UNITED STATES SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549
FORM 20-F
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FORM 20-F | ||
oREGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR | ||
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FOR THE FISCAL YEAR ENDED DECEMBER 31, OR | ||
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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 |
(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 201Mississauga, Ontario L4V 1V2CANADA(Address of principal executive offices)Securities registered or to be registered pursuant to Section 12(b) of the Act.NoneSecurities registered or to be registered pursuant to Section 12(g) of the Act.Common SharesSecurities for which there is a reporting obligation pursuant to Section 15(d) of the Act.NoneIndicate 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, 2003Indicate 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.YesýNooIndicate by check mark which financial statement item the registrant has elected to follow.Item 17oItem 18ýADB SYSTEMS INTERNATIONAL LTD.AnnualAnnual Report on Form 20-F for the Fiscal Year20032004“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.“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. • 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
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• | 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; |
• 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. |
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TABLE OF CONTENTS
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5
6
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 |
STATEMENT OF OPERATIONS(3)
DATA:
|
| Year Ended |
| ||||||||||
|
| 2003 |
| 2003 |
| 2002 |
| 2001 |
| 2000 |
| 1999 |
|
|
| (Cdn$) |
| (U.S.$) (1) |
| (Cdn$) |
| (Cdn$) |
| (Cdn$) |
| (Cdn$) |
|
|
| (Audited) |
| ||||||||||
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.
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 |
C.REASONS FOR THE OFFER AND USE OF PROCEEDS.
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.
The Company is
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As of May 31, 2005, we had cash on hand and
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.
From the time
CYCLES.
DIFFICULT.
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•
• 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. |
LIMITED.
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• 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.
NEED, IN PARTICULAR AS A RESULT OF OUR RECENT WORKFORCE REDUCTIONS.
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CHANGE.
• 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. |
ERRORS.
• 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. |
• 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. |
• 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. |
13
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. |
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.
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.
RESULTS.
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.
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.
), 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.
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),
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.
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. |
•
• 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”). |
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.
17
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. |
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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.As of May 31, 2005 we do not have any significant current capital divestitures or any current capital expenditures so far in 2005.
• | Track and re-deploy assets more effectively | |
• | Automate equipment appraisals | |
• | Efficiently market and sell surplus equipment | |
• | Automate sourcing and tendering processes |
• | 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 |
• | 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 |
• | 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. |
• 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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• | 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. |
We have offered ProcureMate to our customers since 2000.
• 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. |
• 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. |
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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).
We have offered and sold Dyn@mic Seller to our customers since 2000.
• 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. |
RELATED SERVICES
THIRD PARTY OFFERINGS
21
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 |
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.services sectors.
22
Customer | Solution(s) | Industry Segment | Geographic Location | |||
BP Norway AS | ProcureMate; | 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 | |||
| ProcureMate | Health | UK | |||
permanent TSB | Dyn@mic Seller | Financial Services | Ireland | |||
Paramount Resources | WorkMate | Oil and Gas | Canada | |||
Kraft Foods Global, Inc. | Serviced by our joint venture, Asset Manager, providing Asset Tracker |
For information regarding
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 |
Stavanger (Norway).
generation through our sales force.
23
Research
In order to
24
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. |
lifecycle.
Location | Use |
| Term of Lease | |||
302 The East Mall, Suite Toronto, Ontario | Executive, Administrative, Engineering and Marketing |
| Expires | |||
Vingveien 2, 4050, Sola Norway | Executive, Administrative, Engineering and Marketing | 8,234 | 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 | |||
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.
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 |
25
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".
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.
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.
26
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.
27
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.
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
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.
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.
• | persuasive evidence of an arrangement exists, | |
• | delivery has occurred, | |
• | the fee is fixed or determinable, and | |
• | collectibility is probable. |
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.
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.
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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.
Liquidity.
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.
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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 |
| |||
|
| (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.
Aggregate Contractual Obligations
As$8,000 to $453,000 as at December 31, 2004 from $445,000 as at December 31, 2003.
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 |
|
| 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 |
| |
private placement were 100,000 shares issued to a director of the Company for net proceeds of $20,000.
34
Interest Rate and Investment Risk.
total accounts receivable.
(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. DIRECTORS AND SENIOR MANAGEMENT
A. | DIRECTORS AND SENIOR MANAGEMENT |
Name | Age | Position | ||
| ||||
Jeffrey |
| Director and Chief Executive Officer | ||
T. Christopher |
| Director | ||
Paul Godin,(2),(3) |
| Director | ||
Jim Moskos |
| Director and President, ADB Technology Group | ||
Darroch (Rick) Robertson (4) |
| Director | ||
Jan |
| Director and President, Norwegian Operations | ||
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 |
| Chief Financial Officer and Corporate Secretary | ||
Aidan Rowsome(6) |
| 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 |
35
JEFFREY LYMBURNER, Oldsmar, Florida
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.
36
GLEN WHYTE, Toronto, Ontario
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.
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.
Summary Compensation Table
|
|
|
|
|
|
|
|
|
| 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 Lymburner | 2004 | 130,130 | Nil | 15,616 | Nil | Nil | Nil | Nil |
CEO (3) | 2003 | 140,150 | $3,503 | 16,818 | Nil | Nil | Nil | Nil |
2002 | 157,760 | Nil | 25,242 | 110,000 | Nil | Nil | Nil | |
Mike Robb | 2004 | 144,583 | Nil | 6,600 | Nil | Nil | Nil | Nil |
CFO (4) | 2003 | 76,250 | Nil | 5,362 | Nil | Nil | Nil | Nil |
James Moskos | 2004 | 190,000 | Nil | 12,000 | Nil | Nil | Nil | Nil |
President, Technology Group | 2003 | 193,333 | 15,000 | 12,000 | 220,202 | Nil | Nil | Nil |
2002 | 200,000 | Nil | 12,000 | 214,167 | Nil | Nil | Nil | |
Jan Pedersen | 2004 | 201,657 | Nil | Nil | Nil | Nil | Nil | Nil |
President, Norwegian Operations | 2003 | 181,843 | 40,358 | Nil | 22,378 | Nil | Nil | Nil |
2002 | 165,500 | 47,000 | Nil | 214,167 | Nil | Nil | Nil | |
Aidan Rowsome | 2004 | 205,166 | 1,020 | 16,955 | Nil | Nil | Nil | Nil |
Vice-President, Global Sales | 2003 | 173,430 | 10,033 | 17,747 | 122,580 | Nil | Nil | Nil |
2002 | 168,000 | 5,500 | 16,500 | 163,125 | Nil | Nil | Nil |
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. |
The following table sets forth details
Name |
| Securities Under |
| % of Total |
| Exercise or Base |
| Market Value of |
| Expiration |
|
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 |
|
(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.
38
of six percent of salary. This arrangement does not represent a future pension obligation to the Company. Mr. Rowsome participates in this plan.
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.
39
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 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.
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 |
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 |
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 |
None of our employees is represented by a labor union, and we consider our employee relations to be good.
E. SHARE OWNERSHIP
2003.
Name |
| Number of Common |
| Number of Common |
| Range ofexercise |
| Range of |
| Percentage of |
| |||
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:
ITEM 7 - MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 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 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.41A.MAJOR SHAREHOLDERS 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.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.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.B.RELATED PARTY TRANSACTIONSOn 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.The notes are secured by a general security agreement on the property and assets of ADB.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.42
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.
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.
All contingencies and commitments set out in the Financial Statements have been reviewed and updated as at the date of filing this Annual Report.
43
|
| 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 |
|
| 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 |
A. Share Capital
B. Memorandum and Articles of Association
B. | Memorandum and Articles of Association |
45
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.
• 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. |
• | 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. |
• 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
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.
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.
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. | |
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.
49
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. |
E. Taxation
Canadian Federal Income Tax Considerations
E. |
50
received by certain trusts, companies and other organizations whose income is exempt from tax under the laws of the United States.
51
U.S. Federal Income Tax Considerations
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.
53
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.
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.
F. Dividends and Paying Agents
F. | Dividends and Paying Agents |
G. Statements by Experts
H. Documents on display.
55
description of the matter involved, and each such statement shall be deemed qualified in its entirety by such reference.
450 Fifth Street N.W. | 500 West Madison Street | |
Room 1024 | Suite 1400 | |
Washington D.C. 20549 | Chicago, Illinois 60661 |
I. Subsidiary Information.
(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 |
See Item 5 - Operating and Financial Review and Prospects - Liquidity and Capital Resources - - Foreign Currency Rate Fluctuations; Interest Rate and Investment Risk.
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.
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. |
(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.
ITEM 16D –- EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
- FINANCIAL STATEMENTS
57
| 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 | By-laws of the Company.(2) |
| 2.1 | Form of |
| 2.2 | Registration Rights Agreement, dated as of June 16, 2000, between Bid.Com International and Acqua Wellington Value Fund Ltd.(4) |
| 2.3 |
|
|
| |
|
| |
|
| |
|
| |
| Form of Warrant issued or issuable upon exercise of | |
| 4.1 | Salary Protection Letter, dated February 12, 1997, between the Company and Jeffrey Lymburner.(3) |
| 4.2 | Option Agreement dated February 19, 2001 between Bid.Com International Inc. and Wendell Willick.(5) |
| 4.3 | Amendment to Option Agreement dated May 2, 2001 between Bid.Com International Inc. and Wendell Willick.(5) |
| 4.4 | Board Support Agreement, dated as of September 7, 2001 between Bid.Com International Inc. and ADB Systemer ASA.(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 | Employment Agreement, dated as of September 18, 2001 between Bid.Com International Inc. and Jan Pedersen.(5) |
| 4.7 | Subscription Agreement, dated as of April 25, 2002, between ADB Systems International Inc. and Stonestreet Limited Partnership.(5) |
| 4.8 | Arrangement Agreement, dated as of August 23, 2002, between ADB Systems International Inc. and ADB Systems International Ltd.(1) |
| 4.9 | General Conveyance and Assumption Agreement, dated August 23, 2002, between ADB Systems International Inc. and ADB Systems International Ltd.(2) |
| 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. |
| 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 | 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 | Form of Subscription Agreement, dated August 30, 2002, between ADB Systems International Inc. and Stonestreet Limited Partnership.(6) | |
| 4.14 | Form of Subscription Agreement, dated August 30, 2002, between ADB Systems International Inc. and Greenwich Growth Fund Ltd.(6) |
| 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 | Agency Agreement dated June 15, 2004 between ADB Systems International Ltd. and First Associates Investments Inc. |
| 4.17 | General Security Agreement dated as of May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership. |
| 4.18 | Form of Subscription Agreement |
| 4.19 |
|
| Subscription Agreement dated May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership. | |
| 4.20 | |
8.1 | ||
| 10.1 | |
| 11.1 | Code |
| * | Filed herewith |
| (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) | 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) | ||
| 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) | 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) | 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) | 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. |
59
ADB SYSTEMS INTERNATIONAL INC. | ||||
By: | /s/ Jeffrey Lymburner | |||
Name: | Jeffrey Lymburner | |||
Title: | Chief Executive Officer | |||
Dated: June | By: | /s/ Michael Robb | ||
Name: | Michael Robb | |||
Title: | Chief Financial Officer and | |||
Corporate Secretary | ||||
60
Certification
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 |
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 | /s/ Jeffrey Lymburner | |
Jeffrey Lymburner | ||
Chief Executive Officer |
61
Certification
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 |
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 | /s/ Michael Robb | |
Michael Robb | ||
Chief Financial Officer |
62
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| ||||
F-1 | ||||
Consolidated Balance Sheets as at December 31, | F-3 | |||
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 | F-4 | |||
Consolidated Statements of Deficit for the years ended December 31, 2004, 2003 | F-5 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, | F-6 | |||
F-7 |
February
F-1
Comments by AuditorsIndependent Registered Chartered Accountants on Canada –- United States Reporting DifferencesDifference
United States reporting
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 |
Director | Director |
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 |
| — |
| — |
| (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
February 6, 2004 (except for Notes 2 and 23 which are asConsolidated Statements of May 11, 2004)DeficitF-2
Years ended December 31, 2004, 2003 and 2002
|
| 2003 |
| 2003 |
| 2002 |
| |||
|
|
|
| Convenience |
|
|
| |||
|
|
|
|
|
|
|
| |||
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
| |||
|
|
|
|
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 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
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 |
|
|
|
|
| ||||
|
|
|
|
|
|
|
|
|
| ||||
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 |
|
|
|
|
| ||||
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.
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 |
| — |
| — |
| 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 |
| — |
| 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
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.
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 |
| 1 year or life of the license |
Furniture and fixtures |
| 5 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.
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
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.
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.
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 |
| Net Book |
| Cost |
| Accumulated |
| Net Book |
|
| 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 |
| $ | — |
|
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.
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.
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
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 |
| Fair |
| Nominal |
| Fair |
| |||||||||||||
|
| Nominal |
| Fair |
| Nominal |
| Fair |
|
| (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 |
| Fair |
| Common |
| Fair |
| ||||||||
|
| Common |
| Fair |
| Common |
| Fair |
|
| (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 |
|
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.
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 |
| ||||||
|
| 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 |
| Number |
| Weighted |
| Weighted |
| Number |
| Weighted |
| ||
|
| (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 |
| ||||||
|
| 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.
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.)
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.
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 |
| ||||||
|
| 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 |
|
|
|
|
|
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
Range of |
| Number Outstanding and Exercisable at December 31, 2004 |
| Weighted |
| Weighted |
| |
|
| (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 |
|
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 |
| ||||||
|
| 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.
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.
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).
F-22
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
17.14.
|
| 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.
F-23Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
20.16.
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.
F-24
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
21.17.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
19.
(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.
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
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.
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.
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 | ) |
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).
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.
(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.
(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 | ) |
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.
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 |
| Capital Assets |
| Intangible and Other |
|
| Capital Assets |
| Intangible and Other |
| Capital Assets |
| Intangible and |
| ||||||||
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.
Corporate Directory
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
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.