NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OPERATING

 

 

 

 

 

 

 

Net loss for the year

 

$

(5, 104

)

$

(2,815

)

$

(9,364

)

Items not affecting cash

 

 

 

 

 

 

 

Depreciation and amortization

 

1,190

 

1,901

 

2,602

 

Non cash customer acquisition costs

 

—

 

38

 

—

 

Non cash interest expense

 

266

 

239

 

108

 

Employee stock options

 

39

 

193

 

—

 

Stock compensation to third parties

 

—

 

—

 

25

 

Realized gain on settlement of demand loan (Note 19)

 

—

 

(2,195

)

—

 

Realized gains and losses on disposal of marketable securities, strategic investments, and capital assets (Note 17)

 

1

 

(7

)

85

 

Unrealized gains and losses on revaluation of strategic investments
(Note 18)

 

—

 

—

 

24

 

Goodwill impairment (Note 22)

 

—

 

—

 

14

 

Changes in non cash operating working capital (Note 15)

 

322

 

(728

)

61

 

 

 

(3,286

)

(3,374

)

(6,445

)

INVESTING

 

 

 

 

 

 

 

Capital assets

 

(40

)

(45

)

(43

)

Capitalized software, trademarks and intellectual property

 

—

 

—

 

(7

)

Marketable securities

 

—

 

8

 

1,556

 

Proceeds from disposal of capital assets

 

—

 

34

 

167

 

Proceeds from disposal of joint venture and strategic investments
(Note 17 (a))

 

—

 

20

 

126

 

Purchase of non-controlling interest

 

—

 

—

 

(14

)

 

 

(40

)

17

 

1,785

 

 

 

 

 

 

 

 

 

FINANCING

 

 

 

 

 

 

 

Issuance of common shares for cash (Note 8 (b))

 

903

 

1,458

 

1,506

 

Repayment of capital lease

 

—

 

—

 

(42

)

Secured subordinated notes (Note 6)

 

2,598

 

994

 

1,000

 

Deferred charges (Note 5)

 

(167

)

—

 

(1,024

)

Demand loan (Note 19)

 

—

 

—

 

2,000

 

 

 

3,334

 

2,452

 

3,440

 

 

 

 

 

 

 

 

 

NET CASH INFLOW (OUTFLOW) DURING THE YEAR

 

8

 

(905

)

(1,220

)

CASH, BEGINNING OF YEAR

 

432

 

1,337

 

2,557

 

CASH, END OF YEAR

 

$

440

 

$

432

 

$

1,337

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH PAYMENTS

 

 

 

 

 

 

 

Interest paid

 

$

60

 

$

48

 

$

24

 

Income taxes

 

$

—

 

$

—

 

$

—

 

 

F-7SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES – See Note 15


 

See notes to consolidated financial statements.

ADB Systems International Ltd. F-6

Notes to the Consolidated Financial Statements -
Years ended December 31, 2004, 2003 2002 and 2001 (in2002
(in Canadian dollars)

 

1.DESCRIPTION OF BUSINESS

 

ADB Systems International Ltd. (“ADB” or the “Company”) delivers asset lifecycle management solutions that enable companies to source, manage and sell assets for maximum value.  ADB works with a growing number of customers and partners in a variety of sectors including the asset-intensive oil and gas industry to improve operational efficiencies.  ADB also enables customers in government, manufacturing and financial services sectors to reduce purchasing costs and improve procurement processes.

 

ADB Systems International Ltd. was created on August 30, 2002.  Upon implementation of a special resolution of the shareholdershareholders of the Company and shareholders of ADB Systems International Inc. (“Old ADB”, formerly Bid.Com International Inc. (“Bid.Com”)), pursuant to Section 182 of the Business Corporations Act (Ontario), the shareholders of Old ADB exchanged their shares for shares of the Company on a one-for-one basis on October 22, 2002.  All assets and liabilities of Old ADB, other than those related to retail activities (Note 13)16) were transferred to the Company on that date in the form of a return of capital.  ADB Systems International Ltd. conducted no activities prior to October 22, 2002.  Old ADB subsequently changed its name to Bid.Com International Ltd. (“Bid.Com Ltd.”).

 

These consolidated financial statements reflect the financial position of the Company as at December 31, 20032004 and 2002,2003, and results of its operations and its cash flows subsequent to October 22, 2002, and the financial position of Old ADB as at December 31, 2001 and results of operations and of cash flows of Old ADB for the 2002 period prior to October 22, 2002 and the year ended December 31, 2001 based upon continuity of interests accounting as no substantive change of ownership occurred.

 

Bid.Com was an on-line auction service provider and e-tailer.  During 2000, the Company refocused its business model to become an on-line enabling service to other businesses seeking to use its on-line retailing technologies.  The Company provides businesses with the use of its software and hardware technology over a specific term in addition to consulting, implementation, and training services.  In October 2001, Bid.Com acquired ADB Systemer ASA (“ADB Systemer”), a Norway-based software vendor of enterprise asset management and electronic procurement applications.  The Company changed its name to ADB Systems International Inc. to reflect its expanded product offering.

 

2.CONTINUATION OF THE BUSINESS

 

While the accompanying consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern, basis, which contemplates the realization of assets and liquidation of liabilities during the normal course of operations, certain adverse conditions and events cast substantial doubt upon the validity of this assumption. The Company has not yet realized profitable operations and has relied on non-operational sources of financing to fund operations.  The Company’s ability to continue as a going concern will be dependent on management’s ability to successfully execute its business plan including ana substantial increase in revenue as well as maintaining operating expenses at or near the same level as 2004.  Management’s 2005 business plan includes a significant increase in revenue and seekingoperating cash flow primarily from major new contracts in Norway, the UK and North America.  Management believes that it has the ability to raise additional forms of debt or equity financing.  Additional debt or equity financings such as issuance of loans or debentures, issuance of shares, conversion of warrants and exercise of options in the amount of $3.7 million are estimated to be required for 2004.financing if required.  The Company cannot provide assurance that it will be able to execute on its business plan or assure that efforts to raise such additional financings willwould be successful.

 

These financial statements do not include adjustments or disclosures that may result from the Company’s inability to continue as a going concern.  If the going concern assumption were not appropriate for these financial statements, then adjustments would be necessary in the carrying valuevalues of assets and liabilities, and the reported net losses and the balance sheet classifications used.

 

Management believes that continued existence beyond 2004 is dependent on its ability to increase revenue from existing products, and to expand the scope of its product offering which entails a combination of internally developed software and partnerships with third parties.

 

ADB Systems International Ltd. F-7

F-8Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


3.SIGNIFICANT ACCOUNTING POLICIES

 

The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada (Canadian GAAP), which are substantially the same as generally accepted accounting principles in the United States (U.S. GAAP), except as disclosed in Note 20.24.  The accompanying consolidated financial statements are prepared using accounting principles applicable to a going concern, which assumes that the Company will continue in operation for a reasonable period of time and will be able to realize its assets and discharge its liabilities in the normal course of operations (see Note 2).

 

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of the Company and subsidiaries over which it exercises control and its proportionate share of the assets, liabilities, revenue and expenses of a jointly controlled company during the period of ownership, September 1999 to May 2001.control.  Business acquisitions are accounted for under the purchase method and operating results are included in the consolidated financial statements as of the date of the acquisition of control.  All material intercompanyinter-company transactions have been eliminated.

 

INVESTMENT IN ASSOCIATED COMPANY

The investment in associated companyBid.Com Ltd. was accounted for under the equity method (see Note 19(a))23).  This method was considered appropriate based upon management’s evaluation of its abilityinability to determine the strategic operating policies of the associated company without the cooperation of others, its abilityinability to obtain future economic benefits from the associated company, and its lack of exposure to the related risks of ownership.  U.S. GAAP required consolidation of the investment in associated company.  The impact of this difference in U.S. GAAP from Canadian GAAP is disclosed in these financial statements in Note 20 –24 — Reconciliation of United States GAAP.

 

MARKETABLE SECURITIES

Marketable securities include registered equity instruments, allare comprised of which are carried at the lower of cost and quoted market value.  Net unrealized losses on marketable securities related to an impairment, determined to be other than temporary in nature, are determined on the specific identification basis and are included in the Consolidated Statements of Operations.  Marketable securities also include interest-bearing certificates carried at cost plus accrued interest which approximate market value.

 

CAPITAL ASSETS AND AMORTIZATION

Capital assets are carried at cost less accumulated amortization.  Amortization is calculated on a straight-line basis in amounts sufficient to amortize the cost of capital assets over their estimated useful lives as follows:

Computer hardware

 

3 years

Computer software and licenses

 

1 year or life of the license

Furniture and fixtures

 

5 years

Building

20 years

Leasehold improvements

 

life of the lease

STRATEGIC INVESTMENTS

Strategic investments are carried at the lower of cost and estimated net realizable value.  Management has assessed the carrying value of the investments and recorded an impairment provision based on management’s best estimate of net realizable value.

 

SOFTWARE DEVELOPMENT COSTS

The cost of non-core software internally developed for client applications through e-commerce enabling agreements and software licensing is expensed as incurred.  The cost of core software internally developed for client applications through e-commerce enabling agreements is capitalized and is amortized over two years.  The cost of core software internally developed for software licensing contracts is expensed as incurred.  The cost of acquired software and internally developed software for use in on-line retail operations is expensed as incurred.

F-9


 

ACQUIRED SOFTWARE

The cost of core software acquired as a result of the acquisition of ADB Systemer ASA has beenwas capitalized and is amortized over three years, the estimated useful life of the software.

 

ACQUIRED AGREEMENTS

Acquired agreements have beenwere capitalized based on the estimated fair value of common share purchase warrants issued in exchange for entering into certain agreements and are amortized over the initial term of the agreements.  The fair value of these warrants is calculated based on the Cox-Rubinstein binomial valuation model.

 

ADB Systems International Ltd. F-8

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

TRADEMARKS AND INTELLECTUAL PROPERTY

Trademarks and intellectual property are recorded at cost and amortized on a straight-line basis over two years.  Trademarks and intellectual property acquired as a result of the acquisition of ADB Systemer ASA, and directly attributable to core software have beenproducts, were capitalized and arehave been amortized over three years, the estimated useful life of the related software.

 

GOODWILL

In 2001, the Company adopted the provisions of the Canadian Institute of Chartered Accountants (“CICA”) Handbook sections 1581 and 3062, whereby the purchase price of an acquired business is allocated to all assets and liabilities, including identifiable intangible assets, based on their fair values.  Any purchase price in excess of those fair values is recorded as goodwill.  Goodwill must be tested annually for impairment on a fair value basis, and where the carrying value exceeds fair value, a goodwill impairment loss must be recorded.  This accounting policy became effective January 1, 2002 with a transition provision beginning July 1, 2001.  Management assessed the carrying value of the goodwill arising from the acquisition of ADB Systemer, and determined that a permanent decline had occurred in the fair value of goodwill at December 31, 20012002 based on estimated future cash flows from the business acquired.

 

TRANSLATION OF FOREIGN CURRENCIES

The accompanying consolidated financial statements are prepared in Canadian dollars.  All foreign denominated transactions, other than those of self-sustaining subsidiaries, are translated using the temporal method whereby monetary assets and liabilities are translated at the rates in effect on the balance sheet date, non-monetary items at historical rates and revenue and expenses at the average monthly rate.  Gains and losses from foreign exchange translations are included in the statements of operations.

The Company’s foreign subsidiaries in the United States, Ireland and the United Kingdom and Australia are classified as fully integrated with the functional currency being the Canadian dollar.  The Company uses the temporal method of foreign currency translation for these operations.  Monetary assets and liabilities are translated at the exchange rates in effect on the balance sheet date.  Non-monetary assets are translated at historic exchange rates.  Revenue and expense amounts are translated using the average exchange rate for the year except amortization of capital assets which is translated at historic exchange rates.  Gains and losses from foreign exchange translations are included in the statement of operations.

 

The Company’s subsidiary in Norway is classified as a self-sustaining operation whereby the functional currency of the operation is the Norwegian krone.  The Company uses the current rate method of translation for these operations.  Assets and liabilities are translated at the rate of exchange in effect at the balance sheet date.  Revenue and expenses (including depreciation and amortization) are translated using the average exchange rate for the year.  Gains and losses from foreign exchange translations are included as a separate component of shareholders’ equity.

 

LOSS PER SHARE

On January 1, 2001, the Company adopted the provisions of The Canadian Institute of Chartered Accountants Handbook section 3500, “Earnings per Share,” whereby the treasury stock method of calculating diluted earnings per share is used.  For the years presented, all stock options, convertible debentures and warrants are anti-dilutive, therefore diluted loss per share is equal to basic loss per share.  The basic loss per share calculation is based on the weighted average number of shares outstanding during the year.

 

F-10

ADB Systems International Ltd. F-9

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


REVENUE RECOGNITION

a) LicenseThe Company’s revenues are derived from software license fees, implementation, training and relatedconsulting services, agreements

product maintenance and customer support, and software development, and hosting fees. Fees for services are billed separately from licenses of the Company’s product.  The Company has agreements to provide software licenses for client-server-based software applications.  The Company adoptedrecognizes revenue in accordance with Canadian GAAP, which in the Company’s circumstances, are not materially different from the amounts that would be determined under provisions of Statementthe American Institute of Certified Public Accountants Statements of Position (SOP) No. 97-2, “Software“ Software Revenue Recognition,”Recognition”, and as amended by Statement of Position 98-9, “Software Revenue“Modification of SOP 97-2, Software revenue Recognition, With Respect to Certain Transactions,Transactions”. The Company also considers the provisions of CICA EIC 141, which is analogous to Staff Accounting Bulletin (SAB) 104, “Revenue Recognition in Financial Statements”, and CICA EIC 142, which is analogous to the Emerging Issues Task Force consensus on EITF 00-21, “Accounting for Revenue Arrangements with Multiple Elements,” in its accounting fordetermining the appropriate revenue recognition on delivery ofmethodology.

SOFTWARE LICENSE REVENUE

The Company recognizes software licenses.  Revenue is recognized on physical delivery for software licenses when undelivered elements are not essential tolicense revenue in accordance with the functionalityterms of the license.license agreement and when the following criteria as set out in SOP No. 97-2 are met:

•      persuasive evidence of an arrangement exists,

•      delivery has occurred,

•      the fee is fixed or determinable, and

•      collectibility is probable.

Software license revenue consists of fixed license fee agreements involving perpetual licenses.

Software license agreements may be part of multiple element arrangements that include consulting and implementation services.  When software licensesthese services are delivered and require additional elementsconsidered essential to the functionality of the license, such as consulting and implementation services, licensethe associated revenue is recognized on athe basis of the percentage of completion basis until allmethod as specified by contract accounting principles.  When these services requisiteare not considered essential to the functionality of the license, have been delivered and vendor-the entire arrangement fee is allocated to each element in the arrangement based on the respective vendor specific objective evidence (“VSOE”) of the fair value of each component exists.  Software licenseselement.  VSOE used in determining the fair value of license revenues is based on the price charged by the Company when the same element is sold in similar quantities to a customer of a similar size and nature.  VSOE used in determining fair value for installation, implementation and training based on the standard daily rates for the type of service being provided multiplied by the estimated time to complete each task.  VSOE used in determining the fair value of maintenance and support is based on the annual renewal rates.  The revenue allocable to the software license is recognized when the revenue criteria are granted for an indefinite term.met.  The revenue allocable to the consulting services is recognized as the services are performed.

 

IMPLEMENTATION, TRAINING & CONSULTING SERVICE FEES

The Company has agreements to provide maintenance, support,receives revenue from implementation of its product offerings, consulting services and training services. Customers are charged a fee based on time and expenses. Revenue from implementation, consulting service and training fees is recognized as the services are performed or deferred until contractually defined milestones are achieved or until customer acceptance has occurred, as the case may be, for such contracts.

PRODUCT MAINTENANCE & CUSTOMER SUPPORT FEES

The Company receives revenue from maintaining its products and the provision of on-going support services to customers. The maintenance and support fees are typically equal to a specified percentage of the customers’ license fee. If associated with the fixed fee license model, the maintenance revenues received are recorded as deferred revenue and recognized on a straight-line basis over the contract period.

Services revenue from maintenance and support agreements is recognized over the term of the agreement.  Revenue from training services is recognized when thesethe services are provided.

The Company also has agreements that principally include the provision ofperformed.  Maintenance and support revenues paid in advance are non-refundable and are recognized on a software license, but also contain additional deliverable elements, such as the provision of upgrades and hosting services. For these contracts, where vendor-specific objective evidence criteria for independent recognition of revenue elements do not exist, revenue is recognizedstraight-line basis over the term of the agreement, or three years when a revenue sharing arrangement exists. Revenue from net revenue sharing arrangementswhich typically is recorded as received.12 months.

 

b) E-commerce enabling agreementsSOFTWARE DEVELOPMENT FEES

Typically, development of software for our customers is provided based on a predetermined fixed rate basis.  Revenue is recognized as time is incurred throughout the development process.

ADB Systems International Ltd. F-10

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

HOSTING FEES

The Company has agreements where it has become an e-commerce enabler to various businesses.earns revenue from the hosting of customer websites.  Under our existing hosting contracts, we charge customers a recurring periodic flat fee.  The Company adopted the provisions of Statement of Position 97-2, “Software Revenue Recognition,” issued by the American Institute of Certified Public Accountants in its accounting for multiple element e-commerce enabling agreements.  The Company’s multiple element e-commerce enabling agreements are comprised of revenue for providing consulting, implementation, training, and hosting services.  Revenue from individual elements of each contract is recognized when vendor-specific objective evidence exists to determine the fair value of individual contract elements.  When vendor-specific objective evidence exists, consulting, implementation, and training elementsfees are recognized on a percentage of completion basis andas the hosting element is recognized ratably over the term of the contract.  In the absence of vendor-specific objective evidence, the Company defers and amortizes all revenue from individual contract elements ratably over the term of the contract.services are provided.

 

c) Sale of retail products and related activities

Revenue from product sales, commission, shipping, and handling was recognized when goods were shipped to customers.  The Company curtailed its on-line retail operations in October 2000.  During 2002, the non-consolidated investee, Bid.Com Ltd. resumed on-line retail activities (Note 19(a)).

DEFERRED REVENUE

Deferred revenue is comprised of the unrecognized portion of consulting and implementation fees received from maintenance and support e-commerce enabling agreements, and the unrecognized portion of license, installation, and consulting revenue on the sale of software licenses and related services.

 

CUSTOMER ACQUISITION COSTS

Customer acquisition costs are comprised of the calculated fair value of common share purchase warrants issued to customers in return for certain agreements.  These amounts are deducted from gross revenue to the extent that revenue is earned, and are otherwise included in general and administrative expenses.  The fair value of these warrants is calculated based on the Cox-Rubinstein binomial valuation model.

 

DEFERRED CHARGES

Deferred charges are comprised of expenditures incurred in obtaining a demand loan and the issuance of secured subordinated notes.  The expenditures relating to the demand loandeferred charges are amortized over the term of the loanunderlying notes on a straight-line basis; expenditures relatingbasis.  In accordance with Canadian GAAP, conversion of the underlying notes results in the allocation of the associated unamortized deferred charge to shareholders’ equity.  Under U.S. GAAP, note conversion results in the expensing of the associated unamortized deferred charge.  The impact of this difference in Canadian GAAP from U.S. GAAP is disclosed in these notes to the subordinated notes were recorded as a reduction to the equity componentfinancial statements under Reconciliation of those notes.United States GAAP (Note 24).

 

F-11The 2003 opening balance of deferred charges consisted of expenditures incurred in obtaining a demand loan.  This balance was completely amortized in 2003.


 

SECURED SUBORDINATED NOTES

Financial instruments that contain both a liability and an equity element are required to have the instrument’s component parts classified separately under Canadian GAAP.  The Company uses the Cox-Rubinstein binomial valuation model to determine the fair value of the conversion feature at the issue dates of convertible secured subordinated notes and discloses the liability and equity components separately on its balance sheet.  United StatesU. S. GAAP does not permit separate disclosure of different elements of a financial instrument in the financial statements.  The impact of this difference in United StatesU. S. GAAP from Canadian GAAP is disclosed in the notes to these financial statements under Reconciliation of U.S.United States GAAP (Note 20)24).

 

STOCK-BASED COMPENSATION

The Canadian Institute of Chartered Accountants issued Handbook section 3870, “Stock-based Compensation and Other Stock-based Payments,” effective January 1, 2002.  During the fourth quarter of fiscal 2003, the Company elected to adopt the fair value method for stock-based compensation on a prospective basis.  As a result, the annual financial statements reflect the cost of stock-based compensation to employees effective January 1, 2003.  The impact of this standard is disclosed in Note 911 to the financial statements.  The impact of Statement of Financial Accounting Standards (SFAS) 123, “Accounting for Stock-Based Compensation,” is disclosed in the notes to these financial statements under Reconciliation of U.S. GAAP (Note 20)24).

 

Prior to January 1, 2003, under Canadian GAAP, stock options granted to employees were not required to be recorded in the accounts of the Company.  Stock options to employees under U.S. GAAP are accounted for in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”.  Because options granted to employees have been fixed options with the exercise price equal to the market price of stock, under US GAAP no accounting recognition was given to stock options granted to employees at fair market value until they are exercised.

 

Stock-based compensation to third parties is recognized and recorded in the accounts of the Company at the fair market value of the equity instrument as determined by the Cox-Rubinstein binomial valuation model.

ADB Systems International Ltd. F-11

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

INCOME TAXES

The Company accounts for income taxes in accordance with the liability method.  The determination of future tax assets and liabilities is based on differences between the financial statement and income tax bases of assets and liabilities, using substantively enacted tax rates in effect for the period in which the differences are expected to reverse.  Future tax assets are recorded to recognize tax benefits only to the extent that, based on available evidence, it is more likely than not that they will be realized.

 

USE OF SIGNIFICANT ACCOUNTING ESTIMATES

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods.  Estimates are used when determining items such as the allowance for doubtful accounts, the fair value assigned to the debt and equity components of the secured subordinated notes and the expected requirements for non-operational funding in 2005.  Actual results could differ from those estimates.

 

4.CAPITAL ASSETS

 

 

2003

 

2002

 

 

2004

 

2003

 

 

Cost

 

Accumulated
Amortization

 

Net Book
Value

 

Cost

 

Accumulated
Amortization

 

Net Book
Value

 

 

Cost

 

Accumulated Amortization

 

Net Book Value

 

Cost

 

Accumulated Amortization

 

Net Book Value

 

 

(in thousands)

 

 

(in thousands)

 

Computer hardware

 

$

2,588

 

$

2,428

 

$

160

 

$

2,659

 

$

2,423

 

$

236

 

 

$

2,601

 

$

2,547

 

$

54

 

$

2,588

 

$

2,428

 

$

160

 

Computer software

 

28

 

—

 

28

 

—

 

—

 

—

 

 

28

 

28

 

—

 

28

 

—

 

28

 

Furniture and fixtures

 

411

 

333

 

78

 

465

 

268

 

197

 

 

405

 

343

 

62

 

411

 

333

 

78

 

Leasehold improvements

 

151

 

151

 

—

 

151

 

141

 

10

 

 

27

 

1

 

26

 

151

 

151

 

—

 

 

$

3,178

 

$

2,912

 

$

266

 

$

3,275

 

$

2,832

 

$

443

 

 

$

3,061

 

$

2,919

 

$

142

 

$

3,178

 

$

2,912

 

$

266

 

 

F-12During 2004, the Company recorded capital asset amortization in the amount of $160,000 (2003 - $162,000)


 

5.DEFERRED CHARGES

 

During 2002,2004, financing costs in the Company incurred $874,000amount of expenditures$15,000, $162,000 and $23,000 associated with the liability component of the Series F, Series G and Series H notes, respectively were recorded as deferred charges.  The financing costs for the Series G notes include $33,000 representing the allocation of the fair value of compensation options issued in obtaining a demand loan (Note 6)conjunction with these notes (See Note 6 (b)).  These expenditures wereThe deferred charges are being amortized on a straight-line basis over the term of the loan, which matured on June 30, 2003.  In 2002, the Company also incurred financing costs of $150,000 in obtaining convertible debt financing (Note 7).  In 2003, deferred charges were reduced by an amortization expense of $513,000 with a reduction of $511,000 occurring in 2002 comprised of an amortization expense of $361,000 and a reduction to the equity component of the secured notes of $150,000.

6.DEMAND LOANunderlying debt.

 

During the year ended December 31, 2002,2004, conversion of the Company entered into a series of agreements whichSeries F notes resulted in the completionallocation of $13,000 in unamortized deferred charges to contributed surplus.  For 2004, amortization of deferred charges in the amount of $32,000 (2003 - $513,000) was recorded and included in depreciation and amortization expense.

The following table summarizes the transactions within deferred charges.

 

 

2004

 

2003

 

 

 

(in thousands)

 

Opening balance

 

$

—

 

$

513

 

Series F financing costs

 

15

 

—

 

Series G financing costs

 

162

 

—

 

Series H financing costs

 

23

 

—

 

Amortization

 

(32

)

(513

)

Allocation to contributed surplus

 

(13

)

—

 

Closing balance

 

$

155

 

$

—

 

ADB Systems International Ltd. F-12

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

6.SECURED SUBORDINATED NOTES

a) During the year ended December 31, 2004, the Company issued Series F secured subordinated notes with a face value of $500,000.  The Series F notes have an annual rate of interest of 7 percent paid quarterly in arrears, mature May 19, 2007 and are convertible into equity units at a price of $0.31 per unit.  Each equity unit consists of one common share and one half of a seriesshare-purchase warrant with an exercise price of transactions (collectively$0.50.  The share-purchase warrants expire on May 19, 2007.  The Series F secured subordinated notes will automatically convert into units when the “Transaction”) wherebyshare price of the Company receivedcloses above $0.70 for five consecutive trading days during the term.  Holders may convert the notes into units at anytime following a secured demand loan infour-month hold period.  If the aggregateholder does not convert and no automatic conversion takes place, the Company must repay the principal amount of $2,000,000.in cash.  The loan carried an interest rate of 12 percent compounded monthly, and wasSeries F notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

As required by Canadian GAAP, the Company has separated the liability and a pledgeequity components of the sharesSeries F secured subordinated notes.  The Company has determined the fair value of the liability component of the Series F notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s Norwegian subsidiary.  The loan matured on June 30, 2003.underlying rate of borrowing.  The Company could, at its discretion, repayhas determined the loan in cash or transfer to the lender 100 percentfair value of the issued shares of its investment in an associated company in full settlementconversion feature at the issue date of the outstanding principal amountSeries F notes using the Cox-Rubinstein binomial valuation model.  The resulting pro rata fair values of the liability component of the notes and accruedthe conversion features of the units, comprised of shares and attached warrants, was $286,000, $159,000 and $55,000, respectively.  The liability component will be accreted to $500,000 over the term of the Series F notes through the recording of a non-cash interest then owing toexpense until such date at which the lender (Note 19(a)).underlying notes are converted into common shares.

 

On June 30, 2003, the Company exercised its option to transfer its investment in the associated company, which had a nominal carrying value, to the lender in full settlement of the outstanding principal and accrued interest amounts.  This transfer resulted in a gain on settlement of the demand loanFinancing costs in the amount of $2,195,000.$26,000 were incurred in the issuance of the Series F notes.  Financing costs of $15,000 attributed to the liability component of the notes were allocated to deferred charges (See Note 5).  Financing costs of $11,000 attributed to the equity portions of the notes were recorded as a reduction to shareholders’ equity.

 

7.SECURED SUBORDINATED NOTESDuring the year, all of the Series F notes were converted into equity units.  (See table below.)

 

a)b) During the year ended December 31, 2004, the Company issued Series G secured subordinated notes with a face value of $1,710,000.  The Series G notes were issued to private investors including an amount totaling $170,000 issued to directors of the Company. The Series G notes mature June 15, 2007, have an annual rate of interest of 7 percent payable upon the earlier of maturity and conversion and are convertible into equity units at a price of $0.31 per unit.  Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50.  The share-purchase warrants expire on June 15, 2008.  The Series G secured subordinated notes will automatically convert into units when the volume-weighted average share price of the Company closes above $0.70 for 20 consecutive trading days during the term.  Holders may convert the notes into units at anytime following a four-month hold period.  If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. The Series G notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

As required by Canadian GAAP, the Company has separated the liability and equity components of the Series G secured subordinated notes.  The Company has determined the fair value of the liability component of the Series G notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s underlying rate of borrowing.  The Company has determined the fair value of the conversion feature at the issue date of the Series G notes using the Cox-Rubinstein binomial valuation model.  The resulting pro rata fair values of the liability component of the notes and the conversion features of the units, comprised of shares and attached warrants, was $959,000, $539,000 and $212,000, respectively.  The liability component will be accreted to $1,710,000 over the term of the Series G notes through the recording of a non-cash interest expense until such date at which the underlying notes are converted into common shares.

ADB Systems International Ltd. F-13

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

Financing costs in the amount of $230,000 were incurred in the issuance of the Series G notes.  Financing costs of $129,000 attributed to the liability component of the notes were allocated to deferred charges (See Note 5).  Financing costs of $101,000 attributed to the equity portions of the notes were recorded as a reduction to shareholders’ equity.

In addition to the financing costs described above, the Company issued to First Associates Investment Inc. (“First Associates”) an option to purchase up to 485,000 equity units at a purchase price of $0.31 per unit.  The option expires on June 15, 2006.  Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50.  The share-purchase warrants expire on June 15, 2008.  Using the Cox-Rubinstein binomial valuation model, the Company has determined the fair value of these equity units to be $59,000.  The portion of the fair value of these options, in the amount of $33,000, attributable to the liability component of the notes was allocated to deferred charges.  The remaining portion, in the amount of $26,000, attributable to the equity components of the notes was recorded as a reduction to shareholders’ equity.

Subsequent to the issuance of the Series G notes, the interest rate payable on the notes was retroactively increased to 11 percent.  The increase in the interest rate was a condition of the issuance of the Series H notes (See c) below).

c) During the year ended December 31, 2004, the Company issued Series H secured subordinated notes with a face value of $520,000.  The Series H notes were issued to private investors including an amount totaling $270,000 issued to directors of the Company.  The Series H notes mature October 21, 2007, have an annual rate of interest of 11 percent payable upon the earlier of maturity and conversion and are convertible into equity units at a price of $0.20 per unit.  Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.40.  The share-purchase warrants expire on October 21, 2008.  The Series H secured subordinated notes will automatically convert into units when the share price of the Company closes at or above $0.45 for 10 consecutive trading days during the term.  Holders may convert the notes into units at anytime following a four-month hold period.  If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash.  In order to obtain the required approvals to issue the Series H notes, the Company retroactively increased the interest rate on the Series G notes from an annual rate of 7 percent to an annual rate of 11 percent. The Series H notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

As required by Canadian GAAP, the Company has separated the liability and equity components of the Series H secured subordinated notes.  The Company has determined the fair value of the liability component of the Series H notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s underlying rate of borrowing.  The Company has determined the fair value of the conversion feature at the issue date of the Series H notes using the Cox-Rubinstein binomial valuation model.  The resulting pro rata fair values of the liability component of the notes and the conversion features of the units, comprised of shares and attached warrants, was $282,000, $184,000 and $54,000, respectively.  The liability component will be accreted to $520,000 over the term of the Series H notes through the recording of a non-cash interest expense until such date at which the underlying notes are converted into common shares.

Financing costs in the amount of $43,000 were incurred in the issuance of the Series H notes.  Included in the financing costs was the incremental interest expense associated with the retroactive increase of the interest rate on the Series G notes.  Financing costs of $23,000 attributed to the liability component of the notes were allocated to deferred charges (See Note 5).  Financing costs of $20,000 attributed to the equity portions of the notes were recorded as a reduction to shareholders’ equity.

ADB Systems International Ltd. F-14

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

d) During the year ended December 31, 2003, the Company issued Series E secured subordinated notes with a face value of $1.0 million for net proceeds of $994,000.  The Series E notes have an annual rate of interest of 11percent that is paid quarterly in arrears, mature August 19, 2006 and are convertible into equity units at a price of $0.35 per unit.  Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50.  The Series E secured subordinated notes will automatically convert into units when the share price of the Company closes above $0.70 for five consecutive trading days during the term.  Note holders may convert into units at anytime following a four-month hold period.  If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount to the holders of the Series E secured subordinated notes in cash.  As part of this private placement, the Company issued 30,000 common share-purchase warrants to an associate of Stonestreet Limited Partnership (“Stonestreet”) in consideration for professional fees.  Each such warrant entitles the holder to purchase one common share of the Company for $0.50 at any time up to and including August 18, 2006. The Series E notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.

 

The Series E notes were issued to private investors including an amount totaling $100,000 issued to directors and/or senior officers of the Company.  Costs in the amount of $6,000 associated with the issuance of the Series E secured subordinated notes were recorded as a reduction of the equity component of these notes.

 

As required by Canadian GAAP, the Company has separated the liability and equity components of the Series E secured subordinated notes.  The Company has determined the fair value of the debt component of the Series E notes by calculating the present value of the associated cash flows, using a discount rate that reflects the Company’s underlying rate of borrowing.  The Company has determined the fair value of the conversion feature at the issue date of the Series E notes using the Cox-Rubinstein binomial valuation model.  The resulting pro rata fair value of the liability component of the secured subordinated notes and the conversion features of the units, comprised of shares and attached warrants, was $596,000, $292,000 and $106,000, respectively.  The liability component will be accreted to $1 million over the term of the Series E notes through the recording of non-cash interest expense until such date at which the underlying notes are converted into common shares.

 

F-13

ADB Systems International Ltd. F-15

 

b) DuringNotes to the yearConsolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002 the Company issued a total of $1.12 million
(in principal of secured subordinated notes (collectively the “Notes”) in four series.  Series A, B, and C notes were issued to Stonestreet and Series D notes were issued to private investors including directors and/or senior officers.  Series A, B, and D notes are due December 31, 2004, at an interest rate of 8 percent.  Series C notes are due December 31, 2004, and bear interest at 8 percent only from and after maturity or in an event of default.  On October 22, 2002, after obtaining shareholder approval, Series A, B, and D notes became convertible into equity units at $0.12 per unit at the option of the holder.  Each Series A, B, and D equity unit consists of one common share and one-half common share purchase warrant, with each whole warrant exercisable into one common share at $0.14.  Series C notes also became convertible into common shares at a conversion price of $0.12 per share at the option of the holder or at the option of the Company.

The Company issued $120,000 in Series C notes in exchange for the waiver of certain US registration rights granted to Stonestreet pursuant to a subscription agreement dated April 25, 2002.  Accordingly, the Company has recorded the issuance of the Series C notes as secured subordinated notes in shareholders’ equity. 

The Series D secured subordinated notes included $135,000 issued to four directors or senior officers of the Company.

As part of this private placement, the Company issued 150,000 common share purchase warrants to an associate of Stonestreet in partial consideration for securing such placement and for due diligence services.  Each such warrant entitles the holder to purchase one common share of the Company for $0.14 at any time up to and including December 31, 2004.

As required by Canadian GAAP, the Company has separated the liability and equity components of the Series A, B, and D secured subordinated notes.  Using the Cox-Rubinstein binominal valuation model, the Company has determined the fair value of the conversion feature and attached warrants at the issue dates of the secured subordinated notes.  The fair values of the conversion feature of the units, comprised of shares attached, warrants and liability components of the secured subordinated notes issued were $636,000, $300,000 and $64,000 respectively.  The $64,000 liability component will be accreted to $1 million over the term of the Series A, B, and D notes through the recording of non cash interest expense until such date at which the underlying notes are converted into common shares or mature.dollars)

In fiscal 2002, the Company incurred $150,000 of costs associated with the issuance of the Series A, B and D secured subordinated notes, which was recorded as a reduction of the equity component of these notes.

c)e) The following summarizes the nominal and fair values of the liability and equity components of the Series A through EH secured subordinated notes.

 

Secured subordinated notes

 

 

2004

 

2003

 

 

2003

 

2002

 

 

Nominal
Value

 

Fair
Value

 

Nominal
 Value

 

Fair
Value

 

 

Nominal
Value

 

Fair
Value

 

Nominal
Value

 

Fair
Value

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

Opening balance

 

$

205

 

$

34

 

$

—

 

$

—

 

 

$

1,115

 

$

721

 

$

205

 

$

34

 

Issuance of notes

 

1,000

 

596

 

1,120

 

64

 

Issuance of notes:

 

 

 

 

 

 

 

 

 

Series E

 

—

 

—

 

1,000

 

596

 

Series F

 

500

 

286

 

—

 

—

 

Series G

 

1,710

 

959

 

—

 

—

 

Series H

 

520

 

282

 

—

 

—

 

Non-cash interest

 

—

 

112

 

—

 

21

 

 

—

 

266

 

—

 

112

 

Conversion of notes

 

(90

)

(21

)

(915

)

(51

)

 

 

 

 

 

 

 

 

 

Series D

 

(115

)

(96

)

(90

)

(21

)

Series E

 

(625

)

(428

)

—

 

—

 

Series F

 

(500

)

(306

)

—

 

—

 

Closing balance

 

$

1,115

 

$

721

 

$

205

 

$

34

 

 

$

2,605

 

$

1,684

 

$

1,115

 

$

721

 

 

F-14


Conversion features on secured subordinated notes including conversion features of attached warrants

 

 

2004

 

2003

 

 

2003

 

2002

 

 

Common
Shares

 

Fair
Value

 

Common
Shares

 

Fair
Value

 

 

Common
Shares

 

Fair
Value

 

Common
Shares

 

Fair
Value

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

Opening balance

 

2,562

 

$

175

 

—

 

$

—

 

 

5,723

 

$

497

 

2,562

 

$

175

 

Issuance of notes

 

4,286

 

398

 

13,500

 

936

 

 

 

 

 

 

 

 

 

 

Series E

 

—

 

—

 

4,286

 

398

 

Series F

 

2,419

 

203

 

—

 

—

 

Series G

 

8,274

 

624

 

—

 

—

 

Series H

 

3,900

 

218

 

—

 

—

 

Conversion of notes

 

(1,125

)

(76

)

(10,938

)

(761

)

 

 

 

 

 

 

 

 

 

Series D

 

(1,437

)

(99

)

(1,125

)

(76

)

Series E

 

(2,679

)

(248

)

 

 

 

 

Series F

 

(2,419

)

(203

)

 

 

 

 

Closing balance

 

5,723

 

$

497

 

2,562

 

$

175

 

 

13,781

 

$

992

 

5,723

 

$

497

 

 

ADB Systems International Ltd. F-16

8.Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

7.INCOME TAXES

 

The Company adopted accounting for income taxes under the liability method.  Under the liability method, a future tax asset is recorded based upon tax losses carried forward and differences in tax and accounting values in the Company’s assets and liabilities.  The tax asset is reduced by a valuation allowance to the extent that it is more likely than not that the asset would not be realized.  The valuation allowance will be reviewed and adjusted as appropriate for each reporting period.  At December 31, 20032004 and 2002,2003, the Company established the valuation allowance at 100 percent of the future tax asset.

 

 

2003

 

2002

 

 

2004

 

2003

 

 

(in thousands)

 

 

(in thousands)

 

FUTURE TAX ASSET

 

 

 

 

 

 

 

 

 

 

Tax losses carried forward

 

$

3,229

 

$

4,215

 

 

$

5,618

 

$

3,229

 

Difference in tax and accounting valuations for capital assets and investments

 

55

 

(305

)

 

207

 

55

 

 

3,284

 

3,910

 

 

5,825

 

3,284

 

Valuation allowance

 

(3,284

)

(3,910

)

 

(5,825

)

(3,284

)

Future tax asset

 

$

—

 

$

—

 

 

$

—

 

$

—

 

 

 

 

 

 

 

 

 

 

 

PROVISION FOR INCOME TAXES

 

 

 

 

 

 

 

 

 

 

Income taxes at statutory rate

 

$

(467

)

$

(2,781

)

 

$

(1,388

)

$

(467

)

Adjustments to loss

 

(316

)

—

 

 

2,195

 

(316

)

Net reduction in tax rates

 

(896

)

—

 

 

—

 

(896

)

Reduction to valuation allowance on future tax asset

 

1,212

 

—

 

(Increase) reduction to valuation allowance on future tax asset

 

(2,541

)

1,212

 

Tax losses carried forward

 

226

 

2,665

 

 

1,412

 

226

 

Difference in tax and accounting valuations for capital assets and investments

 

360

 

111

 

 

152

 

360

 

Permanent differences for tax and accounting income

 

(119

)

5

 

 

170

 

(119

)

Provision for income taxes

 

$

—

 

$

—

 

 

$

—

 

$

—

 

 

F-15The $2.195 million adjustment to loss represents the difference between estimated 2003 loss carry-forwards and actual 2003 loss carry-forwards.  The $316,000 adjustment to loss represents the difference between estimated 2002 loss carry-forwards and actual 2002 loss carry-forwards.


 

Tax Loss Carryforwardsloss carry-forwards at December 31, 20032004 expire as follows:

 

 

(in thousands)

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

2009

 

 

$

3,157

 

 

 

$

1,659

 

2010

 

 

3,424

 

 

 

8,418

 

2011

 

 

1,116

 

 

 

981

 

2012

 

 

966

 

 

 

—

 

2013

 

 

282

 

 

 

—

 

Tax loss carryforwards that do not expire (a)

 

 

4,581

 

2014

 

 

3,569

 

Tax loss carry-forwards that do not expire (a)

 

 

6,242

 

 

 

$

13,526

 

 

 

$

20,869

 

 

(a)   Under Irish local tax laws, tax loss carryforwardscarry-forwards do not expire.

 


ADB Systems International Ltd. F-17

9.Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

8.SHARE CAPITAL

 

a)            AUTHORIZED

 

Unlimited number of common shares

Unlimited number of preference shares – issuable in series

 

b)            COMMON SHARES

 

 

2003

 

2002

 

 

2004

 

2003

 

 

Number

 

Amount

 

Number

 

Amount

 

 

Number

 

Amount

 

Number

 

Amount

 

 

(in thousands of shares and dollars)

 

 

(in thousands of shares and dollars)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Opening balance

 

50,140

 

$

95,633

 

38,185

 

$

93,568

 

 

59,423

 

$

97,674

 

50,140

 

$

95,633

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares issued pursuant to:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Private placement

 

5,000

 

930

 

5,181

 

1,254

 

Conversion of debentures

 

4,357

 

1,227

 

750

 

72

 

Exercise of warrants

 

920

 

195

 

3,313

 

703

 

Exercise of options

 

39

 

12

 

30

 

11

 

 

72

 

26

 

39

 

12

 

Private placement

 

5,181

 

1,254

 

3,300

 

945

 

Exercise of warrants

 

3,313

 

703

 

1,000

 

550

 

Conversion of debentures

 

750

 

72

 

7,625

 

559

 

 

 

 

 

 

 

 

 

 

Re-issuance of treasury shares

 

98

 

—

 

—

 

—

 

Closing balance

 

59,423

 

$

97,674

 

50,140

 

$

95,633

 

 

69,870

 

$

100,052

 

59,423

 

$

97,674

 

During 2004, the issuance of common shares generated cash proceeds of $903,000 (2003 - $1.458 million) as follows: $749,000 (2003 - $982,000) from private placement issuances, $129,000 (2003 – $464,000) from the exercise of warrants and $25,000 (2003 - $12,000) from the exercise of options.

An unclaimed certificate for 98,000 common shares previously issued from treasury in the 2001 acquisition of ADB Systemer ASA, and not included in the number of shares outstanding, was reissued during 2004.

 

The conversion of the remaining secured subordinated notes would result in the issuance of 958,000 (2002Nil (2003 – 1,708,000)958,000) common shares for Series A, B and D notes, and 2,857,000 (20021,071,000 (2003 – Nil)2,857,000) common shares for Series E notes, 5,516,000 common shares for Series G notes and 2,600,000 common shares for Series H notes.

 

F-16


c)            STOCK OPTIONSPRIVATE COMMON SHARE PLACEMENT

 

The Canadian Institute of Chartered Accountants issued Handbook section 3870, “Stock-based Compensation and Other Stock-based Payments,” effective January 1, 2002.  During the fourth quarter of fiscal 2003,On December 6, 2004, the Company elected to adopt the fair value method for stock-based compensation oncompleted a prospective basis. As a result, the annual financial statements reflect the stock-based compensation expense to employees effective January 1, 2003.

(i)             Stock options are comprised of the following components:

 

 

2003

 

2002

 

 

 

Number

 

Amount

 

Number

 

Amount

 

 

 

(in thousands of options and dollars)

 

 

 

 

 

 

 

 

 

 

 

Employees

 

2,645

 

$

782

 

2,793

 

$

590

 

Non-employees

 

27

 

116

 

253

 

116

 

Total

 

2,672

 

$

898

 

3,046

 

$

706

 

(ii)          The Company has a stock option plan which provides for the issuance of stock options to employees, which may expire as much as 10 years from the date of grant, at prices not less than the fair market value of the common shares on the date of grant.  The aggregate exercise price for employee options outstanding at December 31, 2003 was approximately $1.8 million (2002 – $5.2 million).  The Management Resources and Compensation Committee of the Board of Directors reserves the right to attach vesting periods to stock options granted.  Certain of the stock options outstanding at the end of 2003 are exercisable immediately, while the remainder have vesting periods attached which range from six months to 36 months. The options expire between 2003 and 2006. 

A summary of changes in the stock option plan for the two years ended December 31, 2003 is as follows:

 

 

Number of Options

 

Weighted Average
Exercise Price

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Opening balance

 

2,793

 

2,884

 

$

1.84

 

$

5.19

 

Granted

 

1,095

 

1,299

 

0.37

 

0.43

 

Exercised

 

(39

)

(30

)

0.30

 

0.36

 

Cancelled

 

(1,204

)

(1,360

)

3.38

 

6.78

 

Closing balance

 

2,645

 

2,793

 

$

0.68

 

$

1.84

 

Exercisable, end of year

 

2,057

 

1,981

 

$

0.74

 

$

2.51

 

Options remaining for issuance under stock option plan

 

1,224

 

853

 

 

 

 

 

F-17


Range of
Exercise
Prices

 

Number
Outstanding at
December 31, 2003

 

Weighted
Average
Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

Number
Exercisable at
December 31, 2003

 

Weighted
Average
Exercise Price

 

 

 

(in thousands)

 

 

 

 

 

(in thousands)

 

 

 

$0.22-$0.33

 

178

 

2.1 years

 

$

0.32

 

178

 

$

0.32

 

$0.34-$0.51

 

2,266

 

1.4 years

 

$

0.40

 

1,686

 

$

0.40

 

$0.52-$0.78

 

2

 

1.0 years

 

$

0.76

 

2

 

$

0.76

 

$0.99-$1.48

 

9

 

0.5 years

 

$

1.41

 

7

 

$

1.41

 

$1.83-$2.74

 

146

 

0.1 years

 

$

2.62

 

146

 

$

2.62

 

$3.91-$5.86

 

28

 

0.6 years

 

$

5.02

 

28

 

$

5.02

 

$15.33-$23.00

 

16

 

0.2 years

 

$

23.00

 

10

 

$

23.00

 

 

 

2,645

 

 

 

 

 

2,057

 

 

 

(iii)            The Company also had stock options outstanding to third parties at December 31, 2003.  The aggregate exercise price for third-party stock options outstanding at December 31, 2003 was $69,000 (2002 – $730,000).  These options expire in 2004.  A summary of changes in the stock options to third parties for the two years ended December 31, 2003 is as follows: 

 

 

Number of Options

 

Weighted Average
Exercise Price

 

 

 

2003

 

2002

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Opening balance

 

253

 

289

 

$

2.88

 

$

5.13

 

Granted

 

—

 

2

 

—

 

0.34

 

Exercised

 

—

 

—

 

—

 

—

 

Cancelled

 

(226

)

(38

)

2.91

 

17.76

 

Closing balance

 

27

 

253

 

$

2.56

 

$

2.88

 

Exercisable, end of year

 

27

 

253

 

$

2.56

 

$

2.88

 

d) SHARE-PURCHASE WARRANTS

A summary of changes in the warrants issued and vested for the two years ended December 31, 2003 is as follows:

 

 

2003

 

2002

 

 

 

Number

 

Amount

 

Number

 

Amount

 

 

 

(in thousands)

 

Opening balance

 

6,121

 

$

1,599

 

1,300

 

$

1,349

 

Issued to key customer (Note 9(g))

 

—

 

226

 

2,000

 

—

 

Issued in private equity placement (Note 9 (e))

 

2,733

 

—

 

1,000

 

—

 

Issued upon conversion of debt (Note 9(h))

 

375

 

27

 

3,313

 

239

 

Issued in lieu of fees (Note 7 and 9(e))

 

30

 

—

 

200

 

11

 

Cancelled (Note 9(e), (f) and (g))

 

(608

)

(1,289

)

(692

)

—

 

Exercised

 

(3,313

)

(239

)

(1,000

)

—

 

Closing balance

 

5,338

 

$

324

 

6,121

 

$

1,599

 

The conversion of the remaining secured subordinated notes would resulttransaction resulting in the issuance of 479,000 (2002 – 854,000)5,000,000 shares at a price of $0.20 per share and 5,000,000 common share-purchase warrants exercisable into one common share at a price of $0.35 for Series A, Bgross proceeds of $1,000,000.  The warrants expire on December 6, 2008.  Gross proceeds were comprised of $800,000 in cash and D notes,$200,000 in legal services.  The $200,000 was applied, in part, to outstanding payables and 1,429,000 (2002 – Nil)the remainder was recorded as a prepaid retainer for legal services.  Issuance costs in the amount of $70,000 were incurred, including $19,000 representing the fair value of 150,000 compensation options issued to First Associates.  The compensation options are exercisable into 150,000 equity units at a price of $0.20 per unit.  Each equity unit consists of one common share and one common share-purchase warrantswarrant with an exercise price of $0.35 and an expiry date of December 6, 2008.  The compensation options expire on December 6, 2006.  Included in this private placement were 100,000 shares issued to a director of the Corporation for Series E notes.gross proceeds of $20,000.

 

ADB Systems International Ltd. F-18

F-18Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


e) PRIVATE COMMON SHARE PLACEMENT

 

On June 26, 2003, the Company completed a transaction resulting in the issuance of 4,879,000 common shares at a price of $0.24 and 2,733,000 common share-purchase warrants exercisable into one common share at $0.40 for net proceeds of $1.148 million.  The warrants expire on June 26, 2005.  This private placement included the issuance of 693,000 common shares and 347,000 common share-purchase warrants in settlement of an account payable in the amount of $166,000.  Included in this private placement were 2,146,000 shares issued to a director and officer of the Company for total net proceeds of $505,000.  None of the 2,733,000 warrants had been converted into common shares at December 31, 2003.

 

On September 19, 2003 the Company issued 302,250 shares in settlement of an account payable in the amount of $106,000.

 

On April 25, 2002, the Company entered into an agreement with Stonestreet for a $1.1 million private placement resulting in net proceeds of $945,000 after deducting costs of issue of approximately $155,000.  As a result, the Company issued 3.3 million common shares and 1 million common share-purchase warrants exercisable into common shares at US$0.35 per share.

 

On December 17, 2002, Stonestreet exercised all of these warrants for proceeds of $550,000.  Pursuant to the April 25, 2002 private placement, the Company issued 50,000 share-purchase warrants to an associate of Stonestreet for partial consideration in securing the funding and due diligence services.  These warrants expire on April 25, 2005 and are exercisable into common shares at US$ 0.35 per common share.

 

Asd)The following table sets forth the computation of basic and diluted loss per share.

 

 

2004

 

2003

 

2002

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

Net Loss (numerator for basic loss per share applicable to common shares)

 

$

(5,104

)

$

(2,815

)

$

(9,364

)

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares (denominator for basic loss per share)

 

61,938

 

54,324

 

41,968

 

 

 

 

 

 

 

 

 

Basic loss per share

 

$

(0.08

)

$

(0.05

)

$

(0.22

)

For each fiscal year, the Company excluded the effect of all convertible debt, stock options and share-purchase warrants, as their impact would have been anti-dilutive.

9.CONTRIBUTED SURPLUS

During the year ended December 31, 2004, recorded value of $6,000 (2003 - $1,289,000) related to expired warrants was allocated from warrants to contributed surplus.

During the year ended December 31, 2004, conversion of the Series F secured subordinated notes resulted in the reduction of contributed surplus by $13,000 due to the allocation of unamortized deferred charges.  (See Note 5.)


ADB Systems International Ltd. F-19

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

10.WARRANTS

a)A summary of changes in the warrants issued and vested for the two years ended December 31, 2004 is as follows:

 

 

2004

 

2003

 

 

 

Number

 

Amount

 

Number

 

Amount

 

 

 

(in thousands)

 

Opening balance

 

5,338

 

$

324

 

6,121

 

$

1,599

 

Issued to key customer (Note 10 (c))

 

—

 

—

 

—

 

226

 

Issued in private equity placement (Note 8 (c))

 

5,000

 

—

 

2,733

 

—

 

Issued upon conversion of debt (Note 10 (b))

 

2,178

 

153

 

375

 

27

 

Issued in lieu of fees

 

—

 

—

 

30

 

—

 

Cancelled

 

(84

)

(6

)

(608

)

(1,289

)

Exercised

 

(920

)

(66

)

(3,313

)

(239

)

Closing balance

 

11,512

 

$

405

 

5,338

 

$

324

 

The conversion of the remaining secured subordinated notes would result in the issuance of a private placement ofNil (2003 – 479,000) common shares in 2000,share-purchase warrants for Series A, B and D notes, 536,000 (2003 – 1,429,000) common share-purchase warrants for Series E notes, 2,758,000 common share-purchase warrants for Series G notes and 1,300,000 common share-purchase warrants for Series H notes.

b)CONVERTIBLE SECURED SUBORDINATED DEBENTURES

During the year, the Company issued 180,158a total of 2,178,000 share-purchase warrants as follows: 479,000 with an exercise price of US$5.36$0.14 per share.  Theseshare and 1,699,000 with an exercise price of $0.50 per share (2003 – 375,000 with an exercise price of $0.14 per share) as the result of the conversion of secured subordinated notes.

During the year, 84,000 share-purchase warrants, that arose from of the conversion of Series D secured subordinated notes, expired and as a result were cancelled.

c)STRATEGIC MARKETING AGREEMENT

On December 13, 2002, the Company issued 2 million warrants convertible into common shares of the Company to a customer at an exercise price of $0.45 per warrant.  The warrants expired on June 16,2002.  January 5, 2005.  Warrants that have vested are to be automatically exercised when the share price of the Company closes at or above $1.02 for three consecutive trading days.  The vesting of warrants is based on achieving a number of performance objectives associated with the GE Asset Manager LLC joint venture (See Note 21).

 

f) During 2003, a total of 1.25 million of the above warrants vested; 250,000 warrants vested when three initial customers of the joint venture were identified and the remaining 1 million warrants vested upon the legal establishment of the joint venture.  The remaining 750,000 warrants have not vested as at December 31, 2004.  Vesting was contingent upon the achievement of certain performance and business related goals, which are currently undefined, associated with the GE Asset Manager joint venture.

ADB Systems International Ltd. F-20

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

d)ACQUISITION OF ADB SYSTEMER ASA

 

On October 11, 2001, the Company acquired 98.3 percent of the outstanding common shares of ADB Systemer ASA.  As a result of the acquisition, the Company issued 607,600 share-purchase warrants with a strike price of two Norwegian krone, in exchange for 700,000 share purchase warrants in ADB Systemer ASA.  These warrants retained all of the characteristics of the original warrants and had specific exercise dates of March 31, 2002 and March 31, 2003, expiring March 31, 2003 (see Note 16)20).  All of the 607,600 warrants were cancelled on March 31, 2003.

 

g) 11.STRATEGIC MARKETING AGREEMENTSTOCK OPTIONS

 

On March 28, 2000, pursuant to a strategic marketing agreement with onea)Stock options are comprised of its key customers, the Company issued 512,500 common share-purchase warrants at a price of $15.80 per warrant. Each common share-purchase warrant entitled the holder to acquire one common share.  These warrants had been fully vested and were cancelled on December 13, 2002. following components:

 

 

2004

 

2003

 

 

 

Number

 

Amount

 

Number

 

Amount

 

 

 

(in thousands of options and dollars)

 

 

 

 

 

 

 

 

 

 

 

Employees

 

853

 

$

820

 

2,645

 

$

782

 

Non-employees

 

—

 

116

 

27

 

116

 

Total

 

853

 

$

936

 

2,672

 

$

898

 

b)EMPLOYEE STOCK OPTIONS

 

On December 13, 2002,The Company has a stock option plan which provides for the Company issued 2 million warrants convertible intoissuance of stock options to employees, which may expire as much as 10 years from the date of grant, at prices not less than the fair market value of the common shares on the date of the Company to this customer at angrant.  The aggregate exercise price of $0.45 per warrant under a two-year term from date of issuance.  Warrants that have vested are to be automatically exercised when the share price of the Company closes at or above $1.02 for three consecutive trading days.  The vesting of warrants is based on achieving a number of performance objectives associated with the GE Asset Manager LLC joint venture (See Note 17). 

During 2003, a total of 1.25 million of the above warrants vested; 250,000 warrants vested when three initial customers of the joint venture were identified and the remaining 1 million warrants vested upon the legal establishment of the joint venture.  The remaining 750,000 warrants have not vested asemployee options outstanding at December 31, 2003.  Vesting is contingent upon2004 was approximately $296,000 (2003 – $1.8 million).  The Management Resources and Compensation Committee of the achievementBoard of certain performanceDirectors reserves the right to attach vesting periods to stock options granted.  All of the stock options outstanding at the end of 2004 are exercisable immediately.  The options expire between 2005 and business related goals, which are currently undefined, associated with the GE Asset Manager joint venture.2006.

 

F-19A summary of changes in the stock option plan for the two years ended December 31, 2004 is as follows:

 

 

Number of Options

 

Weighted Average
Exercise Price

 

 

 

2004

 

2003

 

2004

 

2003

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Opening balance

 

2,645

 

2,793

 

$

0.68

 

$

1.84

 

Granted

 

—

 

1,095

 

—

 

0.37

 

Exercised

 

(72

)

(39

)

0.34

 

0.30

 

Cancelled

 

(1,720

)

(1,204

)

0.84

 

3.38

 

Closing balance

 

853

 

2,645

 

$

0.35

 

$

0.68

 

Exercisable, end of year

 

853

 

2,057

 

$

0.35

 

$

0.74

 

Options remaining for issuance under stock option plan

 

3,191

 

1,224

 

 

 

 

 

ADB Systems International Ltd. F-21

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


Range of
Exercise
Prices

 

Number Outstanding and Exercisable at December 31, 2004

 

Weighted
Average
Remaining
Contractual
Life

 

Weighted
Average
Exercise
Price

 

 

 

(in thousands)

 

 

 

 

 

$0.22-$0.33

 

167

 

1.1 years

 

$

0.32

 

$0.34-$0.37

 

684

 

1.6 years

 

$

0.35

 

$0.76

 

2

 

1.0 years

 

$

0.76

 

 

 

853

 

 

 

 

 

 

h) CONVERTIBLE SECURED SUBORDINATED DEBENTURES

During the year, the Company issued a total of 375,000 (2002 – 3,312,500) share-purchase warrants with an exercise price of $0.50 per share (2002 - $0.14 per share) as the result of the conversion of secured subordinated debentures.

i) The following table sets forth the computation of basic and diluted loss per share.

 

 

2003

 

2002

 

2001

 

 

 

(in thousands, except per share amounts)

 

Numerator:

 

 

 

 

 

 

 

Net Loss (numerator for basic loss per share applicable to common shares)

 

$

(2,815

)

$

(9,364

)

$

(18,714

)

 

 

 

 

 

 

 

 

Denominator:

 

 

 

 

 

 

 

Weighted average shares denominator for basic loss per share

 

54,324

 

41,968

 

29,130

 

 

 

 

 

 

 

 

 

Basic loss per share

 

$

(0.05

)

$

(0.22

)

$

(0.64

)

For each fiscal year, the Company excluded the effect of all convertible debt, stock options and share-purchase warrants, as their impact would have been anti-dilutive.

j) STOCK-BASED COMPENSATION TO EMPLOYEES

During the fourth quarter of fiscal 2003, the Company adopted the accounting recommendations contained in the CICA Handbook Section 3870 – “Stock-based–“Stock-based Compensation and Other Stock-based Payments” effective January 1, 2003.  This Section establishes standards for the recognition, measurement and disclosure of stock-based compensation and other stock-based payments made in exchange for goods and services, and applies to transactions, including non-reciprocal transactions, in which an enterprise grants shares of common stock, stock options, or other equity instruments, or incurs liabilities based on the price of common stock or other equity instruments.  Commencing in fiscal 2003, the Company recordsrecorded a compensation expense for stock options granted to employees on or after January 1, 2003, based on the fair value method of accounting.  For the year ended December 31, 2003,2004, the employee stock option expense was $193,000.  As a result of$39,000 (2003 - $193,000).  For the early adoption of these recommendations,year ended December 31, 2003, expenses in the first, second and third quarters increased by $2,000, $1,000 and $130,000, respectively.respectively as the result of the early adoption of these recommendations.  Accordingly, quarterly net income (loss) in 2003 for such quarters previously reported as ($1,755,000), $527,000 and ($460,000), respectively arewere revised to ($1,757,000), $526,000 and ($590,000), respectively.

 

For the year ended December 31, 2002, the Company did not record a compensation expense for stock options granted to employees.  Instead, the Company disclosed the pro forma net income (loss) and the pro forma income (loss) per share had the Company adopted the fair value method of accounting for stock-based compensation awarded on or after January 1, 2002.

 

The Company determined the fair value of employee stock option grants using the Cox-Rubinstein binomial valuation model with the following assumptions on a weighted average basis:

 

 

2003

 

2002

 

 

2004

 

2003

 

2002

 

Dividend yield

 

—

 

—

 

 

N/A

 

—

 

—

 

Risk free interest rate

 

3.53

%

3.69

%

 

N/A

 

3.53

%

3.69

%

Volatility

 

137.51

%

131.51

%

 

N/A

 

137.51

%

131.51

%

Expected term, in years

 

2.94

 

2.00

 

 

N/A

 

2.94

 

2.00

 

 


ADB Systems International Ltd. F-22

F-20Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


For the years ended December 31, 2004, 2003 and 2002, the amortization of the value of the stock-based compensation granted by the Company to employees in 2002, over the vesting period of the awards as specified under CICA 3870, would have resulted in the following pro forma loss attributable to common shareholders and pro forma basic and diluted loss per share:

 

 

2003

 

2002

 

 

2004

 

2003

 

2002

 

Loss attributable to common shareholders

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

(2,815

)

$

(9,364

)

 

$

(5,104

)

$

(2,815

)

$

(9,364

)

Pro forma

 

$

(2,956

)

$

(9,608

)

 

$

(5,104

)

$

(2,956

)

$

(9,608

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted net loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

As reported

 

$

(0.05

)

$

(0.22

)

 

$

(0.08

)

$

(0.05

)

$

(0.22

)

Pro forma

 

$

(0.05

)

$

(0.23

)

 

$

(0.08

)

$

(0.05

)

$

(0.23

)

 

10.c)NON-EMPLOYEE STOCK OPTIONS

The Company had no stock options outstanding to third parties at December 31, 2004.  A summary of changes in the stock options to third parties for the two years ended December 31, 2004 is as follows:

 

 

Number of Options

 

Weighted Average
Exercise Price

 

 

 

2004

 

2003

 

2004

 

2003

 

  

(in thousands)

     

 

 

 

 

Opening balance

 

27

 

253

 

$

2.88

 

$

2.88

 

Granted

 

—

 

—

 

—

 

—

 

Exercised

 

—

 

—

 

—

 

—

 

Cancelled

 

(27

)

(226

)

2.56

 

2.91

 

Closing balance

 

—

 

27

 

$

—

 

$

2.56

 

Exercisable, end of year

 

—

 

27

 

$

—

 

$

2.56

 

12.OTHER OPTIONS

During the year ended December 31, 2004, the Company issued 485,000 compensation options with a fair value of $59,000 relating to the issuance of Series G secured subordinated notes (See Note 6 (b)).  The options entitle the holder to purchase an equity unit at a purchase price of $0.31 per unit and expire on June 15, 2006.  Each equity unit consists of one common share and one half of a share-purchase warrant with an exercise price of $0.50.  The share-purchase warrants expire on June 15, 2008.

Also during the year ended December 31, 2004, the Company issued 150,000 compensation options with a fair value of $19,000 relating to the December private equity placement (See Note 8 (c)).  The options entitle the holder to purchase an equity unit at a purchase price of $0.20 per unit and expire on December 6, 2006.  Each equity unit consists of one common share and one share-purchase warrant with an exercise price of $0.35.  The share-purchase warrants expire on December 6, 2008.


ADB Systems International Ltd. F-23

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

13.FINANCIAL INSTRUMENTS

 

Foreign exchange risk

The Company’s revenue from software licensing and related services and e-commerce enabling agreements is transacted in various currencies including the Canadian dollar, U.S. dollar, UK pound, EURO, and Norwegian krone.  Correspondingly, operating expenses related to these activities are transacted in the above-denoted currencies.  The Company does not use derivative instruments to manage exposure to foreign exchange fluctuations.  The Company incurred $84,000$24,000 in foreign exchange losses in 2003 (2002-$29,000; 2001-$95,000)2004 (2003 - $84,000; 2002 - $29,000).

 

The Company transacted the majority of its retail product sales and purchases in U.S. dollars.

 

Interest rate risk

The Company has limited exposure to fluctuations in interest rates.  The Company does not use derivative instruments to reduce its exposure to interest rate risk.

 

Credit risk

Credit risk arises from the potential that a customer will fail to meet its contractual obligations under a software licensing and related services agreement or an e-commerce enabling agreement.

 

In 2004, one customer accounted for 31 percent (2003 – two customers accounted for 26 percent and 15 percent) of total revenues.  At December 31, 2004, there were three customers that accounted for 18 percent, 13 percent and 11 percent, respectively, of total accounts receivable.  At December 31, 2003, three customers accounted for 25 percent, 19 percent and 14 percent, respectively, of total accounts receivable.

Fair value

The fair value of monetary assets and liabilities approximates amounts at which they would be exchanged between knowledgeable and unrelated persons.  The amounts recorded in the financial statements approximate fair value.

 

Equity instruments14.

During 2001, the Company was exposed to fair value fluctuations of publicly traded common shares received in connection with the disposal of one of its strategic investments.  To mitigate this risk, the Company engaged in the purchase of call and the sale of put options.  The Company did not engage in the purchase of call or put options exceeding the number of shares held.  As at January 31, 2002, all common shares and related call and put options had been disposed of.

11.COMMITMENTS AND CONTINGENCIES

 

(a)     Minimum payments under operating leases during the next five years are as follows:

 

 

 

(in thousands)

 

2004

 

$

232

 

2005

 

113

 

2006

 

43

 

2007

 

24

 

2008

 

$

24

 

F-21

 

 

(in thousands)

 

2005

 

$

416

 

2006

 

369

 

2007

 

339

 

2008

 

310

 

2009

 

279

 

2010 and thereafter

 

154

 


 

(b)    As a result of a review of statutory reporting obligations regarding employee benefits, the Company has identified a potential for non-compliance.  The employees and regulators concerned have been notified.  The probability and amount of any potential liability relating to this situation is presently not determinable.

 

(c)     The Company has entered into compensation arrangements with certain of its employees.  In the event of involuntary termination, the Company may be liable for potential payments totaling $295,000$182,000 to these employees.

 

(d)    The Company entered into a licensing agreement with NCR Corporation on April 29th, 2002.  The agreement provides the Company with access to specific technology patents over a seven-year period for US$100,000 annually.

 


ADB Systems International Ltd. F-24

12.Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

CHANGE15.CHANGES IN NON CASHNON-CASH OPERATING WORKING CAPITAL

 

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

424

 

$

(522

)

$

(12

)

Deposits and prepaid expenses

 

56

 

(45

)

251

 

Accounts payable

 

(63

)

224

 

(1,040

)

Accrued liabilities

 

(453

)

427

 

5

 

Deferred revenue

 

(692

)

(23

)

(2,121

)

 

 

$

(728

)

$

61

 

$

(2,917

)

The following table sets forth the changes in non-cash working capital items resulting from the inflow (outflow) of cash in the period.

 

 

2004

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Accounts receivable

 

$

(151

)

$

444

 

$

(540

)

Deposits and prepaid expenses

 

(8

)

60

 

(47

)

Accounts payable

 

288

 

(87

)

218

 

Accrued liabilities

 

139

 

(491

)

416

 

Deferred revenue

 

44

 

(741

)

9

 

Effect of currency translation

 

10

 

87

 

5

 

 

 

$

322

 

$

(728

)

$

61

 

 

The following table summarizes the non-cash financing activities of the Company

 

 

2004

 

2003

 

2002

 

 

 

 

 

 

 

 

 

Issuance of common shares in settlement of accounts payable (Note 8(c))

 

$

118

 

$

272

 

$

—

 

Issuance of common shares in return for prepaid services (Note 8(c))

 

82

 

—

 

—

 

Reduction in debt from conversion of secured subordinated notes (Note 6(e))

 

(830

)

(21

)

(51

)

Reduction in conversion feature from conversion of secured subordinated notes (Note 6(e))

 

(550

)

(76

)

(761

)

Settlement of demand loan by transfer of Bid.Com Ltd. Shares (Note 19)

 

—

 

(2,000

)

—

 

Settlement of accrued liability by transfer of Bid.Com Ltd. shares

 

—

 

(68

)

—

 

13.16.RETAIL ACTIVITIES

 

The Company ceased its on-line retail activities in October 2000; however, in 2001 it was required to settle certain amounts payable relating to product sales of previous years.  These amounts were not previously anticipated and did not reoccur in 2002.  Duringduring 2003, the Company received a $67,000 refund from a U.S.-based credit card institution formally engaged by the Company when it operated its on-line retail activities in the U.S.

 

The Company’s non-consolidated investment, Bid.Com, recommenced on-line retail activities in 2002 (Note 19(a))23).  The shares of Bid.Com were transferred in settlement of a demand loan (Note 6) on June 30, 2003.2003 (Note 19).

 

ADB Systems International Ltd. F-25

F-22

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


17.

14.REALIZED GAINS AND LOSSES ON DISPOSAL OF MARKETABLE SECURITIES, STRATEGIC INVESTMENTS AND CAPITAL ASSETS, AND RECOVERY OF ASSETS

 

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

Gain on disposal of strategic investment (Note 14(a))

 

$

20

 

$

41

 

$

6

 

(Loss) gain on disposal of capital assets (Note 14(b))

 

(13

)

23

 

—

 

(Loss) gain on disposal of marketable securities (Note 14(c))

 

—

 

(149

)

3,656

 

Gain on disposal on Point 2 (Note 14(d))

 

—

 

—

 

2,249

 

Recovery of Point2 receivable (Note 14(d))

 

—

 

—

 

811

 

 

 

$

7

 

$

(85

)

$

6,722

 

 

 

2004

 

2003

 

2002

 

 

 

(in thousands)

 

Gain on disposal of strategic investment (Note 17(a))

 

$

—

 

$

20

 

$

41

 

(Loss) gain on disposal of capital assets (Note 17(b))

 

(1

)

(13

)

23

 

Loss on disposal of marketable securities (Note 17(c))

 

—

 

—

 

(149

)

 

 

$

(1

)

$

7

 

$

(85

)

 

(a)     During 2003, the Company sold shares in Megawheels Technologies Inc. for proceeds of $20,000.  During 2002, the Company disposed of its strategic investments, resulting in cash proceeds of $126,000 and a realized gain of $41,000.

 

(b)    During 2003,2004, the Company disposed of capital assets that were no longer required resulting in a loss of $13,000.$1,000.  Similar disposals in 20022003 resulted in a loss of $13,000 and a gain of $23,000.$23,000 in 2002.

 

(c)     In January 2001,The loss on disposal of marketable securities includes a loss of $143,000 resulting from the Company’s unregistered AOL shares became freely trading and the Company sold 122,801 shares for gross proceeds of $10.0 million, realizing a gain of $3.7 million.  In January 2002 sale of the Company sold itsCompany’s remaining AOL shares for gross proceeds of $1.3 million and a realized loss of $143,000.million.

 

(d)             In May 2001, the Company sold its equity interest in Point2 Internet Systems Inc. (Point2) for $2.7 million in cash.  The Company realized a gain of $2.2 million, and recovered a receivable in the amount of $811,000 from Point2 that had been provided for in 2000.

15.18.UNREALIZED GAINS AND LOSSES ON REVALUATION OF STRATEGIC INVESTMENTS AND PROVISON FOR IMPAIRMENT OF ASSETS

 

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

Revaluation of strategic investments (Note 15(a))

 

$

—

 

$

(24

)

$

(1,510

)

Provision for impaired assets (Note 15(b))

 

—

 

—

 

(925

)

 

 

$

—

 

$

(24

)

$

(2,435

)

 

 

2004

 

2003

 

2002

 

 

 

(in thousands)

 

Revaluation of strategic investments (Note 18(a))

 

$

—

 

$

—

 

$

(24

)

 

 

$

—

 

$

—

 

$

(24

)

 

(a)     During 2002, and 2001, the Company reviewed the carrying value of each of its strategic investments and determined that in light of recent financial performance of each investment and market conditions, the decline in value of these investments was other than temporary, and a revaluation was required.

19.REALIZED GAIN ON SETTLEMENT OF DEMAND LOAN

During the year ended December 31, 2002, the Company completed a series of transactions whereby the Company received a secured demand loan in the aggregate principal amount of $2,000,000.  The loan carried an interest rate of 12 percent compounded monthly, and was secured by a general security agreement on the assets of the Company and a pledge of the shares of the Company’s Norwegian subsidiary.  The loan matured on June 30, 2003.  The Company could, at its discretion, repay the loan in cash or transfer to the lender 100 percent of the issued shares of its investment in an associated company in full settlement of the outstanding principal amount and accrued interest then owing to the lender (Note 23).

 

(b)On June 30, 2003,               Thethe Company reviewedexercised its option to transfer its investment in the associated company, which had a nominal carrying value, of a prepaid advertising asset during the first quarter of 2001 and determined the future value of this asset had been significantly reduced as a result of market conditions and changes to the Company’s business-to-business marketing strategy.lender in full settlement of the outstanding principal and accrued interest amounts.  This transfer resulted in a gain on settlement of the demand loan in the amount of $2,195,000.

ADB Systems International Ltd. F-26

F-23Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


20.

16.ACQUISITION OF ADB SYSTEMER ASA

 

On October 11, 2001, the Company acquired 98.3 per cent of the outstanding shares of ADB Systemer of Sola, Norway.  ADB Systemer was a publicly traded software vendor focused on enterprise asset management and integrated electronic procurement.  ADB Systemer has wholly-owned subsidiaries in the United States and in the United Kingdom.

 

The purchase price for 12,518,493 of the outstanding ADB Systemer common shares was $13.762 million.  The purchase price was comprised of $2.293 million in cash, $9.844 million of common stock issued from treasury, acquisition costs of $765,000, employee stock options with a fair market value of $576,000 granted to ADB Systemer employees as replacement options and warrants with a fair market value of $284,000 issued to ADB Systemer warrant holders as replacement warrants.  Common stock issued from treasury totaled 10,866,052 shares (21,732,104 pre-consolidation) with a value of $9.844 million based on a five-day trading average before and after September 10, 2001, the date the acquisition was announced to the general public.  The purchase price for ADB Systemer did not include any contingent payments, options, or commitments.  The purchase price of $13.762 million was allocated as follows:

 

 

 

2001

 

 

 

(in thousands)

 

 

 

 

 

Net monetary assets (including cash of $814)

 

$

418

 

Capital assets

 

308

 

Contractual agreements

 

177

 

Acquired software and related intellectual property

 

3,383

 

Goodwill

 

9,476

 

Total purchase price

 

$

13,762

 

 

ADB Systemer’s operations were consolidated after the effective date of the acquisition, October 11, 2001.

 

The amortization periods for contractual agreements and software and related intellectual property are 12 and 36 months respectively.  An amortization expense relating to software in the amount of $846,000 was recorded in 2004 (2003 - $1,128,000).  At the end of fiscal 2004, acquired software had been fully amortized.  At the end of fiscal 2003, accumulated amortization for acquired software amounted to $2,537,000, (2002 - $1,409,000), resulting in a net book value of $846,000 (2002 - - $1,974,000). $846,000.

 

Goodwill was not amortized, but was subject to an impairment test where the carrying value of goodwill was compared to its fair value.  In the event the carrying value of goodwill exceeded its fair value, a goodwill impairment would be recorded. At December 31, 2001, the carrying value of goodwill was tested for impairment, and it was determined that a goodwill impairment of $9.476 million was required.  Goodwill is not deductible for tax purposes.

 

ADB Systems International Ltd. F-27

F-24

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


21.

17.INVESTMENTS IN JOINTLY CONTROLLED COMPANIESCOMPANY

 

a) On September 25, 2003 the Company established a joint venture with GE Commercial Equipment Financing, a unit of GE Commercial Finance, with each entity holding a 50 percent interest in the joint venture.  The joint venture will operateoperates under the name of GE Asset Manager LLC.  The joint business venture will developdevelops and marketmarkets asset management technology to customers in a broad range of industries.  Upon the establishment of this joint venture, 1 million share-purchase warrants issued by ADB to GE Capital Corporation vested.  The fair value of these warrants of $188,000, calculated at the vesting date, is reflected on the Consolidated Balance Sheets as an Acquired Agreement.  An amortization expense of $150,000 was recorded in 2004 (2003 - $38,000). This acquired agreement is beinghas been fully amortized over the initial periodas of the venture agreement.  Accumulated amortization at December, 31, 2003, is $38,000, resulting in a net book value of $150,000. 2004.

 

As at December 31, 2003,2004, the joint venture held no assets or liabilities, nor were there anyand earned no revenue.  A nominal amount of incremental expenses has been incurred by the Company in development and marketing activities withinpertaining to the joint venture.  As a result, there are no amounts with respect to GE Asset Manager LLCSuch expenses have been included in the consolidated financial statements of the Company.

 

b) In 1999 the Company acquired a 51% interest in Point2 Internet Systems Inc. (“Point2”) by issuing $2,500,000 of common shares and common share-purchase warrants to acquire $2,000,000 of common shares for no additional consideration.  The warrants were exercised in 2000.  The Company acquired 51 percent of the shares of Point2 but only elected 50 percent of the board of directors.  The investment was accounted for on a proportionate consolidation basis and the Company recorded its proportionate share of revenue and expenses, assets and liabilities from the date of acquisition.  Of the total purchase price, $134,000 was allocated to current assets, $521,000 to non-current assets and $28,000 to current liabilities resulting in goodwill of $2,044,000.

In May 2001, the Company sold its equity interest in Point2 for $2.6 million in cash.  The Company realized a gain of $2.2 million, and recovered a receivable from Point2 provided for in 2000.

Condensed income statement and cash flow information for Point2 for the five-month period ended May 31, 2001 is as follows:

 

 

2001

 

 

 

(in thousands)

 

Revenue

 

$

192

 

Net loss

 

293

 

Change in cash resources

 

—

 

18.22.GOODWILL IMPAIRMENT

 

The Company reviewed the carrying value of goodwill acquired in connection with the acquisition of ADB Systemer.  The carrying value of goodwill was tested against its fair value and it was determined that a goodwill impairment of $9.476 million was required at December 31, 2001 (Note 16)20).  For the year ended December 31, 2002 a goodwill impairment of $14,000 was recorded on goodwill acquired in connection with the purchase of shares of the non-controlling interest shareholders of ADB Systemer.  The permanent decline in the fair value arose on a downturn in economic conditions resulting in lower than previously anticipated cash flows.

 

F-25


23.

19.RELATED PARTY TRANSACTIONS

 

(a)On August 30, 2002, the Company entered into a series of agreements with a lender, an unrelated party, whereby the lender granted to the Company a secured loan in the aggregate principal amount of $2 million (Note 6)19).  The Company and the same unrelated party also entered into an agreement whereby on-line retail operations were to be conducted by Bid.Com Ltd.  These operations utilized the on-line retail technology, experience and expertise of the Company developed and operated under the name “Bid.Com International Inc.” in the on-line selling of consumer products supplied by the lender.

 

On June 30, 2003, the Company exercised its option to transfer 100 percent of the issued shares of Bid.Com Ltd. in full settlement of the outstanding principal and accrued interest owed to the lender.

 

The Company owned 100 percent of the issued and outstanding shares of Bid.Com Ltd., but determined that, for accounting purposes, consolidation of Bid.Com Ltd. was not appropriate.  This determination was based upon the Company’s evaluation of its continuing abilityinability to determine the strategic operating policies of Bid.Com without the cooperation of others, its abilityinability to obtain the future economic benefits from the resources of Bid.Com Ltd., and its lack of exposure to the related risk of ownership.  Therefore, the Company accounted for its investment in Bid.Com Ltd. on the equity basis.  The Company was not exposed to losses incurred by Bid.Com Ltd., and accordingly this investment was carried at a nominal amount.  U.S. GAAP required consolidation of the investment in Bid.Com Ltd. in the Company’s financial statements.  The impact of this U.S. GAAP difference from Canadian GAAP is disclosed in note 20.24.

 

ADB Systems International Ltd. F-28

Condensed balance sheet information for Bid.Com Ltd as atNotes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002 is as follows:
(in Canadian dollars)

 

 

2002

 

 

 

(in thousands)

 

Current assets

 

$

435

 

Capital assets

 

71

 

Current liabilities

 

701

 

Shareholders’ deficiency

 

(195

)

Condensed income statement and cash flow information for Bid.Com Ltd. for the six-month period ended June 30, 2003 and the two-month period ended December 31, 2002 is as follows:

 

 

2003

 

2002

 

 

2003

 

 

(in thousands)

 

 

(in thousands)

 

Revenue

 

$

3,614

 

$

258

 

 

$

3,614

 

Net income (loss)

 

208

 

(195

)

Net income

 

208

 

Change in cash resources

 

(358

)

358

 

 

(358

)

 

Revenue of $35,000 and $243,000 related to web-site development, support and maintenance services provided to Bid.com Ltd. has beenwas included in the consolidated results of the Company for the six months ended June 30, 2003 and the two months ended December 31, 2002, respectively.2003.  In addition, the Company charged overhead-related costs of $76,000 and $22,000 for rent, connectivity and management fees to Bid.com Ltd. for the six-month period ended June 30, 2003, and the two months ended December 31, 2002, respectively.2003.  These overhead charges have beenwere recorded as a reduction of expenses in the consolidated financial statements for the yearsyear ended December 31, 2003 and December 31, 2002.2003.

 

At December 31, 2002, accounts receivable includes $59,000 related to unpaid service and overhead fees charged during the year to Bid.Com Ltd.

F-26


24.

b)                                     During 2001 the Company recorded $1 million in revenue relating to an agreement with a company in which it had an interest and in which certain Directors of the Company, in aggregate, had a controlling interest.  Under this agreement, the Company would provide its on-line auction technology and related services to the investee.  In April 2001, this investee went into receivership, and the Company’s investment in the investee was written down to zero. 

20.RECONCILIATION OF UNITED STATES GAAP

The financial statements of the Company have been prepared in accordance with generally accepted accounting principles as applied in Canada, which conform in all material respects with generally accepted accounting principles in the United States, except as noted below.

 

(a)   STOCK-BASED COMPENSATION TO EMPLOYEES

 

In fiscal 2003, the Company adopted the accounting recommendations contained in the CICA Handbook Section 3870 – “Stock-based—“Stock-based Compensation and Other Stock-based Payments” effective January 1, 2003 regarding expensing of employee stock-based compensation.  Accordingly, commencing in fiscal 2003, the Company records a compensation expense for stock options granted to employees on or after January 1, 2003, based on the fair value method of accounting.  For fiscal 2002, the Company did not recognize compensation expense for employee stock options, however pro-forma disclosure giving recognition to the fair market value of options granted from January 1, 2002 has been provided in Note 9(j). 11.

 

Under U.S. GAAP stock-based compensation granted to employees is accounted for in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” or in accordance with SFAS 123 “Accounting for Stock-Based Compensation.”  Prior to 2003, under United States GAAP the Company elected to follow APB 25 and no accounting recognition was given to stock options granted at fair market value until they were exercised.  Upon exercise, the proceeds were credited to shareholders’ equity.  In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation —– Transition and Disclosure,” an amendment of FASB Statement No. 123.  This Statement amends FASB Statement No. 123, “Accounting for Stock- Based Compensation,” to provide alternative methods of transition for a voluntary change to fair value method of accounting for stock-based employee compensation.  In fiscal 2003, the Company elected to prospectively adopt the fair value method for stock-based compensation as prescribed in SFAS No. 148.  Under CICA 3870 and SFAS No. 148, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which significantly differ from the Company’s stock option awards.  The Company’s calculations for employee grants were made using the Cox-Rubinstein binomial model with weighted average assumptions as described in the following table.  As a result, the 20032004 annual financial statements under U.S. GAAP reflect a stock-based compensation expense to employees of $193,000$39,000 (2003 - $193,000) for options granted on or after January 1, 2003.

 


ADB Systems International Ltd. F-29

Prior to fiscal 2003, SFAS No. 123, “Accounting for Stock-Based Compensation,” requires the disclosure of pro forma net income (loss) and earnings (loss) per share had the Company adopted the fair value method from the date the standard was applicable.  The calculations for the pro forma disclosures of stock options granted prior to 20032004 are reported below and were made using the Cox-Rubinstein binomial valuation model with the following weighted average assumptions:

 

 

 

2003

 

2002

 

2001

 

Dividend yield

 

—

 

—

 

—

 

Risk free interest rate

 

3.53

%

3.69

%

4.02

%

Volatility

 

137.51

%

131.51

%

110.54

%

Expected term, in years

 

2.94

 

2.00

 

2.77

 

F-27

 

 

2004

 

2003

 

2002

 

Dividend yield

 

N/A

 

—

 

—

 

Risk free interest rate

 

N/A

 

3.53

%

3.69

%

Volatility

 

N/A

 

137.51

%

131.51

%

Expected term, in years

 

N/A

 

2.94

 

2.00

 


 

If the estimated fair values of the Company’s stock options granted to employees had been amortized to expense over the vesting period of the awards as specified under SFAS No. 123, the loss attributable to common shareholders and the basic and diluted loss per share on a pro forma basis (as compared to such items as reported) would have been:

 

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

Loss attributable to common shareholders under U.S. GAAP

 

 

 

 

 

 

 

As calculated (Note 20(g))

 

$

(2,572

)

$

(9,947

)

$

(18,728

)

Stock-based compensation included in net loss

 

193

 

—

 

—

 

 

 

(2,379

)

(9,947

)

(18,728

)

Stock-based compensation if fair value applied to all awards

 

(337

)

(797

)

(1,601

)

Pro forma net loss as if fair value applied to all awards

 

$

(2,716

)

$

(10,744

)

$

(20,329

)

Basic and diluted net loss per share:

 

 

 

 

 

 

 

As calculated

 

$

(0.05

)

$

(0.24

)

$

(0.64

)

Pro forma

 

$

(0.05

)

$

(0.26

)

$

(0.70

)

 

 

2004

 

2003

 

2002

 

 

 

(in thousands)

 

Loss attributable to common shareholders under U.S. GAAP

 

 

 

 

 

 

 

As calculated (Note 24(g))

 

$

(5,013

)

$

(2,572

)

$

(9,947

)

Stock-based compensation included in net loss

 

39

 

193

 

—

 

 

 

(4,974

)

(2,379

)

(9,947

)

Stock-based compensation if fair value applied to all awards

 

(39

)

(337

)

(797

)

Pro forma net loss as if fair value applied to all awards

 

$

(5,013

)

$

(2,716

)

$

(10,744

)

Basic and diluted net loss per share:

 

 

 

 

 

 

 

As calculated

 

$

(0.08

)

$

(0.05

)

$

(0.24

)

Pro forma

 

$

(0.08

)

$

(0.05

)

$

(0.26

)

(b)COMPREHENSIVE INCOME

 

Financial Accounting Standards Board Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive Income,” requires disclosure of comprehensive income, which includes reported net earnings adjusted for other comprehensive income.  Comprehensive income is defined as the change in net assets of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

 

(c) MARKETABLE SECURITIES

U.S. GAAP requires that the Company disclose marketable securities into one of three categories: held to maturity; available for sale; or trading. As at December 31, 2003 and 2002, the marketable securities held were classified as follows:

 

 

2003

 

2002

 

 

 

(in thousands)

 

Trading

 

$

13

 

$

20

 

(d) ACCUMULATED OTHER COMPREHENSIVE INCOME

Under Canadian GAAP, gains and losses from foreign exchange translations of subsidiaries classified as self-sustaining are included in the foreign cumulative translation account component of shareholders’ equity.  Under U.S. GAAP, these gains and losses are included as a component of comprehensive income (loss).

 

ADB Systems International Ltd. F-30

F-28Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)


(c)   MARKETABLE SECURITIES

 

(e)U.S. GAAP requires that the Company disclose marketable securities into one of three categories: held to maturity; available for sale; or trading. As at December 31, 2004 and 2003, the marketable securities held were classified as follows:

 

 

2004

 

2003

 

 

 

(in thousands)

 

Trading

 

$

13

 

$

13

 

(d)   FINANCIAL INSTRUMENTS WITH LIABILITY AND EQUITY ELEMENTS

 

Under Canadian GAAP, the secured subordinated notes (see Note 7)6) are recorded based upon the relative fair values of the liability and equity components of the instruments.  The liability component is accreted to the face value of the subordinated notes over the term to maturity until the underlying notes are converted into common shares.  Under U.S. GAAP, upon issuance, the secured subordinated notes would have been recorded as a liability and reclassified to equity only upon conversion.  Accordingly, the interest accretion of $112,000 (2002$266,000 (2003 - $68,000)$112,000) that is recorded under Canadian GAAP is reversed under U.S. GAAP.

Additionally, under Canadian GAAP, the financing costs arising from the issuance of the convertible notes are allocated between the liability and equity components of the notes.  The financing costs associated with the liability component of the notes are deferred and amortized over the term of the underlying debt (see Note 5).  The financing costs associated with the equity component of the notes are charged to shareholders’ equity.  Under U.S. GAAP, all of the financing costs are deferred and amortized over the term of the underlying debt.  As a result, the 2004 amortization expense under U.S GAAP is $58,000 compared to an amortization expense of $32,000 under Canadian GAAP.  Furthermore, under Canadian GAAP, conversion of debt results in the allocation of any unamortized deferred financing charges associated with that debt to shareholders’ equity.  Under U.S. GAAP, such unamortized financing charges are expensed upon conversion of the associated debt.  Accordingly, under U.S. GAAP, an additional amount of $23,000, representing the unamortized financing charges associated with the Series F notes, is expensed.  The unamortized financing charges under Canadian GAAP, in the amount of $13,000, were allocated to contributed surplus upon the conversion of the Series F notes.

 

Further, under U.S. GAAP, the beneficial conversion feature represented by the excess of the fair value of the shares issuable on conversion of the subordinated notes, measured on the commitment date, over the amount of the loan proceeds to be allocated to the common shares upon conversion would be allocated to contributed surplus.  This results in a discount on the subordinated notes that is recognized as additional interest expense over the term of the subordinated notes and any unamortized balance is expensed immediately upon conversion of the subordinated notes.  Accordingly, for U.S. GAAP purpose,purposes, the Company has recognized beneficial conversion features in 2004 of $20,000, $90,000 and $49,000 relating to Series F subordinated notes, Series G subordinated notes and Series H subordinated notes, respectively.  In 2003, the Company has recognized a beneficial conversion feature in 2003,of $96,000 with respect to the Series E subordinated notes, of $96,000 and in 2002, with respect to the Series A through D notes, of $389,000.notes.  An interest expense of $64,000 (2002$126,000 (2003 - $316,000)$64,000) results from the amortization of the discount over the term to maturity of those subordinated notes as well as the unamortized discount for those subordinated notes converted during the year.  Canadian GAAP does not require the recognition of any beneficial conversion feature.

 

ADB Systems International Ltd. F-31

(f)Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

(e)   ADDITIONAL DISCLOSURES AS REQUIRED IN ACCORDANCE WITH UNITED STATES GAAP

U.S. GAAP requires the disclosure of the allowance for doubtful accounts.  The accounts receivable balance reported on the consolidated balance sheets at December 31, 2004, includes an allowance for doubtful accounts in the amount of $51,000 (2003 - $65,000).

U.S. GAAP requires the disclosure of accrued liabilities that exceed five percent of current liabilities.  Included in accrued liabilities at December 31, 20032004 are accrued audit fees of $145,000$193,000 (2003 - $145,000) and accrued compensation expenses (severance and unpaid vacation) of $228,000 (2002 – $482,000)$274,000 (2003 - $228,000).

 

U.S. GAAP requires the disclosure of non-cash interest components incurred during the year.  In 2003,2004, the Company incurred $126,000 (2002(2003 - - $68,000)$64,000) in non-cash interest expense associated with secured subordinated notes.  In 2003, the Company incurred $126,000 in non-cash interest expense associated with a demand loan that was settled through the transfer of the investment in an associated company (Note 6)19).

 

F-29


(g) The effect ofUnder U.S. GAAP, EITF 01-09 requires, in certain circumstances, that the above differences (Note 20(d) (e) and (j)) on the Company’s financial statements is set out below:

Consolidated Balance Sheets

 

 

2003

 

2002

 

 

 

(in thousands)

 

Cash and marketable securities

 

$

445

 

$

1,357

 

Accounts receivable

 

1,384

 

1,769

 

Deposits and prepaid expense

 

118

 

178

 

Capital assets

 

266

 

443

 

Intangible assets

 

998

 

2,549

 

Assets – discontinued operations (Note 20(j))

 

—

 

506

 

Accounts payable and accrued liabilities

 

1,370

 

2,288

 

Demand loan

 

—

 

2,000

 

Deferred revenue

 

91

 

832

 

Secured subordinated notes (Note 20(e))

 

1,009

 

131

 

Non-controlling interest

 

3

 

3

 

Liabilities – discontinued operations (Note 20(j))

 

—

 

642

 

Shareholders’ equity

 

$

738

 

$

906

 

Consolidated Statements of Operations

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

Net loss for the year as reported under Canadian GAAP

 

$

(2,815

)

$

(9,364

)

$

(18,714

)

Adjustments

 

 

 

 

 

 

 

Accretion of interest on secured subordinated notes (Note 20(e))

 

112

 

68

 

—

 

Gain on settlement of demand loan (Note 20(j))

 

(2,195

)

—

 

—

 

Amortization of beneficial conversion feature (Note 20(e))

 

(64

)

(316

)

—

 

Translation of foreign currency

 

—

 

—

 

(14

)

Net loss from continuing operations for the year as reported under U.S. GAAP

 

(4,962

)

(9,612

)

(18,728

)

Income (loss) from discontinued operations (Note 20(j))

 

2,390

 

(195

)

—

 

Net loss for the year as reported under U.S. GAAP

 

(2,572

)

(9,807

)

(18,728

)

Preferential distribution to shareholder (Note 20(k))

 

—

 

(140

)

—

 

Net loss attributable to common shareholders under U.S. GAAP

 

$

(2,572

)

$

(9,947

)

$

(18,728

)

 

 

 

 

 

 

 

 

Net loss for the year as reported under U.S. GAAP

 

$

(2,572

)

$

(9,807

)

$

(18,728

)

Accumulated other comprehensive income (loss) (Note 20(d))

 

74

 

32

 

14

 

Comprehensive income (loss) as reported under U.S. GAAP

 

$

(2,498

)

$

(9,775

)

$

(18,714

)

Basic and diluted loss per share from continuing operations

 

$

(0.09

)

$

(0.23

)

$

(0.64

)

Basic and diluted net loss per share

 

$

(0.05

)

$

(0.24

)

$

(0.64

)

F-30


(h) IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

The FASBwarrants issued SFAS No. 132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits”.  This statement revises employers’ disclosures about pension plans and other postretirement benefit plans.  It requires additional disclosures to those in the original Statement 132 about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans.  This Statement is effective for financial statements with fiscal years ending after December 15, 2003.  The adoption of SFAS No. 132 had no effect on the Company’s results of operations and financial position for 2003.

The FASB made amendments to SFAS No. 133, “Derivative Instruments and Hedging Activities”.  The amendments set forth in Statement 133 improve financial reporting by requiring that contracts with comparable characteristicscustomers be accounted for similarly.  This Statement is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003.  The guidance should be applied prospectively.  The Company did not engage in the use of derivative instruments or establish hedging relationships.  The adoption of SFAS No. 133 had no effect on the Company’s results of operations and financial position for 2003.

In April 2003, the FASB issued a staff position No. SFAS 140-1, “Accounting for Accrued Interest Receivable Related to Securitized and Sold Receivables under Statement 140.”  This staff position addresses the issue of how accrued interest receivable related to securitized and sold receivables should be accounted for and reported under Statement 140.  This guidance was effective for fiscal quarters beginning after March 31, 2003.  The adoption of SFAS No. 140-1 had no effect on the Company’s results of operations and financial position for 2003.

In June 2001, FASB issued SFAS No. 143 “ Accounting for Asset Retirement Obligations.”  SFAS No. 143 requires the Company to record the fair value of an asset retirement obligationrecorded as a liabilityreduction of revenue.  There is no similar guidance in the period in which it incurs a legal obligation associated with the retirement of tangible long-lived assets that result from acquisition, construction, development and/or normal assets.  The Company is required to also record a corresponding asset that is depreciated over the life of the asset.  Subsequent to the initial measurement of the asset retirement obligation, the obligation willCanadian GAAP.  Accordingly, depreciation and amortization and revenue would be adjusted at the end of each period to reflect the passage of time and changes in the estimated future cash flows underlying the obligation.  The Company was required to adopt SFAS No. 143 on January 1, 2003.  The adoption of SFAS No. 143 had no effect on the Company’s results of operations and financial position for 2003.reduced by $150,000 (2003 - $38,000) under U.S. GAAP.

 

The FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, requires that, for fiscal years beginning after May 15, 2002, gains and losses from the early extinguishments of debt no longer be classified as an extraordinary item, net of income taxes, but be included in the determination of pretax earnings.  (f)There was no effect on the adoption of SFAS No. 145 on the Company’s results of operations and financial position for 2003.

In July 2002, the FASB issued SFAS No. 146, “ Accounting for Costs Associated with Exit or Disposal Activities,” which requires companies to recognize costs associated with exit or disposal activities as incurred rather than at the date of commitment to an exit or disposal plan. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.  The adoption of SFAS No.146 had no effect on the Company’s results of operations and financial position for 2003.

In December 2002, the FASB issued SFAS No 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” an amendment of FASB Statement No. 123.  This Statement amends FASB Statement No. 123, “Accounting for Stock- Based Compensation,” to provide alternative methods of transition for a voluntary change to fair value method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of Statement No. 123 to require prominent disclosures in both annual and interim financial statements.  Certain of the disclosure modifications are required for fiscal years ending after December 15, 2002 and are included in the notes to these consolidated financial statements.  In fiscal 2003, the Company elected to prospectively adopt the fair value method for

F-31


stock-based compensation.  As a result, the annual financial statements reflect the stock-based compensation expense to employees of $193,000 for such compensation granted on or after January 1, 2003.

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 of obligations under guarantees.  The disclosure requirements of FIN 45 are effective for the Company’s year ended December 31, 2003.  FIN 45requires the recognition of a liability by a guarantor at the inception of certain guarantees entered into or modified after December 31, 2002, based on the fair value of the guarantee.  There was no effect on the adoption of FIN No. 45 on the Company’s results of operations and financial position for 2003.

In January 2003 and December 2003, the FASB issued interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), and its revision, FIN 46-R, respectively.  FIN 46 and FIN 46-R address the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entity to finance its own activities or do not possess certain characteristics of a controlling financial interest.  FIN 46 and FIN 46-R require the consolidation of these entities, known as variable interest entities (“VIE,s”), by the primary beneficiary of the entity.  The primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both.  FIN 46 and FIN 46-R will be effective for the Company’s annual financial statements commencing January 1, 2004.  The Company is continuing to evaluate its investments to determine which, if any, will be impacted by the adoption of FIN 46 and FIN 46-R.  Adoption of both of these standards is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

The Emerging Issues Task Force reached a consensus on Issue 00-21, addressing how to account for arrangements that involve the delivery or performance of multiple products, services, and/or rights to use assets.  Revenue arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the arrangement meets the following criteria: (a) the delivered item has value to the customer on a standalone basis; (b) there is objective and reliable evidence of the fair value of undelivered items; and (c) delivery of any undelivered item is probable.  Arrangement consideration should be allotted among the separate units of the accounting based on their relative fair value, with the amount allocated to the delivered item being limited to the amount contingent on the delivery of additional items or meeting other specified performance conditions.  The final consensus will be applicable to the Company for agreements entered into in fiscal periods beginning on or after January 1, 2004 with early adoption permitted.  The Company is evaluating the impact of adoption on the consolidated financial statements.

(i) OPERATING LOSS

U.S. GAAP requires that the Company disclose operating loss.  Operating loss of the Company for the year was $4.982 million, comprised of net loss from continuing operations of $4.962 million less realized and unrealized gains and losses on marketable securities and strategic investments of $20,000  (2002 - $9.480 million, comprised of net loss from continuing operations of $9.612 million plus $132,000; 2001 - $20.880 million, comprised of net loss of $18.728 million less $2.152 million).

F-32


(j)    INVESTMENT IN ASSOCIATED COMPANY/DISCONTINUED OPERATIONS

 

U.S. GAAP requires consolidation of the Company’s investment in the associated company described in Note 19(a).19.  Furthermore, under FAS 144, the Bid.Com Ltd. component would be classified as an asset held for sale and be subject to the reporting requirements for discontinued operations.  The effect of consolidation of this entity upon the Canadian GAAP balance sheet is reported in Note 20(g)24(g).

Net revenue by Geographic Region:

 

 

2003

 

2002

 

2001

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

North America

 

$

1,211

 

$

2,182

 

$

2,761

 

Ireland and U.K.

 

1,239

 

472

 

893

 

Norway

 

3,403

 

3,126

 

741

 

 

 

$

5,853

 

$

5,780

 

$

4,395

 

 

Consolidation of this associated company results in a decrease in the net loss attributable to common shareholders due to income from discontinued operations in the amount of $195,000 for fiscal 2003.  For fiscal 2002, the net loss attributable to common shareholders is increased due to a loss from discontinued operations of $195,000.  Revenue in the amount of $1.074 million is included in the 2003 income from discontinued operations.  Revenue of $15,000 is included in the 2002 loss from discontinued operations.

 

For fiscal 2003, the impact of consolidation of the associated company upon cash flows was to decrease cash flows as a result of cash outflows from discontinued operations in the amount of $358,000.  For fiscal 2002, the impact upon cash flows was to increase cash flows as the result of cash inflows from discontinued operations in the amount of $358,000.

 

ADB Systems International Ltd. F-32

(k)Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

(g)   The effect of the above differences described in Note 24(b), (d) and (f) on the Company’s financial statements is set out below:

Consolidated Balance Sheets

 

 

2004

 

2003

 

 

 

(in thousands)

 

Cash and marketable securities

 

$

453

 

$

445

 

Accounts receivable

 

1,535

 

1,384

 

Deposits and prepaid expense

 

208

 

118

 

Capital assets

 

142

 

266

 

Intangible assets

 

277

 

998

 

Accounts payable and accrued liabilities

 

1,680

 

1,370

 

Deferred revenue

 

135

 

91

 

Secured subordinated notes (Note 24(e))

 

2,465

 

1,009

 

Non-controlling interest

 

3

 

3

 

Shareholders’ equity

 

$

(1,668

)

$

738

 

Consolidated Statements of Operations

 

 

2004

 

2003

 

2002

 

 

 

(in thousands)

 

Net loss for the year as reported under Canadian GAAP

 

$

(5,104

)

$

(2,815

)

$

(9,364

)

Adjustments:

 

 

 

 

 

 

 

Accretion of interest on secured subordinated notes (Note 24(d))

 

266

 

112

 

68

 

Gain on settlement of demand loan (Note 24(f))

 

—

 

(2,195

)

—

 

Amortization of deferred charges relating to secured subordinated notes under Canadian GAAP (Note 24(d))

 

32

 

—

 

—

 

Amortization of deferred charges relating to secured subordinated notes under U.S. GAAP (Note 24(d))

 

(81

)

—

 

—

 

Amortization of beneficial conversion feature (Note 24(d))

 

(126

)

(64

)

(316

)

Net loss from continuing operations for the year as reported under U.S. GAAP

 

(5,013

)

(4,962

)

(9,612

)

Income (loss) from discontinued operations (Note 24(f))

 

—

 

2,390

 

(195

)

Net loss for the year as reported under U.S. GAAP

 

(5,013

)

(2,572

)

(9,807

)

Preferential distribution to shareholder (Note 24(j))

 

—

 

—

 

(140

)

Net loss attributable to common shareholders under U.S. GAAP

 

$

(5,013

)

$

(2,572

)

$

(9,947

)

 

 

 

 

 

 

 

 

Net loss for the year as reported under U.S. GAAP

 

$

(5,013

)

$

(2,572

)

$

(9,807

)

Other comprehensive income (loss) (Note 24(b))

 

6

 

74

 

32

 

Comprehensive income (loss) as reported under U.S. GAAP

 

$

(5,007

)

$

(2,498

)

$

(9,775

)

Basic and diluted loss per share from continuing operations

 

$

(0.08

)

$

(0.09

)

$

(0.23

)

Basic and diluted net loss per share

 

$

(0.08

)

$

(0.05

)

$

(0.24

)

ADB Systems International Ltd. F-33

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

(h)   IMPACT OF NEW ACCOUNTING PRONOUNCEMENTS

On September 30, 2004, the FASB issued staff position EITF  Issue No. 03-1-1 “Effective Date of 10-20 of EITF Issue No. 03-1 – The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments”.  The staff position delays the effective date for the measurement and recognition guidance contained in paragraphs 10-20 of Issue 03-1. The adoption of EITF Issue No. 03-1-1 had no effect on the Company’s results of operations and financial position for 2004.

In December 2004, the FASB issued staff position No. SFAS 109-1, “Application of FASB Statement 109, Accounting for Income Taxes, for the Tax Deduction Provided to U.S. Based Manufacturers by the American Jobs Creation Act of 2004”. The staff position addresses the issue as to whether this deduction should be accounted for as a special deduction or a tax rate reduction. This guidance was effective upon issuance on December 21, 2004. The adoption of SFAS No. 109-1 had no effect on the Company’s results of operations and financial position for 2004.

The FASB issued SFAS No. 123 (revised 2004), “Share-Based Payment”.  This Statement is a revision of FASB Statement No. 123, “Accounting for Stock- Based Compensation” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.”  This Statement establishes standards for the accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of those equity instruments. This Statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.  This Statement is effective for annual or interim financial statements commencing after June 15, 2005. The Company currently accounts for its employee stock option plan in accordance with the provisions of SFAS No. 123 (revised 2004), accordingly the adoption of these standards is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

In January 2003 and December 2003, the FASB issued interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46”), and its revision, FIN 46-R, respectively.  FIN 46 and FIN 46-R address the consolidation of entities whose equity holders have either not provided sufficient equity at risk to allow the entity to finance its own activities or do not possess certain characteristics of a controlling financial interest.  FIN 46 and FIN 46-R require the consolidation of these entities, known as variable interest entities (“VIE”), by the primary beneficiary of the entity.  The primary beneficiary is the entity, if any, that is subject to a majority of the risk of loss from the VIE’s activities, entitled to receive a majority of the VIE’s residual returns, or both.  FIN 46 and FIN 46-R is effective for the Company’s annual financial statements commencing January 1, 2004.  Adoption of both of these standards had no effect on the Company’s financial position, results of operations or cash flows.

The Emerging Issues Task Force provided guidance on Issue 03-1, “The meaning of Other-Than-Temporary Impairment and its Application to Certain Investments. This Task Force guidance for evaluating whether an investment is other-than-temporarily impaired should be applied in other-than-temporary impairment evaluations made in reporting periods beginning after June 15, 2004. The disclosures are effective in annual financial statements for fiscal years ending after December 15, 2003, for investments accounted for under Statements 115 and 124. For all other investments within the scope of this Issue, the disclosures are effective in annual financial statements for fiscal years ending after June 15, 2004. The additional disclosures for cost method investments are effective for fiscal years ending after June 15, 2004. Comparative information for periods prior to initial application is not required.

The Emerging Issues Task Force reached a consensus on Issue 03-10, “Application of EITF Issue No. 02-16 — Accounting by a Customer for Certain Consideration Received from a Vendor by Resellers to Sales Incentives Offered to Consumers by Manufacturers. The Company has determined that EITF Issue No. 02-16 had no effect on the Company’s results of operations and financial position for 2004.

ADB Systems International Ltd. F-34

Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)

(i)    OPERATING LOSS

U.S. GAAP requires that the Company disclose operating loss.  Operating loss of the Company for the year was $5.013 million, comprised of net loss of $5.013 million less realized and unrealized gains and losses on marketable securities and strategic investments of $Nil  (2003 - $4.982 million, comprised of net loss from continuing operations of $4.962 million less $20,000; 2002 - $9.480 million, comprised of net loss from continuing operations of $9.612 million plus $132,000).

(j)    PREFERENTIAL DISTRIBUTION TO SHAREHOLDERS

 

In accordance with U.S. GAAP, the $120,000 Series C secured subordinated debentures (see Note 7) issued in exchange for the waiver of certain US registration rights granted to Stonestreet pursuant to a subscription agreement dated April 25, 2002 (Note 9(e)) is recorded as preferential distribution to Stonestreet and deducted from the net loss to determine net loss attributable to common shareholders.  The Series C secured subordinated debentures include a beneficial conversion feature; accordingly, a preferential distribution of $140,000 has been recorded.

 

21.25.  SEGMENTED INFORMATION

The Company operates in the following reportable geographic segments: North America, Ireland and the United Kingdom, and Norway.

 

Assets by Geographic RegionRegion:

 

 

2003

 

2002

 

 

2004

 

2003

 

 

(in thousands)

 

 

(in thousands)

 

 

Capital Assets

 

Intangible and Other
Assets

 

Capital Assets

 

Intangible and Other
Assets

 

 

Capital Assets

 

Intangible and Other
Assets

 

Capital Assets

 

Intangible and
Other Assets

 

North America

 

$

106

 

$

152

 

$

174

 

$

518

 

 

$

39

 

$

155

 

$

106

 

$

152

 

Ireland and U.K.

 

16

 

—

 

69

 

—

 

 

6

 

—

 

16

 

—

 

Norway

 

144

 

846

 

200

 

2,031

 

 

97

 

—

 

144

 

846

 

 

$

266

 

$

998

 

$

443

 

$

2,549

 

 

$

142

 

$

155

 

$

266

 

$

998

 

 

For the year ended December 31, 2003, individual customers accounted for 26 percent and 15 percent of net revenue, respectively.  For the year ended December 31, 2002, individual customers accounted for 28Net Revenue by Geographic Region:

 

F-33

 

 

2004

 

2003

 

2002

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

North America

 

$

796

 

$

1,211

 

$

2,182

 

Ireland and U.K.

 

681

 

1,239

 

472

 

Norway

 

3,453

 

3,403

 

3,126

 

 

 

$

4,930

 

$

5,853

 

$

5,780

 


 

percent and 13 percent of net revenue, respectively.  For the year ended December 31, 2001 one customer accounted for 22 percent of net revenue.

22.26.RECLASSIFICATION OF PRIOR YEARS

Certain prior years amounts have been reclassified to conform to the current year basis of presentation. 

23.  SUBSEQUENT EVENT

During the period of January 1, 2004 to March 18, 2004, Series E secured subordinated notes with a face value of $400,000 were converted into equity units (See Note 7(a)).  As a result of this conversion, 1,142,856 common shares and 571,428 share-purchase warrants were issued.

 

On May 11, 2004,February 23, 2005, the Company entered into an agreement with First Associates Investments Inc. to act as Agentcompleted a transaction resulting in raising up to $5the issuance of 2.5 million onequity units at a best efforts basis, in secured convertible debt (“Notes”).  The Notes have a three-year term and will pay interestprice of 7 percent$0.23 per annum, paid quarterly in arrears.  The debt can be converted at anytime by the lender, following a four-month hold period, into units consistingunit for gross proceeds of $575,000.  Each equity unit consists of one common share at $0.31 and one-half of aone common share-purchase warrant exercisable into a common share at $0.50.  Each warrant willwith an exercise price of $0.40 each.  The warrants expire three years from the dateon February 22, 2009.

ADB Systems International Ltd. F-35

Corporate Directory

Directors

Jeffrey Lymburner
CEO

T. Christopher Bulger(1),(2),(3)

CEO, Megawheels

Duncan Copeland(1),(2),(3)
President, Copeland and Company

Paul Godin(2),(3)

Jim Moskos
President,
ADB Technologies Group

Jan Edvin Pedersen
President, ADB Systems, European Operations

Rick Robertson(1)
Associate Professor of closing.  Business
Richard Ivey School of Business,
The Notes will convert automatically if the Company’s weighted average share price reaches $0.70 or more over a ten-day trading period.  If the Notes remain unconverted at the endUniversity of Western
Ontario

Officers
Jeffrey Lymburner
CEO

Mike Robb

Chief Financial Officer

Jim Moskos

President, ADB Technology Group

Jan Pedersen

President ADB Systems, European Operations

Aidan Rowsome

Vice President, Global Sales

(1)           Member of the termAudit Committee

(2)           Member of the Company will be required to repayManagement Resources and Compensation Committee

(3)           Member of the principal in cash.Corporate Governance Committee

ADB Systems Offices

North America
Corporate Headquarters
ADB Systems International Ltd.
302 The East Mall, Suite 300
Toronto, Ontario ML4V 1V2
1 888 287 7467

ADB Systems International Ltd.
3001 North Rocky Point Drive East,
Suite 200, Tampa, Florida 33607
1 888 750 7467

Europe
ADB Systemer International ASA
Vingveien 2, N-4050
Sola, Norway
+ 47 51 64 71 00

 

24.                 CONVENIENCE TRANSLATIONADB Systems International Ltd.
3000 Cathedral Hill
Guildford, Surrey GU2 7YB UK
+ 44 (0) 1483 243 577

 

The financial statements as at December 31, 2003 and for the year then ended have been translated into U.S. dollars using the exchange rate of the U.S. dollar at December 31, 2003 as published by the Federal Reserve Bank of New York (U.S. $1.000 = Cdn. $1.29).  The translation was made solely for the convenience of readers in the United States.  The translated U.S. dollar figures should not be construed as a representation that the Canadian currency amounts actually represent or could be converted into U.S. dollars.ADB Systems International Ltd.
52 Broomhill Road, Suite 108
Broomhill Industrial Estate
Tallaght, Dublin 24, Ireland
+ 353 1 431 0513


Additional Shareholder Information
www.adbsys.com
investor-relations@adbsys.com

 

F-34Registrar and Transfer Agent
Equity Transfer Services
120 Adelaide Street West
Suite 420, Toronto, ON M5W 4C3
(416) 361-0152

Auditors

Deloitte & Touche LLP

Toronto, Ontario, Canada

Lawyers
Brown Raysman Millstein
Felder & Steiner LLP, New York
Gowling Lafleur Henderson LLP,
Toronto

Stock Exchange Listings
Toronto Stock Exchange
Symbol: ADY

OTC Bulletin Board

Symbol: ADBYF

Shares Outstanding

Issued: 69,870,131

December 31, 2004

ADB Systems, Dyn@mic Buyer, ProcureMate, WorkMate and Dyn@mic Seller are trademarks of ADB Systems International Ltd. and its affiliates.

© 2005 ADB Systems International Ltd.