UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 | |
FORM 20-F | |
o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR | |
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004 OR | |
o TRANSITION 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 |
• | 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; | |
• | increasingly longer collection cycles; | |
• | potential fluctuations in our financial results and our difficulties in forecasting; | |
• | volatility of the stock markets and fluctuations in the market price of our stock; | |
• | your ability to buy and sell our shares on the Over the Counter Bulletin Board; | |
• | our ability to compete with other companies in our industry; | |
• | our ability to repay our debt to lenders; | |
• | our ability to retain and attract key personnel; |
• | risk of significant delays in product development; |
• | failure to timely develop or license new technologies; | |
• | risks relating to any requirement to correct or delay the release of products due to software bugs or errors; | |
• | risk of system failure or interruption; | |
• | problems which may arise in connection with the acquisition or integration of new businesses, products, services, technologies or other strategic relationships; | |
• | risks associated with international operations; | |
• | risks associated with protecting our intellectual property, and potentially infringing the intellectual property rights of others; | |
• | uncertainty about the continued acceptance of the Internet as a viable commercial medium; and | |
• | sensitivity to the overall economic environment. |
Page | ||||
PART I | 6 | |||
ITEM 1 - | 6 | |||
ITEM 2 - | 6 | |||
ITEM 3 - | 6 | |||
A. | 6 | |||
B. | 8 | |||
C. | 8 | |||
D. | 8 | |||
ITEM 4 - | 16 | |||
A. | 16 | |||
B. | 18 | |||
C. | 28 | |||
D. | 28 | |||
ITEM 5 - | 29 | |||
ITEM 6 - | 37 | |||
A. | 37 | |||
B. | 39 | |||
C. | 40 | |||
D. | 41 | |||
E. | 42 | |||
ITEM 7 - | 43 | |||
A. | 43 | |||
B. | 43 | |||
ITEM 8 - | 44 | |||
ITEM 9 - | 44 | |||
ITEM 10 - | 47 | |||
A. | 47 | |||
B. | 47 | |||
C. | 50 | |||
D. | 52 | |||
E. | 52 | |||
F. | 58 | |||
G. | 58 | |||
H. | 58 | |||
I. | 58 |
Page | |||
58 | |||
59 | |||
59 | |||
59 | |||
59 | |||
ITEM 15 - CONTROLS AND PROCEDURES | 59 | ||
60 | |||
ITEM 17- FINANCIAL STATEMENTS | 60 | ||
ITEM 18 - FINANCIAL STATEMENTS | 60 | ||
TEM 19 - EXHIBITS | 60 |
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 |
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. |
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 |
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.
• | general economic conditions as well as economic conditions specific to our industry; |
• | long sales cycles, which characterize our industry; |
• | implementation delays, which can affect payment and recognition of revenue; |
• | any decision by us to reduce prices for our solutions in response to price reductions by competitors; |
• | the amount and timing of operating costs and capital expenditures relating to monitoring or expanding our business, operations and infrastructure; and |
• | the timing of, and our ability to integrate, any future acquisition, technologies or products or any strategic investments or relationships into which we may enter. |
• | 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. |
• | 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; | |
• | 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. |
• | 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. |
Fiscal 2004 | |||
• | ADB was engaged in a number of activities aimed at expanding our relationships with existing customers and developing relationships with new customer organizations. Through these efforts, which included the introduction of new technology enhancements to our suite of product offerings, the cross selling of ancillary applications, and the increase in the number of users of our technology, ADB was able to expand our working relationships with BP the National Health Services (UK), and GE CEF, among others. | ||
• | In North America, the primary thrust of our activities in 2004 concentrated on the rollout of Asset Manager from GE, our joint venture with GE Commercial Finance. This joint venture is designed to combine GE’s equipment financing and asset management expertise together with our experience in providing mission-critical technology solutions for asset lifecycle management. Together, we have developed web-based solutions to help our customers: | ||
• | Track and re-deploy assets more effectively; | ||
• | Automate equipment appraisals; | ||
• | Efficiently market and sell surplus equipment; and | ||
• | Automate sourcing and tendering processes. | ||
• | Through the joint venture, we signed a customer agreement with Kraft Foods Global, Inc. (“Kraft”) and continued to service our customer agreement with the General Electric Company, acting through its GE Aircraft Engines division (“GE Aircraft Engines”). | ||
• | ADB made a number of enhancements to our suite of technology product offerings in 2004. These enhancements, which centered on re-architecting the under-lying platform of our Dyn@mic Buyer solution and expanding the functionality of our WorkMate and Material Transfer applications, allow us to stay current with the latest technology trends while maintaining a competitive advantage. | ||
• | A key cornerstone of our technology activities focused on the development of Asset Tracker, a new, web-based asset-tracking offering that is delivered through our joint venture with GE. | ||
• | Effective November 15, 2004 our stock symbol on the Over The Counter Bulletin Board (the “OTCBB”) was changed to ADBYF. The addition of the F to the symbol was a requirement of the OTCBB to signify that we are a foreign issuer. |
• | The Brick made a $2.0 million secured loan to Old ADB and ADB at an interest rate of 12% per 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. | |
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. |
• | 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. |
• | 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. |
• | 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. |
Partner | Service or Offering | |
AMEC Services Limited | Engineering Services | |
RBT Consulting | Healthcare Consulting Services | |
Production Access, Inc. | Oil and Gas Data Management Solutions |
Customer | Solution(s) | Industry Segment | Geographic Location | |||
BP Norway AS | ProcureMate; WorkMate | Oil and Gas | Norway | |||
Prosafe Drilling Company (Prosafe) | WorkMate | Oil and Gas | Norway | |||
Halliburton Productos (Halliburton) | WorkMate | Oil and Gas | Brazil | |||
AmecFluor | WorkMate | Oil and Gas | Korea | |||
Talisman Energy Inc. | WorkMate | Oil and Gas | Canada, UK | |||
Hordaland fylkeskommune (HFK) | ProcureMate | Public Authority | Norway | |||
GE Commercial Equipment Financing (GE) | Dyn@mic Seller | Financial Services | US | |||
National Health Services (UK) | 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 |
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 |
• | 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. |
Location | Use | Square Feet (Approximate) | Term of Lease | |||
302 The East Mall, Suite 300 Toronto, Ontario | Executive, Administrative, Engineering and Marketing | 5,435 | Expires Oct. 2009 | |||
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 2005 | |||
3000 Cathedral Hill Guildford, Surrey, England | Marketing | no dedicated space | Month-by-Month | |||
3001 North Rocky Point Drive East, Tampa, Florida | Executive | 143 | Month-by-Month |
ITEM 5 - | OPERATING AND FINANCIAL REVIEW AND PROSPECTS |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
• | persuasive evidence of an arrangement exists, | |
• | delivery has occurred, | |
• | the fee is fixed or determinable, and | |
• | collectibility is probable. |
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 |
(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 |
Name | Age | Position | ||
Directors | ||||
Jeffrey Lymburner(1) | 48 | Director and Chief Executive Officer | ||
T. Christopher Bulger(2),(3),(4) | 48 | Director | ||
Paul Godin,(2),(3) | 52 | Director | ||
Jim Moskos | 42 | Director and President, ADB Technology Group | ||
Darroch (Rick) Robertson (4) | 53 | Director | ||
Jan Pedersen | 47 | 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 | 42 | Chief Financial Officer and Corporate Secretary | ||
Aidan Rowsome(6) | 44 | Former Vice-President, Global Sales |
(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 |
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) | 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. |
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 |
Name | Number of Common Shares Owned (1)(2) | Number of Common Shares Underlying Options (3) | Range of Exercise Prices of Options | Range of Expiration Dates of Options | Percentage of Common Shares Beneficially Owned (4) | |||||
T. Christopher Bulger | 265,000 | 75,000 | $0.22-$0.37 | 07/03/06-01/25/10 | * | |||||
Paul Godin | 332,667 | 70,000 | $0.22 | 01/25/10 | * | |||||
Jeffrey Lymburner | 3,211,975 | 153,300 | $0.22 | 01/25/10 | 4.44% | |||||
Jim Moskos | 21,375 | 370,202 | $0.22-$0.35 | 07/03/06 - 01/25/10 | * | |||||
Darroch Robertson | 5,000 | 110,000 | $0.22-$0.37 | 07/03/06-01/25/10 | * | |||||
Michael Robb | Nil | 138,750 | $0.22-$0.35 | 02/26/06-01/25/10 | * | |||||
Jan Pedersen | 767,019 | 442,292 | $0.22-$ 0.33 | 07/03/06-01/25/10 | 1.06% | |||||
Duncan Copeland | 87,050 | 70,000 | $0.22 | 01/25/10 | * | |||||
Aidan Rowsome | 62,500 | 122,580 | $0.33-$0.35 | 07/03/06-08/15/06 | * |
* | Represents less than 1%. | |
(1) | All numbers adjusted to reflect the two for one consolidation of our shares in October 2001. | |
(2) | Represents shares owned beneficially by the named individual other than those shares which may be acquired under our Corporation's option plans. Unless otherwise noted, all persons referred to above have sole voting and sole investment power. | |
(3) | Includes all shares which the named individual has the right to acquire under all vested and unvested options and warrants granted to such individual under our company's option plan. | |
(4) | This information is based on 72,370,131 common shares outstanding as of May 31, 2005. Common shares subject to options exercisable within 60 days are deemed outstanding for computing the percentage ownership of the person holding the options but are not deemed outstanding for computing the percentage ownership of any other person. |
A. | MAJOR SHAREHOLDERS |
B. | RELATED PARTY TRANSACTIONS |
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 | |||||||||||||
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 |
B. | Memorandum and Articles of Association |
• | 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. |
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. |
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. |
F. | Dividends and Paying Agents |
450 Fifth Street N.W. | 500 West Madison Street |
Room 1024 | Suite 1400 |
Washington D.C. 20549 | Chicago, Illinois 60661 |
(a) | Quantitative Information about Market Risk |
(b) | Qualitative Information about Market Risk |
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. |
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 Convertible Secured Note.(6) | |
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 Convertible Secured Notes.(6) | |
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. and ADB Systems International Ltd.(6) | |
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) | |
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.(7) | |
4.17 | General Security Agreement dated as of May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership.(7) | |
4.18 | Form of Subscription Agreement between ADB Systems International Ltd. and First Associates Investments Inc.(7) | |
4.19 | Subscription Agreement dated May 19, 2004 between ADB Systems International Ltd. and Stonestreet Limited Partnership.(7) | |
4.20 | ||
8.1 | ||
10.1 | ||
11.1 | Code of Ethics of ADB Systems International Ltd.(7) |
* | 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. |
ADB SYSTEMS INTERNATIONAL INC. | |||
By: | /s/ Jeffrey Lymburner | ||
Name: | Jeffrey Lymburner | ||
Title: | Chief Executive Officer | ||
Dated: June 24, 2005 | By: | /s/ Michael Robb | |
Name: | Michael Robb | ||
Title: | Chief Financial Officer and Corporate Secretary |
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. |
Dated: June 24, 2005 | /s/ Jeffrey Lymburner |
Jeffrey Lymburner | |
Chief Executive Officer |
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. |
Dated: June 24, 2005 | /s/ Michael Robb |
Michael Robb | |
Chief Financial Officer |
Report of Independent Registered Chartered Accountants | F-1 | |||
Consolidated Balance Sheets as at December 31, 2004 and 2003 | F-3 | |||
Consolidated Statements of Operations for the years ended December 31, 2004, 2003 and 2002 | F-4 | |||
Consolidated Statements of Deficit for the years ended December 31, 2004, 2003 and 2002 | F-5 | |||
Consolidated Statements of Cash Flows for the years ended December 31, 2004, 2003, and 2002 | F-6 | |||
Notes to Consolidated Financial Statements | F-7 |
Jeff Lymburner | Michael Robb |
CEO | Chief Financial Officer |
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.
|
| 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 | ) |
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 |
| $ | — |
| $ | — |
| $ | — |
|
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES – See Note 15
See notes to consolidated financial statements.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(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 was created on August 30, 2002. Upon implementation of a special resolution of the shareholders 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 16) were transferred to the Company on that date in the form of a return of capital. ADB 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, 2004 and 2003, and results of its operations and its cash flows subsequent to October 22, 2002, and results of operations and of cash flows of Old ADB for the 2002 period prior to October 22, 2002 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, 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 a 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 operating cash flow primarily from major new contracts in Norway, the UK and North America. Management believes that it has the ability to raise additional 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 additional financings would 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 values of assets and liabilities, 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.
Notes 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 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. 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 inter-company transactions have been eliminated.
INVESTMENT IN ASSOCIATED COMPANY
The investment in Bid.Com Ltd. was accounted for under the equity method (see Note 23). This method was considered appropriate based upon management’s inability to determine the strategic operating policies of the associated company without the cooperation of others, its inability 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 24 — Reconciliation of United States GAAP.
MARKETABLE SECURITIES
Marketable securities are comprised of 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 |
SOFTWARE DEVELOPMENT COSTS
The cost of software internally developed for client applications through e-commerce enabling agreements and software licensing is expensed as incurred.
ACQUIRED SOFTWARE
The cost of core software acquired as a result of the acquisition of ADB Systemer ASA was capitalized and amortized over three years, the estimated useful life of the software.
ACQUIRED AGREEMENTS
Acquired agreements were 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 products, were capitalized and have 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, 2002 based on estimated future cash flows from the business acquired.
TRANSLATION OF FOREIGN CURRENCIES
The accompanying consolidated financial statements are prepared in Canadian dollars. The Company’s foreign subsidiaries in the United States, Ireland and the United Kingdom 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
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.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
REVENUE RECOGNITION
The Company’s revenues are derived from software license fees, implementation, training and consulting services, product maintenance and customer support, and software development, and hosting fees. Fees for services are billed separately from licenses of 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 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 determining the appropriate revenue recognition methodology.
SOFTWARE LICENSE REVENUE
The Company recognizes software license revenue in accordance with the terms of the license agreement and when the following criteria as set out in SOP No. 97-2 are met:
• persuasive evidence of an arrangement exists,
• delivery has occurred,
• the fee is fixed or determinable, and
• collectibility is probable.
Software license revenue consists of fixed license fee agreements involving perpetual licenses.
Software license agreements may be part of multiple element arrangements that include consulting and implementation services. When these services are considered essential to the functionality of the license, the associated revenue is recognized on the basis of the percentage of completion method as specified by contract accounting principles. When these services are not considered essential to the functionality of the license, the entire arrangement fee is allocated to each element in the arrangement based on the respective vendor specific objective evidence (“VSOE”) of the fair value of each element. VSOE used in determining the fair value of license revenues is based on the price charged by the Company when the same element is sold in similar quantities to a customer of a similar size and nature. VSOE used in determining fair value for 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 met. The revenue allocable to the consulting services is recognized as the services are performed.
IMPLEMENTATION, TRAINING & CONSULTING SERVICE FEES
The Company receives revenue from implementation of its product offerings, consulting services and training services. Customers are charged a fee based on time and expenses. Revenue from implementation, consulting service and training fees is recognized as the services are performed or deferred until contractually defined milestones are achieved or until customer acceptance has occurred, as the case may be, for such contracts.
PRODUCT MAINTENANCE & CUSTOMER SUPPORT FEES
The Company receives revenue from maintaining its products and the provision of on-going support services to customers. The maintenance and support fees are typically equal to a specified percentage of the customers’ license fee. If associated with the fixed fee license model, the maintenance revenues received are recorded as deferred revenue and recognized on a straight-line basis over the contract period.
Services revenue from maintenance and support is recognized when the services are performed. Maintenance and support revenues paid in advance are non-refundable and are recognized on a straight-line basis over the term of the agreement, which typically is 12 months.
SOFTWARE DEVELOPMENT FEES
Typically, development of software for our customers is provided based on a predetermined fixed rate basis. Revenue is recognized as time is incurred throughout the development process.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
HOSTING FEES
The Company earns revenue from the hosting of customer websites. Under our existing hosting contracts, we charge customers a recurring periodic flat fee. The fees are recognized as the hosting services are provided.
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 the issuance of secured subordinated notes. The deferred charges are amortized over the term of the underlying notes on a straight-line basis. 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 financial statements under Reconciliation of United States GAAP (Note 24).
The 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. U. S. GAAP does not permit separate disclosure of different elements of a financial instrument in the financial statements. The impact of this difference in U. S. GAAP from Canadian GAAP is disclosed in the notes to these financial statements under Reconciliation of United States GAAP (Note 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 11 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 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
|
| 2004 |
| 2003 |
| |||||||||||||||||
|
| Cost |
| Accumulated Amortization |
| Net Book Value |
| Cost |
| Accumulated Amortization |
| Net Book Value |
| |||||||||
|
| (in thousands) |
| |||||||||||||||||||
Computer hardware |
| $ | 2,601 |
| $ | 2,547 |
| $ | 54 |
| $ | 2,588 |
| $ | 2,428 |
| $ | 160 |
| |||
Computer software |
| 28 |
| 28 |
| — |
| 28 |
| — |
| 28 |
| |||||||||
Furniture and fixtures |
| 405 |
| 343 |
| 62 |
| 411 |
| 333 |
| 78 |
| |||||||||
Leasehold improvements |
| 27 |
| 1 |
| 26 |
| 151 |
| 151 |
| — |
| |||||||||
|
| $ | 3,061 |
| $ | 2,919 |
| $ | 142 |
| $ | 3,178 |
| $ | 2,912 |
| $ | 266 |
|
During 2004, the Company recorded capital asset amortization in the amount of $160,000 (2003 - $162,000)
5. DEFERRED CHARGES
During 2004, financing costs in the amount of $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 conjunction with these notes (See Note 6 (b)). The deferred charges are being amortized on a straight-line basis over the term of the underlying debt.
During the year ended December 31, 2004, conversion of the Series F notes resulted in the allocation 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 share-purchase warrant with an exercise price of $0.50. The share-purchase warrants expire on May 19, 2007. The Series F secured subordinated notes will automatically convert into units when the share price of the Company closes above $0.70 for five consecutive trading days during the term. Holders may convert the notes into units at anytime following a four-month hold period. If the holder does not convert and no automatic conversion takes place, the Company must repay the principal amount in cash. The Series F notes are secured by a general security agreement on the assets of the Company, subordinated to the security claims provided to the holders of previously issued notes.
As required by Canadian GAAP, the Company has separated the liability and equity components of the Series 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 underlying rate of borrowing. The Company has determined the fair value of the conversion feature at the issue date of the Series F 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 $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 expense until such date at which the underlying notes are converted into common shares.
Financing costs in the amount of $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.
During the year, all of the Series F notes were converted into equity units. (See table below.)
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.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
e) The following summarizes the nominal and fair values of the liability and equity components of the Series A through H secured subordinated notes.
Secured subordinated notes
|
| 2004 |
| 2003 |
| |||||||||
|
| Nominal |
| Fair |
| Nominal |
| Fair |
| |||||
|
| (in thousands) |
| |||||||||||
|
|
|
| |||||||||||
Opening balance |
| $ | 1,115 |
| $ | 721 |
| $ | 205 |
| $ | 34 |
| |
Issuance of notes: |
|
|
|
|
|
|
|
|
| |||||
Series E |
| — |
| — |
| 1,000 |
| 596 |
| |||||
Series F |
| 500 |
| 286 |
| — |
| — |
| |||||
Series G |
| 1,710 |
| 959 |
| — |
| — |
| |||||
Series H |
| 520 |
| 282 |
| — |
| — |
| |||||
Non-cash interest |
| — |
| 266 |
| — |
| 112 |
| |||||
Conversion of notes |
|
|
|
|
|
|
|
|
| |||||
Series D |
| (115 | ) | (96 | ) | (90 | ) | (21 | ) | |||||
Series E |
| (625 | ) | (428 | ) | — |
| — |
| |||||
Series F |
| (500 | ) | (306 | ) | — |
| — |
| |||||
Closing balance |
| $ | 2,605 |
| $ | 1,684 |
| $ | 1,115 |
| $ | 721 |
| |
Conversion features on secured subordinated notes including conversion of attached warrants
|
| 2004 |
| 2003 |
| ||||||
|
| Common |
| Fair |
| Common |
| Fair |
| ||
|
| (in thousands) |
| ||||||||
|
|
|
| ||||||||
Opening balance |
| 5,723 |
| $ | 497 |
| 2,562 |
| $ | 175 |
|
Issuance of notes |
|
|
|
|
|
|
|
|
| ||
Series E |
| — |
| — |
| 4,286 |
| 398 |
| ||
Series F |
| 2,419 |
| 203 |
| — |
| — |
| ||
Series G |
| 8,274 |
| 624 |
| — |
| — |
| ||
Series H |
| 3,900 |
| 218 |
| — |
| — |
| ||
Conversion of notes |
|
|
|
|
|
|
|
|
| ||
Series D |
| (1,437 | ) | (99 | ) | (1,125 | ) | (76 | ) | ||
Series E |
| (2,679 | ) | (248 | ) |
|
|
|
| ||
Series F |
| (2,419 | ) | (203 | ) |
|
|
|
| ||
Closing balance |
| 13,781 |
| $ | 992 |
| 5,723 |
| $ | 497 |
|
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, 2004 and 2003, the Company established the valuation allowance at 100 percent of the future tax asset.
|
| 2004 |
| 2003 |
| ||
|
| (in thousands) |
| ||||
FUTURE TAX ASSET |
|
|
|
|
| ||
Tax losses carried forward |
| $ | 5,618 |
| $ | 3,229 |
|
Difference in tax and accounting valuations for capital assets and investments |
| 207 |
| 55 |
| ||
|
| 5,825 |
| 3,284 |
| ||
Valuation allowance |
| (5,825 | ) | (3,284 | ) | ||
Future tax asset |
| $ | — |
| $ | — |
|
|
|
|
|
|
| ||
PROVISION FOR INCOME TAXES |
|
|
|
|
| ||
Income taxes at statutory rate |
| $ | (1,388 | ) | $ | (467 | ) |
Adjustments to loss |
| 2,195 |
| (316 | ) | ||
Net reduction in tax rates |
| — |
| (896 | ) | ||
(Increase) reduction to valuation allowance on future tax asset |
| (2,541 | ) | 1,212 |
| ||
Tax losses carried forward |
| 1,412 |
| 226 |
| ||
Difference in tax and accounting valuations for capital assets and investments |
| 152 |
| 360 |
| ||
Permanent differences for tax and accounting income |
| 170 |
| (119 | ) | ||
Provision for income taxes |
| $ | — |
| $ | — |
|
The $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 carry-forwards at December 31, 2004 expire as follows:
|
|
| (in thousands) |
| |
|
|
|
|
| |
2009 |
|
| $ | 1,659 |
|
2010 |
|
| 8,418 |
| |
2011 |
|
| 981 |
| |
2012 |
|
| — |
| |
2013 |
|
| — |
| |
2014 |
|
| 3,569 |
| |
Tax loss carry-forwards that do not expire (a) |
|
| 6,242 |
| |
|
|
| $ | 20,869 |
|
(a) Under Irish local tax laws, tax loss carry-forwards do not expire.
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
|
| 2004 |
| 2003 |
| ||||||
|
| Number |
| Amount |
| Number |
| Amount |
| ||
|
| (in thousands of shares and dollars) |
| ||||||||
|
|
|
|
|
|
|
|
|
| ||
Opening balance |
| 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 |
| 72 |
| 26 |
| 39 |
| 12 |
| ||
Re-issuance of treasury shares |
| 98 |
| — |
| — |
| — |
| ||
Closing balance |
| 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 Nil (2003 – 958,000) common shares for Series A, B and D notes, 1,071,000 (2003 – 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.
c) PRIVATE COMMON SHARE PLACEMENT
On December 6, 2004, the Company completed a transaction resulting in the issuance of 5,000,000 shares at a price of $0.20 per share and 5,000,000 common share-purchase warrants exercisable into one common share at a price of $0.35 for gross proceeds of $1,000,000. The warrants expire on December 6, 2008. Gross proceeds were comprised of $800,000 in cash and $200,000 in legal services. The $200,000 was applied, in part, to outstanding payables and 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 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 Corporation for gross proceeds of $20,000.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
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.
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.
d) 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 Nil (2003 – 479,000) common 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 a total of 2,178,000 share-purchase warrants as follows: 479,000 with an exercise price of $0.14 per share 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 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).
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 20). All of the 607,600 warrants were cancelled on March 31, 2003.
11. STOCK OPTIONS
a) Stock options are comprised of the 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
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, 2004 was approximately $296,000 (2003 – $1.8 million). The Management Resources and Compensation Committee of the Board of Directors 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 2006.
A 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 |
|
|
|
|
|
During the fourth quarter of fiscal 2003, the Company adopted the accounting recommendations contained in the CICA Handbook Section 3870 –“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 recorded 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, 2004, the employee stock option expense was $39,000 (2003 - $193,000). For the year ended December 31, 2003, expenses in the first, second and third quarters increased by $2,000, $1,000 and $130,000, 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 were 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:
|
| 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 |
|
Notes 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:
|
| 2004 |
| 2003 |
| 2002 |
| ||||
Loss attributable to common shareholders |
|
|
|
|
|
|
| ||||
As reported |
| $ | (5,104 | ) | $ | (2,815 | ) | $ | (9,364 | ) | |
Pro forma |
| $ | (5,104 | ) | $ | (2,956 | ) | $ | (9,608 | ) | |
|
|
|
|
|
|
|
|
|
|
| |
Basic and diluted net loss per share: |
|
|
|
|
|
|
| ||||
As reported |
| $ | (0.08 | ) | $ | (0.05 | ) | $ | (0.22 | ) | |
Pro forma |
| $ | (0.08 | ) | $ | (0.05 | ) | $ | (0.23 | ) | |
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 $24,000 in foreign exchange losses in 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.
14. COMMITMENTS AND CONTINGENCIES
(a) Minimum payments under operating leases during the next five years are as follows:
|
| (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 $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.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
15. CHANGES IN NON-CASH OPERATING WORKING CAPITAL
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 | ) | — |
|
16. RETAIL ACTIVITIES
The Company ceased its on-line retail activities in October 2000; however, during 2003, the Company received a $67,000 refund from a U.S.-based credit card institution formally engaged by the Company when it operated its on-line retail activities in the U.S.
The Company’s non-consolidated investment, Bid.Com, recommenced on-line retail activities in 2002 (Note 23). The shares of Bid.Com were transferred in settlement of a demand loan on June 30, 2003 (Note 19).
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
17. REALIZED GAINS AND LOSSES ON DISPOSAL OF MARKETABLE SECURITIES, STRATEGIC INVESTMENTS AND CAPITAL ASSETS, AND RECOVERY OF ASSETS
|
| 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 2004, the Company disposed of capital assets that were no longer required resulting in a loss of $1,000. Similar disposals in 2003 resulted in a loss of $13,000 and a gain of $23,000 in 2002.
(c) The loss on disposal of marketable securities includes a loss of $143,000 resulting from the January 2002 sale of the Company’s remaining AOL shares for gross proceeds of $1.3 million.
18. UNREALIZED GAINS AND LOSSES ON REVALUATION OF STRATEGIC INVESTMENTS
|
| 2004 |
| 2003 |
| 2002 |
| ||||
|
| (in thousands) |
| ||||||||
Revaluation of strategic investments (Note 18(a)) |
| $ | — |
| $ | — |
| $ | (24 | ) | |
|
| $ | — |
| $ | — |
| $ | (24 | ) |
(a) During 2002, 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).
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 loan in the amount of $2,195,000.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
20. ACQUISITION OF ADB SYSTEMER ASA
On October 11, 2001, the Company acquired 98.3 per cent of the outstanding shares of ADB Systemer of Sola, Norway. ADB Systemer was a publicly traded software vendor focused on enterprise asset management and integrated electronic procurement. ADB Systemer has wholly-owned subsidiaries in the United States and in the United Kingdom.
The purchase price for 12,518,493 of the outstanding ADB Systemer common shares was $13.762 million. The purchase price was comprised of $2.293 million in cash, $9.844 million of common stock issued from treasury, acquisition costs of $765,000, employee stock options with a fair market value of $576,000 granted to ADB Systemer employees as replacement options and warrants with a fair market value of $284,000 issued to ADB Systemer warrant holders as replacement warrants. Common stock issued from treasury totaled 10,866,052 shares (21,732,104 pre-consolidation) with a value of $9.844 million based on a five-day trading average before and after September 10, 2001, the date the acquisition was announced to the general public. The purchase price for ADB Systemer did not include any contingent payments, options, or commitments. The purchase price of $13.762 million was allocated as follows:
|
| 2001 |
| |
|
| (in thousands) |
| |
|
|
|
| |
Net monetary assets (including cash of $814) |
| $ | 418 |
|
Capital assets |
| 308 |
| |
Contractual agreements |
| 177 |
| |
Acquired software and related intellectual property |
| 3,383 |
| |
Goodwill |
| 9,476 |
| |
Total purchase price |
| $ | 13,762 |
|
ADB Systemer’s operations were consolidated after the effective date of the acquisition, October 11, 2001.
The amortization periods for contractual agreements and software and related intellectual property are 12 and 36 months respectively. An amortization expense relating to software in the amount of $846,000 was recorded in 2004 (2003 - $1,128,000). At the end of fiscal 2004, acquired software had been fully amortized. At the end of fiscal 2003, accumulated amortization for acquired software amounted to $2,537,000, resulting in a net book value of $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.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
21. INVESTMENTS IN JOINTLY CONTROLLED COMPANY
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 operates under the name of GE Asset Manager LLC. The joint business venture develops and markets 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 has been fully amortized as of December, 2004.
As at December 31, 2004, the joint venture held no assets or liabilities, and earned no revenue. A nominal amount of incremental expenses has been incurred by the Company in development and marketing activities pertaining to the joint venture. Such expenses have been included in the financial statements of the Company.
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 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.
23. RELATED PARTY TRANSACTIONS
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 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 inability to determine the strategic operating policies of Bid.Com without the cooperation of others, its inability 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 24.
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
Condensed income statement and cash flow information for Bid.Com Ltd. for the six-month period ended June 30, 2003 is as follows:
|
| 2003 |
| |
|
| (in thousands) |
| |
Revenue |
| $ | 3,614 |
|
Net income |
| 208 |
| |
Change in cash resources |
| (358 | ) | |
Revenue of $35,000 related to web-site development, support and maintenance services provided to Bid.com Ltd. was included in the consolidated results of the Company for the six months ended June 30, 2003. In addition, the Company charged overhead-related costs of $76,000 for rent, connectivity and management fees to Bid.com Ltd. for the six-month period ended June 30, 2003. These overhead charges were recorded as a reduction of expenses in the consolidated financial statements for the year ended December 31, 2003.
24. RECONCILIATION OF UNITED STATES GAAP
The financial statements of the Company have been prepared in accordance with generally accepted accounting principles as applied in Canada, which conform in all material respects with generally accepted accounting principles in the United States, except as noted below.
(a) STOCK-BASED COMPENSATION TO EMPLOYEES
In fiscal 2003, the Company adopted the accounting recommendations contained in the CICA Handbook Section 3870 —“Stock-based 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 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 2004 annual financial statements under U.S. GAAP reflect a stock-based compensation expense to employees of $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 2004 are reported below and were made using the Cox-Rubinstein binomial valuation model with the following weighted average assumptions:
|
| 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:
|
| 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.
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).
Notes to the Consolidated Financial Statements
Years ended December 31, 2004, 2003 and 2002
(in Canadian dollars)
(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, 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 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 $266,000 (2003 - $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 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 of $96,000 with respect to the Series E subordinated notes. An interest expense of $126,000 (2003 - $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.
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, 2004 are accrued audit fees of $193,000 (2003 - $145,000) and accrued compensation expenses (severance and unpaid vacation) of $274,000 (2003 - $228,000).
U.S. GAAP requires the disclosure of non-cash interest components incurred during the year. In 2004, the Company incurred $126,000 (2003 - $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 19).
Under U.S. GAAP, EITF 01-09 requires, in certain circumstances, that the warrants issued to customers be recorded as a reduction of revenue. There is no similar guidance in Canadian GAAP. Accordingly, depreciation and amortization and revenue would be reduced by $150,000 (2003 - $38,000) under U.S. GAAP.
(f) INVESTMENT IN ASSOCIATED COMPANY/DISCONTINUED OPERATIONS
U.S. GAAP requires consolidation of the Company’s investment in the associated company described in Note 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 24(g).
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.
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 issued in exchange for the waiver of certain US registration rights granted to Stonestreet pursuant to a subscription agreement dated April 25, 2002 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.
25. SEGMENTED INFORMATION
The Company operates in the following reportable geographic segments: North America, Ireland and the United Kingdom, and Norway.
Assets by Geographic Region:
|
| 2004 |
| 2003 |
| ||||||||
|
| (in thousands) |
| ||||||||||
|
| Capital Assets |
| Intangible and Other |
| Capital Assets |
| Intangible and |
| ||||
North America |
| $ | 39 |
| $ | 155 |
| $ | 106 |
| $ | 152 |
|
Ireland and U.K. |
| 6 |
| — |
| 16 |
| — |
| ||||
Norway |
| 97 |
| — |
| 144 |
| 846 |
| ||||
|
| $ | 142 |
| $ | 155 |
| $ | 266 |
| $ | 998 |
|
Net Revenue by Geographic Region:
|
| 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 |
|
26. SUBSEQUENT EVENT
On February 23, 2005, the Company completed a transaction resulting in the issuance of 2.5 million equity units at a price of $0.23 per unit for gross proceeds of $575,000. Each equity unit consists of one common share and one common share-purchase warrant with an exercise price of $0.40 each. The warrants expire on February 22, 2009.
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 Business
Richard Ivey School of Business,
The University 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 Audit Committee
(2) Member of the Management Resources and Compensation Committee
(3) Member of the 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
ADB Systems International Ltd.
3000 Cathedral Hill
Guildford, Surrey GU2 7YB UK
+ 44 (0) 1483 243 577
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
Registrar 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.