SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F
[ ] 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
OR
[ ] 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
BID.COM INTERNATIONAL INC.
(Exact name of Registrant as specified in its charter)
Not Applicable
(Translation of Registrant's name into English)
ONTARIO, CANADA
(Jurisdiction of incorporation or organization)
6725 Airport Road, Suite 201
Mississauga, Ontario L4V 1V2
(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.
52,646,718 Common Shares as of December 31, 1999
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ______
Indicate by check mark which financial statement item the registrant has elected
to follow.
Item 17 X Item 18 ______
EXCHANGE RATES
The following table sets forth, for the period indicated, certain exchange
rates based on the noon buying rate in New York City for cable transfers in
Canadian dollars, as certified for customs purposes by the Federal Reserve Bank
of New York. Such rates are the number of U.S. dollars per one Canadian dollar
and are the inverse of the rates quoted by the Federal Reserve Board of New York
for Canadian Dollars per U.S. $1.00. On May 18, 2000, the exchange rate was
US$1.00 = Cdn$1.5007. Certain financial information presented in this annual
report has been translated from Canadian dollars to U.S. dollars at an exchange
rate of Cdn$1.444 to US$1.00, the noon buying rate in New York City on December
31, 1999 for cable transfers in Canadian dollars as certified for customs
purposes by the Federal Reserve Bank of New York.
Year Ended December 31,
Rate 1995 1996 1997 1998 1999
- ---- ---- ---- ---- ---- ----
Last Day of year $.7323 $.7301 $.6999 $.6504 $.6925
Average(1) during .7286 .7332 .7221 .6740 .6744
year
High during year .7527 .7513 .7487 .7105 .6925
Low during year .7023 .7235 .6945 .6341 .6439
(1) The average rate is the average of the exchange rates on the last day of
each month during the year.
FORWARD LOOKING STATEMENTS
This Registration Statement includes forward-looking statements, regarding among
other items:
. our future capital needs
. our ability to further develop our business to business relationships and
revenues
. our ability to develop appropriate alliances
. acceptance of our products and services
. competitive factors
. new products and technological changes
. our marketing and sales plans
. our expectations about the markets for our online products and services
. the acceptance of the Internet and/or online auctions as a viable commercial
medium
. the validity of our patent and protection of our proprietary technology
. geographic expansion of our business
We have based these forward-looking statements largely on our expectations.
Forward-looking statements are subject to risks and uncertainties, certain of
which are beyond our control. Actual results could differ materially from those
anticipated as a result of the factors described in the "Risks Factors" section
beginning on page 14, including, among others:
. the timing of our future capital needs and our ability to raise additional
capital when needed
. uncertainty about the acceptance of the Internet and/or online auctions as a
viable commercial medium
. uncertainty of market acceptance of our products and services
. our ability to compete with other online auction businesses and e-commerce
enablers
. failure to timely develop or license new technologies
. delays in the issuance of, or the failure to obtain, patents for certain
proprietary technologies
. problems with important vendors and business partners on whom we rely
. our inability, directly and/or through our marketing and advertising
alliances, to attract a sufficient number of customers to our Web site
. our inability to attract and retain key personnel
. risk of system failure or interruption
. implementation and enforcement of government regulations
. problems which may arise in connection with the acquisition or integration of
new businesses, products, services, technologies or other strategic
relationships
We do not undertake any obligation to publicly update or revise any forward-
looking statements contained in this annual report, whether as a result of new
information, future events or otherwise. Because of these risks and
uncertainties, the forward-looking events and circumstances discussed in this
annual report might not transpire.
Trademarks or trade names of Bid.Com used in this annual report include:
BID.COM(TM); POWERED BY BID.COM(TM); BID.COM(TM), THE ONLINE AUCTION(TM);
INTERNET LIQUIDATORS(TM); BID BUDDY(TM); SEARCH BUDDY(TM); and EXPERIENCE
ENGINE(TM).
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Unless otherwise indicated, all references in this annual report to
"dollars" or "$" are references to Canadian dollars. Our financial statements
are expressed in Canadian dollars. Except as otherwise noted, certain financial
information presented in this annual report has been translated from Canadian
dollars to U.S. dollars at an exchange rate of Cdn$1.444 to US$1.00, the noon
buying rate in New York City on December 31, 1999 for cable transfers in
Canadian dollars as certified for customs purposes by the Federal Reserve Bank
of New York. Such translations should not be construed as representations that
the Canadian dollars represent, or have been or could be converted into, U.S.
dollars at that or any other rate.
Overview
We are a global provider of on-line dynamic pricing solutions for the
business-to-business and business-to-consumer markets. Our dynamic pricing
"powered by Bid.com" solutions include ascending price auctions, live or real-
time Dutch (declining price) auctions, requests for proposal/quote auctions and
fixed price formats together with related consulting, research, training and
implementation services. We offer business-to-consumer auction services at our
Web site www.bid.com. We also provide our auction technology and related
services to business customers to enable them to conduct online auctions and
other ecommerce product and service offerings.
Our auctions run on our proprietary e-commerce platform which we believe is
state-of-the-art. Our platform has a scaleable transactional backbone and an
efficient delivery system. In March 1999, we received a patent from the U.S.
Patent and Trademark Office covering our process for conducting Dutch auctions
over electronic distribution channels. We believe that our capability within
the Dutch auction sector is a key point of differentiation in the online
marketplace. We believe this differentiation will grow in significance as more
online shoppers and businesses become familiar with the Dutch auction format..
Through our business-to-consumer auctions, we sell a broad range of
products at prices that usually are lower than those charged by traditional
retailers. We sell primarily brand name, front-line products under
manufacturers warranty, including:
. computer hardware and software . jewelry
. consumer electronics . collectible sports and entertainment
cards and other memorabilia
. toys, games and sporting goods . travel and entertainment products and
services
From the commencement of our business operations in 1995 through 1998, we
focussed our activities primarily on business-to-consumer auctions. Beginning
in 1999, we began to shift our primary business focus to business-to-business
auctions and related services. We have entered into auction enabling agreements
in several industry sectors including electronic media, travel, wireless
communications, automotive, heavy machinery and art and antiquities. Although
during 1999 a substantial majority of our revenues were derived from business-to
- -consumer auctions and related services, we anticipate that during 2000 and in
future years, an increasingly larger percentage of our revenues will be
generated by technology, services and products we will provide to customers in
the business-to-business market.
Industry Background
The Internet
International Data Corporation has estimated that the number of web users
worldwide grew from 19 million in 1995, to over 200 million by the end of 1999,
and is on track to reach 1 billion people by 2005. We believe that Internet
growth will result from a number of factors, including:
. the large and growing use of personal computers in the workplace and home;
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. increasing reliance on the Internet by the business-to-business sector;
. advances in the performance and speed of personal computers and modems;
. improvements in network infrastructure; and
. easier and cheaper access to the Internet and increased awareness of the
Internet among businesses and consumers.
Jupiter Communications LLC estimates that the number of US households with
an online service will grow from 32 million in 1999 to 57 million in 2002,
representing a penetration rate of over 50%.
It is anticipated that online users will continue to grow as
communications, cable and computer related companies begin to offer access to
the Internet through home television sets via Web TV or cable. Several large
communications companies have begun selling high speed online access and
Internet phone service over existing broadband cable lines. Cable modems have
the advantage of delivering data faster than telephone modems. In addition, a
cable modem is always connected, which eliminates the need for a user to dial up
access to the Internet. Forrester Research Inc. estimates that the number of
homes in North America accessing the Internet with cable modems will grow from
about 700,000 by the end of 1999 to approximately 13.6 million by the end of
2002.
We believe that a significant opportunity exists for online business-to-
business and business-to-consumer trade. In April 2000, Forrester Research
estimated that global internet trade will reach $656 billion in 2000 and $6.9
trillion by 2004. Forrester estimates that the US will account for
approximately 75% of business-to-business trade in 2000, and 46% by 2004 as
international growth accelerates.
While business-to-consumer sales were first to gain widespread adoption
among US households, online business-to-business sales have recently surpassed
it as companies reengineer their sales processes. In two years, an overwhelming
majority of US firms will be transacting business on the Internet. According to
Forrester, more than 90% of firms described plans to buy and sell on the
Internet, which should result in total business e-commerce revenues of $2.7
trillion by 2004. This growth will be accelerated by the rapid development of
e-marketplaces - new models for conducting e-commerce, including auctions,
aggregators, bid systems, and exchanges.
The Internet offers many data management and multimedia features which
enable businesses and consumers to search for products by category or brand. In
addition, the Internet allows businesses and consumers to access a wealth of
information, including reviews and competitive pricing and audio and video
presentations which, enhance static catalog formats. Vendors can more easily
obtain demographic and behavioral data about their customers, providing them
with greater direct marketing opportunities and the ability to offer a more
personalized experience. Internet retailers also offer consumers the
convenience of home shopping and 24-hours-a-day, seven-days-a-week operations,
available to any location, foreign or domestic, that has access to the Internet.
Internet Auctions
We believe that online auctions have a number of characteristics that make
the sale of goods via the Internet particularly attractive as compared to
traditional distributors, vendors and retail stores or to static priced online
stores and catalogs. The primary advantage is that customers are empowered to
set their own price for a purchase. Online auctions represent a dynamically
changing sales format that leverages the unique characteristics of the Internet,
such as interactivity and the sense of community built by customers
competitively bidding in an exciting auction environment. Online auctions also
provide immediate feedback to distributors, vendors and other e-tailers
regarding price-points that are attractive to customers. This constitutes an
efficient market model that enables supply and demand functions to move to
equilibrium in real-time, and provides online auctioneers the opportunity to
respond to market conditions quickly.
Jupiter Communications predicts that by 2004, online business-to-consumer
auctions will increase at an annual rate of 46% per year through 2004, reaching
$4.5 billion in sales per year. Forrester estimates that 3 million people or
35% of online shoppers used an auction site in 1998. Forrester expects this
number to grow to over 14 million (or 35% of shoppers) by 2003.
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Our Business Strategy
Building on our significant experience in the delivery of on-line dynamic
price solutions, our objective is to provide leading businesses in selected
industry verticals with auction enabling and related service capabilities,
thereby allowing them to enjoy the advantages of a new or alternative on-line
distribution strategy. Because of our modular technology and expertise in the
delivery of related services such as implementation, consulting, training and
hosting, we are uniquely positioned to provide customized solutions to meet the
needs of our clients. Our business strategy is comprised of the following key
components:
. Shifting our Primary Business Focus to Business-to-Business Product and
Service Offerings - We have begun to shift our primary business focus to the
business-to-business market from the business-to-consumer market. We believe
that our proprietary technology has wide application in the business-to-business
sector because it enables organizations to efficiently conduct high volume
transactions. We presently provide our auction technology e-commerce platform
and related services to enable companies to conduct business-to-business
auctions in several industry sectors. We plan to continue to pursue
opportunities in the business-to-business sector in North America and
internationally. We also plan to promote our capabilities as an application
service provider or ASP, hosting our software for third parties from our own
locations.
. Maintaining and Enhancing Our Proprietary State-of-the-Art Technology - We
have developed a proprietary state-of-the-art e-commerce platform for the
operation and support of online auctions. We believe our proprietary technology
is competitive with other enablers of business-to-business offerings. In order
that we remain competitive, we must maintain and enhance our technology. We have
recently introduced Request for Proposal/Quote capabilities to our offerings,
and are developing new transaction formats and complementary technologies. In
addition, we are developing wireless applications for our technology.
. Entering into Significant Alliances with Industry Leaders - We seek
to establish marketing and other significant relationships with leading
companies in a broad range of industries. We believe that these relationships
will help provide us with access to important industry participants and will
help increase our brand awareness.
. Continuing our Global Expansion - In 1999, we opened offices in Dublin,
Ireland and Melbourne, Australia, to serve the European and Asia-Pacific
markets, respectively. We plan to expand our markets in European Community
countries from our office in Ireland and through additional sales and marketing
offices we plan to open in Continental Europe during 2000. We expect to expand
our Asia-Pacific presence in a similar fashion,
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as customer relationships are developed. In 2000, we anticipate establishing a
sales and marketing presence on both coasts of the U.S.
. Seeking Acquisitions and Strategic Investments - We plan to continue to expand
by seeking technologies, products, and services that compliment our existing
business. If appropriate opportunities are available, we may acquire
businesses, technologies or products or enter into strategic relationships that
may further diversify revenue sources and product offerings, expand our customer
base or enhance our auction platform.
Our Services and Products
We provide on-line dynamic pricing solutions under our "Powered by Bid.Com"
banner for the business-to-business and business-to-consumer markets. We offer a
number of on-line transaction methods, and are continuing to develop new methods
by which businesses can sell their products and services. Our "dynamic pricing"
methods include:
Rising Price (Top Bid) Auctions. In the conventional rising price auction
format, the highest bids win the items auctioned. The rising price auction
allows participants to competitively bid on available products and services by
incrementally adjusting their bid positions. 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. Participants
can also use our BID BUDDY tools to place absentee bids up to a pre-determined
limit. This "intelligent" bidding agent checks bid activity at regular
intervals and increases a customer's bid by the minimum required increment to
ensure that products are purchased at the best possible price. If outbid, the
customer receives an e-mail alert and is permitted to increase his bid.
The interactive nature of the bid update system encourages continued
customer participation throughout the auction lifecycle. Customers can also use
our SEARCH BUDDY search tool which may be pre-programmed up to a maximum seven
days in duration, to find product offerings customized to a customer's specific
areas of interest. If a match is found for a customer's search, the customer
receives immediate notification by e-mail with a direct link to the desired
product. Customers may also use an affinity engine which recommends items
targeted to a customer's product preferences based on a customer's viewing and
bidding history. The recommendations are provided in real time.
Dutch Auctions. In our Dutch auctions, a starting price is set and a
limited time period is allocated for a fixed quantity of the product to be
auctioned. As time advances, the price drops in small increments. The longer
one waits, the lower the price. However, if a bidder waits too long the limited
quantity of the product being auctioned may be sold out. 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. The bidders remain online and actively participate
throughout the auction process.
In March 1999, we received a patent from the US Patent and Trademark Office
covering our process for conducting Dutch auctions over electronic distribution
channels. We have a patent application pending in Canada covering the same
technology. This unique format lends itself to a multitude of products and
services and special event auctions. We believe that the Dutch auction format
will have wide application in the business-to-business sector because it
facilitates the efficient conduct of high volume transactions.
Fixed Price Offerings. Our technology enables the sale of products and
services on a fixed price basis. The vendor posts the good or service and the
price. The purchaser has no ability to bid in respect of the price.
Request-for-Quotation Auction. The RFQ system is a transaction method
that allows buyers to post an online offer to purchase such that pre-qualified
suppliers may view the offer download documentation related to it and then bid
on-line. Buyers can let bidders see the details of all other bids, or
alternatively customize the site for confidentiality reasons.
Bidders or vendors can be pre-qualified by the buyer and provided with
access to view and download only the documentation that the buyers specifies.
Bidders can then request additional information from the buyer via a question
and answer module which we provide. The buyer will examine the questions that
the bidder post and then prepare a response document to those questions they
wish to answer which is then posted on-line.
Pre-qualified bidders are notified when the auction for the offer will
begin. Vendors are allowed to place bids while the time-limited auction is
live, and can change the terms and conditions of their initial bids during the
auction. The amount of information they receive regarding other qualified bids
is limited to whatever the buyer wants them to know.
Sealed Bid. Similar to the RFQ system, the sealed bid method allows the
buyer to post its product or service requirements to a multitude of vendors.
The system has the ability to incorporate such features as detailed technical
information, questions and answer forums, and automatic e-mail notification of
amended or new buyer-posted documents.
The sealed bid system differs from the RFQ in that the vendors only have
one opportunity to supply a bid. Other bids placed by competing vendors are not
visible to anyone during the actual auction. Only after the close of the
auction is the buyer able to view the vendor bids.
Application Service Provider (ASP). Our technology allows a customer to
add an auction component to its existing web site by enabling auctions using
software engines that reside in our platform. This model allows our customer
to concentrate on its core competency which we manage and maintain the hardware,
software and connectivity associated with the various pricing methodologies that
we support.
Business-to-Business
In the business-to-business market we provide our auction technology,
e-commerce platform and other services to businesses to enable them to operate
business-to-business and business-to-consumer auctions and other e-commerce
product and service offerings. The modular nature of our software allows us to
tailor our products and services to the needs of each client. The software
includes all of our dynamic pricing methods. We also offer a wide range of
services, including consulting, research, training and implementation services.
Customization and implementation of our technology and products for a client may
take several weeks to several months, depending on the client.
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Business-to-Consumer
We currently operate two national business-to-consumer auction sites at
www.bid.com, one in the United States and one in Canada. We also operate other
private brand local or regional stand-alone auctions. Customers who access the
online auction through our Web site or the Web sites or search engines of our
strategic or advertising partners, are all channeled to one of the two national
auction sites, depending on the geographic location of the customer. Our
proprietary auction platform can support a large number of concurrent and
sequential participants, capturing the excitement of a live event in an online
environment. Customers can interact at their convenience and have access to a
variety of products and services at constantly changing prices. The U.S.
auction is conducted in U.S. dollars and the Canadian auction is conducted in
Canadian dollars.
To date, we have generated most of our revenues from online auction sales
in the United States. During 1999, revenues from online auction sales in the
U.S. and Canada were approximately 90% and 10%, respectively, of total online
auction sales.
User-Friendly Design. Our Web site has been designed with the goal of
bringing participants into the online equivalent of a live auction. Customers
view detailed product descriptions with catalog quality pictures and graphical
representations. Winning bidders can complete the purchase transaction quickly,
usually within minutes for repeat customers. In addition, the system design
allows us to change and upgrade the auction site with ease and quickly respond
to requests by marketing partners and advertising sponsors to change the look of
the products offered. The front-end user interfaces can undergo continual
enhancements without requiring changes to the transactional back-end of the
system. The system provides full delivered cost disclosure prior to the
consumer completing the purchase by adjusting the cost charged to purchasers for
all added taxes and delivery charges to the customers' door, anywhere in North
America.
Bidder Registration. Customers may view our Web site without cost or
registration. However, they must provide certain registration information
before participating in the online auction, including verifiable location and
billing information and a commercial credit card. We use the registration
information for processing successful bids into customer orders. Using this
information, our data systems determine shipping and handling charges and
applicable taxes, charge customer credit cards, print order information,
transmit order information to our contract warehouses and vendors and provide
transaction information for our accounting system. Customers are generally
required to pay for purchased goods by commercial credit card, thereby
significantly reducing our credit risk.
Retail Products. Our auctions offer a broad range of nationally recognized
brand name goods at low prices and under manufacturers warranty. Historically,
a substantial amount of e-commerce activity has focused on competitive and low
gross margin categories of products such as refurbished computers. We believe
that with the growing use of the Internet by a larger segment of the population,
Internet consumers will seek higher quality and a broader mix of products than
in the past.
We have offered and will continue to offer lower margin computers, computer
accessories and computer upgrades at our auction sites. However, we continue to
shift our product mix and increase the number and variety of
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goods in other product categories, many of which generate higher margins,
including consumer electronics, toys, games, sporting goods, memorabilia,
jewelry and travel and entertainment products and services. From time to time,
we intend to introduce other product categories on a selected basis.
The majority of our products are front-line goods and the remainder are
typically clearance or other end-of-the-line items. We offer products from many
brand name computer, consumer electronics, jewelry and other manufacturers. We
also offer travel packages, gold and precious gem jewelry and authentic sports
collectibles, from multiple sources. Within our broad product categories, we
rotate the products we offer to consumers on a daily basis.
The products supplied to us for sale through our Web sites are usually
backed by a manufacturer's warranty. Front-line goods typically carry a full
manufacturer's warranty, while clearance and other end of the line items are
accompanied by limited warranties. We ourselves provide no warranties on the
products or services sold through our Web sites.
The products sold at our auctions are typically shipped directly by our
suppliers to the winning bidders. From time to time, we may offer our own
fulfillment capability to new suppliers that are not initially equipped to ship
directly to customers. We currently use Purolator Courier, Federal Express and
United Parcel Service to distribute purchased goods and are in the process of
adding other courier services. We do not maintain our own warehouse, but rely on
third party contract warehouses.
Limited Inventory. We normally obtain products for sale in our auctions
from suppliers under arrangements that allow us to purchase merchandise only
after our customer has purchased and paid for the product. These arrangements
typically provide that the supplier will reserve for sale by us specified
quantities of products for a fixed period of time without obligating us to
purchase those products until sales are made to our customers. As a result, we
do not usually stock inventory and consequently have no liability for unsold
merchandise. In certain circumstances, we may place purchase orders in advance
for unique products. As part of our customer satisfaction policy, we may allow
our customers to return merchandise upon payment of a re-stocking fee. The
merchandise is either returned to the supplier for credit or resold by us.
Transactional revenues from the sale of products create gross margins
based on the difference between the actual selling price and the reserve price
negotiated by us with our suppliers. Sold products are usually shipped directly
from the supplier to the customer. Shipping, handling and applicable taxes are
typically added to the auction price and are paid by the customer. Inventory on
our balance sheets reflects sales returns in transit and an insignificant amount
of purchased inventory. We record both items at the lower of costs and net
realizable value.
Customer Support and Service. We believe that our ability to establish and
maintain long-term relationships with our customers and encourage repeat visits
and purchases is dependent, in part, on the strength of our customer service
support and staff. We currently employ a staff of three full-time and two part-
time customer support and service personnel who are responsible for handling
customer inquiries from 8:30 a.m. to 5:00 p.m. (Eastern Standard Time) seven
days a week. The customer service staff answer customer questions about the
bidding process, track shipments, investigate problems with merchandise and act
as liaisons between customers and our vendors. Under certain circumstances, we
accept returns from our customers but we charge customers a re-stocking fee.
Customers
Business-to-Business
We provide our technology, e-commerce platform and related services to
customers in a variety of industries, including: electronic media, travel,
wireless communications, automotive, heavy machinery and art and antiquities.
Our business-to-business customers typically use our technology and services to
implement and operate on-line business-to-business or business-to-consumer
auctions for their customers or to provide other economic solutions to existing
business activities. We believe that our technology is suited to a broad range
of industries in which companies are seeking alternative distribution channels
or other economic solutions.
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We generate revenue from our business-to-business relationships in several
ways. We typically receive some combination of license, auction enabling,
hosting and service fees for our technology. In addition, we are paid consulting
and other fees when we provide consulting, training and certain other services.
In many cases, we also may receive a percentage of revenues or other
transactional-based fees from on-line transactions. In certain cases, we may
also invest in our customers, in connection with the delivery of our services.
Examples of some of the business-to-business relationships we have entered
into under the "powered by Bid.com" banner include:
. General Electric Capital Corporation GE Capital is a global diversified
financial services company. We have entered into agreements with GE
Capital under which its Commercial Equipment Finance Division uses our
technology and services to remarket assests on-line to its global
customer base. As part of our agreement, the GE Capital Commercial
Equipment Finance Division has also agreed to market Bid.Com's products
and services to other divisions of GE and their partners. Under our
agreement GE Capital Commercial Equipment Finance Division will pay us
implementation and hosting fees and a share of online transaction
revenues. As part of the agreement we have issued 1,000,000 warrants to
GE Capital, of which 200,000 have vested. The remaining 800,000 are
subject to performance based vesting provisions. The agreements with GE
Capital were entered into in April, 2000 and have terms varying between
six months and three years.
. ValueVision Interactive Inc. (VVI or ValueVision). VVI offers live
programming 24 hours per day, 7 days a week and broadcasts, (as of
September 14, 1999) to approximately 32 million cable homes. In
September, 1999 we entered into a three year agreement under which we
will provide a complete E-commerce solution for VVI's Dutch Auction
component of ValueVision's "Snap TV" brand carrying the "powered by
Bid.Com" sub-brand. Under our agreement, ValueVision will pay us
technology service fees for certain of the services we perform and we
will receive a percentage of gross transaction revenues from Snap TV
auction services in North America.
. Point2 Internet Systems Inc. Point2 is an online remarketer of heavy
equipment for the mining, construction, forestry, and oil and gas
industry sectors. We have licensed our on-line auction and e-commerce
technology to Point2, which Point2 uses to conduct auctions through its
Web site catering to manufacturers, dealers and buyers of heavy
equipment. This site also provides a full suite of marketing and
informational services. When we initially entered into the agreement with
Point2, we acquired 25% of Point2's common shares and an option to
acquire an additional 26%. We exercised that option in August 1999 and
currently own 51% of Point2's common shares.
. Megawheels.com Inc. Megawheels offers a leading Canadian E-commerce
solution to automotive dealers which supports one of Canada's
largest automotive online databases. We license our proprietary online
auction and E-commerce technology, including both Dutch and rising price
components, to Megawheels. We also provide the technical services
required for the implementation and operation of Megawheels' online
auctions for the automotive community. Under our agreement with
Megawheels we receive licensing fees and we share in a percentage of
net revenues generated by online transactions. In addition, in connection
with entering into the agreement, we acquired a minority equity interest
in Megawheels. Our agreement expires in 2014.
Business-to-Consumer.
As of May 15, 2000 we had approximately 204,000 registered bidders at our
www.bid.com Web site.
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Marketing
Business-to-Business
Our marketing strategy for the business-to-business market is comprised of the
following elements:
. Enter into marketing alliances with industry leaders - We seek to
enter into marketing alliances with leading consulting and financial
services firms that provide economic and technology services to the
business community. In 1999, we entered into a memorandum of
understanding with CapGemini Consulting Inc., one of
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Europe's leading management consulting and information technology
services groups. Under the terms of our arrangement, we and CapGemini
will jointly market e-commerce solutions and attempt to accelerate the
deployment of online auctions in France. We will provide the technical
services and training required for the implementation, integration and
operation of online auctions for selected current and future of clients
of CapGemini. In May 2000, we entered into a memorandum of understanding
to form a marketing alliance with PricewaterhouseCoopers LLP. Under the
terms of our arrangement, we and PricewaterhouseCoopers will jointly
introduce our dynamic pricing technology to North American clients.
PricewaterhouseCoopers will become the preferred systems integrator for
our customers requiring technology and implementation services.
. Leverage our relationship with business-to-business customers - We intend
to expand and broaden our penetration into existing and new markets by
leveraging our existing customer relationships. For example, under our
relationship with GE Capital, the GE Capital Commercial Equipment Finance
Division has agreed to market our products and services to other
divisions of GE and its partners. We also believe that the credibility of
our customers will strengthen our brand name, enhance our reputation in
the business community and help us enter into future business alliances.
. Expand internationally - We are attempting to expand our business-to-
business market by penetrating markets in Europe, Asia and the Pacific
Rim and, in the future, elsewhere in the world. During 1999, we opened
our Dublin, Ireland office to provide services to the European Community.
During the first quarter of 2000 we added sales professionals in Paris,
France and London, England. In November 1999, we opened an office in
Melbourne, Australia to serve Australia and the Pacific Rim regions. We
intend to grow internationally through market alliances with firms like
CapGemini and by opening additional sales and marketing offices in the
U.S., Europe and elsewhere in the world.
To promote our business-to-business technology and services we maintain a
9 person sales and business development team. We market our services by
participating in e-commerce conferences, and advertising in trade
publications and in other appropriate venues.
Business-to-Consumer
Our marketing strategy in the business-to-consumer market is designed to
increase traffic to our auction website and to promote awareness of our Bid.Com
brand. To implement this strategy, we have:
. Entered into marketing alliances with Internet service providers and
other content providers. In July 1998, we entered into an e-commerce and
promotion services agreement with Rogers Media, a subsidiary of Rogers
Media Communications Inc. and, on November 16, 1998, we launched our co-
designed online auction site. By logging on to the site, Canadians can
experience an authentic Canadian auction event, bidding for bargains on
products such as computers, sports equipment, gifts and vacation
packages. Canadian consumers are offered brand name goods direct from the
manufacturer in Canadian dollars with Canadian warranties usually at
below-retail prices with dedicated Canadian customer service.
Under the agreement, we granted Rogers Media the exclusive right within
Canada to co-brand the Canadian Bid.Com auction. Rogers Media have agreed that
the Canadian Bid.Com auction will be the only online auction displayed on the
home page of Rogers Media's new e-commerce portal. In addition, Rogers Media
agreed to generate specified levels of site traffic and advertising revenues,
and committed to in excess of Cdn$1.0 million in minimum annual advertising for
the Canadian Bid.Com auction on the media properties of Rogers Media, their
affiliates and certain non-affiliated media. We are required to pay a minimum
cash amount of Cdn $200,000 annually to Rogers Media to purchase advertising on
Rogers. We share equally with Rogers Media in the revenue from all transaction
and advertising sales generated through the co-branded site in Canada, net of
all taxes, costs, transaction fees, duties, and credits for returns or unpaid
items. The Rogers Media Agreement may be terminated by Rogers Media at any time
upon 90 days written notice us. We may terminate the agreement following a
breach of the agreement by Rogers Media upon 30 days written notice to Rogers
Media.
In addition, we anticipate that we may use trade magazines published by
Rogers Media to support the development of our business-to-business online
auctions. Rogers Media's national media properties includes some of Canada's
most widely read publications including: Macleans,; Chatelaine,; Flare,;
Canadian Business,; Profit and Marketing Magazine; and numerous trade and
professional magazines covering a broad range of industries.
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In the past we have entered into other marketing alliances which have
terminated, including our marketing alliance with America Online which
terminated in March, 2000.
. Implemented a lower cost selected marketing approach - In addition to
marketing alliances, we have implemented a more selected marketing approach that
blends brand promotion with lower cost customer acquisitions and retention. We
pursue referral based marketing arrangements which reward individuals and
companies for referring bidders to our website. We also access our own database
of registered bidders to directly market both auction and non-auction products
to purchasers with demonstrated purchasing histories. In addition, we have
entered into key word agreements with internet service providers that promote
Bid.Com when a user searches key words, such as "auction". We also attempt to
stimulate additional e-commerce activity by operating on-line auctions for, or
licensing auction platforms to, charities and special causes.
Technology Platform
Our proprietary auction platform incorporates state-of-the-art interactive
technology, including enhanced, customized user interfaces designed to bring
participants into the online equivalent of a live auction room. Our technology
provides product descriptions with catalog quality pictures and graphical
representations. The design allows us to change and upgrade each auction site
with ease, and quickly respond to requests by clients and advertising sponsors
to change the look of products offered. On-screen real-time data provides
information about the current bid status of all bidders in order to facilitate
an interactive auction process. We have received a United States patent for the
process of conducting our Dutch auctions over electronic distribution channels,
and we have a patent application pending in Canada covering the same technology.
We have devoted significant resources to developing our proprietary
software technology. We believe that our success depends, in part, on our
internally developed proprietary e-commerce management software, which
implements a variety of customized auction and fixed price sales formats. The
technology platform is constructed using distributed software technologies which
allow rapid redevelopment and deployment of new software technology in order to
take advantage of emerging business opportunities.
We license commercially available technology whenever possible, rather than
seek a custom-made or internally-developed solution. We believe that this
strategy lowers our operating costs and increases our ability to respond to
changing demands resulting from growth and technological shifts. This approach
also allows us to focus our development efforts on creating and enhancing the
specialized proprietary software that is unique to our business. Our technology
platform is based on Microsoft core applications, including the Windows NT
operating system and an SQL server relational database, all residing on
scaleable hardware. We use Intel-based Hewlett Packard Netservers and DEC Alpha
enterprise servers, which employ symmetrical multiprocessing as the basis of our
hardware systems.
We use what we believe to be leading security and encryption systems to
maintain the security of online purchases and customer data. Each customer who
pre-registers or makes a purchase on the www.bid.com site selects a unique user
ID and a password. Repeat purchases are transacted using only the user's unique
ID and password. Credit card transactions with the banking community are
conducted over a separate ISDN line, through a server which maintains customer
information behind a number of state-of-the-art firewalls "off line" from the
Internet and which employ encryption technology such as SSL (Secure Socket
Layer). Consumers not wishing to transmit registration information online may
use one of our toll-free telephone lines to register with Bid.Com.
We have embraced high performance switching technologies, including
Asynchronous Transfer Mode (ATM), to provide end users with what we believe is
the fastest access possible to our Web site. Our access to telecommunications
infrastructure is scaleable on demand and has been proven to provide reliable
transactional support.
In November 1998, we won three Canadian Information Productivity Awards,
for our online auction technology, including an Award of Excellence, Best of
Category Award for Small Business, and top honors with the Best of Show Award.
Our development work received distinction within a group of award-winning IT
solutions which included such organizations as GE Capital, Canadian Pacific
Railways, IBM Canada, National Bank of Canada, Scotiabank, Air Canada, Revenue
Canada, ING Canada, Rogers Media, Cantel and Royal Bank of Canada.
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In September 1999, we introduced a new Web site design featuring improved
navigational features, a new fixed price purchasing option, a brighter image and
new corporate logo. We also improved our customer service section and broadened
product selection for our business-to-consumer auctions. Shoppers are able to
check the status of their orders online and also review their shopping history.
On January 31, 2000 our Web site was further revised to include a section
devoted to our business-to-business offerings.
Our engineering, production and research and development staff currently
consists of 10 software development engineers and three system consultants.
Research and Development
We believe that our proprietary auction management software provides a
competitive advantage over other online auction companies and auction enablers
and that our future success depends, in part, on our ability to continue
developing and enhancing that software. Therefore, we have focused our research
and development efforts on the continued development of our proprietary auction
management software. Our ongoing research and development efforts are aimed at
enhancing the features and functionality of our existing software components,
the development of new software components, and the integration of superior
third party technology into our environment.
Our research and development expenditures were approximately $1.0 million
for the year ended December 31, 1999, $889,000 for the year ended December 31,
1998 and $661,000 for the year ended December 31, 1997, including salaries and
related expenses of our personnel engaged in research and development. Research
and development activities in 1999 included the re-design of our Web page,
redevelopment of a fixed price site and development of business-to-business
auction technology.
Intellectual Property
Our performance and ability to compete are dependent to a significant
degree on our proprietary technology. We rely on a combination of patent,
copyright, trademark and trade secret laws, as well as confidentiality
agreements and technical measures, to establish and protect our proprietary
rights. In March 1999, we received a patent from the U.S. Patent and Trademark
Office covering the process whereby we conduct Dutch auctions over electronic
distribution channels. We have a patent application pending in Canada covering
the same technology.
Our proprietary software is subject to common law copyright protection, but
we do not have, and do not intend to pursue, any registered copyrights. Common
law protection may be narrower than that which we could obtain under registered
copyrights. As a result, we may experience difficulty in enforcing our
copyrights against certain third party infringements. The source code for our
proprietary software is protected as a trade secret.
Our major trademarks or tradenames include: BID.COM; POWERED BY BID.COM;
BID.COM, THE ONLINE AUCTION; INTERNET LIQUIDATORS; BID BUDDY; SEARCH BUDDY; and
EXPERIENCE ENGINE. Except for INTERNET LIQUIDATORS, which is registered in
Canada, all of these trademarks and tradenames are the subject of pending
applications for registration in either or both of the United States and Canada.
Our competitive position is also dependent upon our unpatented trade
secrets. In an effort to protect our trade secrets, and as part of our
confidentiality procedures, we generally enter into confidentiality and non-
disclosure agreements with our employees and consultants and generally limit
access to and distribution of our software, documentation and other proprietary
information.
Competition
The online commerce market is new, rapidly evolving and intensely
competitive. We expect that online commerce competition in general, and online
auction competition in particular (both as an intermediary and as an enabler),
will further intensify in the future. Barriers to entry are minimal, and
current and new competitors can launch new sites at a relatively low cost. In
addition, the broader retail consumer product industry is intensely
12
competitive.
Business-to-Consumer Competition
Our competitors, determined on the basis of type of merchandise and
sales format offered by such entities to customers, include:
. companies providing business-to-consumer online auctions services such as
Onsale, Inc., First Auction by Internet Shopping Network Inc., uBid, Inc.
Egghead.com, Inc. and Bid.hit, Inc.;
. consumer-to-consumer online auction services such as eBay Inc, Yahoo!,
Auctions Powered by Onsale, Auction Universe, a Times-Mirror Company,
Excite Inc. and a number of small services, including those that serve
specialty markets;
. companies providing online communities and services that specialize in or
otherwise have expertise in developing online commerce and some of whom
currently offer a variety of business-to-consumer trading services,
including Amazon.com, America Online and Microsoft Corporation;
. companies that offer merchandise similar to that of which we offer but
through physical auctions and with which we compete for sources of
supply;
. catalog companies with substantial customer data bases, which may devote
greater resources to Internet commerce in the future; and
. large retailers and other companies with strong brand recognition and
experience in online commerce that are increasingly directing greater
resources to Internet commerce and who seek to compete in the online
auction market, including Cendant Corporation and QVC, Inc.
We believe that the principal competitive factors in our business-to-
consumer online auction market are brand recognition, product selection, variety
of value-added services, ease of use, site content, quality of service,
reliability of delivery of products, quality of search tools, system
reliability, technical expertise and price. We believe that we are competitive
in each of these areas.
Business-to-Business Competition. The online auction and dynamic solutions
markets are new, rapidly evolving and intensely competitive. The companies we
compete with in this market include:
. companies providing auction software and dynamic commerce solutions such
as Moai Technologies, Opensite Inc., IBM's Websphere product, Trading
Dynamics (recently acquired by Ariba), CommerceBid (recently acquired by
CommerceOne), and Webvision.
. outsourced auction-hosting services that compete with Bid.Com's hosted
auction service such as Fairmarket, Inc., Bidland.com Inc., and
Opensite's Concierge service.
We believe our business model to be unique by combining business-to-
business and consumer auction sales and fixed price sales. We are not aware of
any other business which competes directly with us in all of these areas.
However, because the barriers to the e-commerce industry are minimal, we may in
the future face additional competitors who we cannot currently identify.
We believe that the principal competitive factors in our business-to-
business on-line auction market are variety of pricing methods, quality of
service, reliability, technical expertise and price. We believe that we are
competitive in each of these areas.
Employees
As of April 27, 2000, we employ 64 full-time employees, including 9 in
sales and business development, 14 in engineering support, and operations, 16 in
merchandise acquisition and marketing, 4 in customer support and service, and 21
in finance, administrative and senior management functions. We also employ 5
part-time employees, all of whom are in
13
customer support and service and one in engineering support. We also hire
independent contractors for software development, technical documentation,
artistic design, merchandising and administration, as needed. None of our
employees are represented by a labor union, and we consider our employee
relations to be good.
History
Our business was commenced by Internet Liquidators Inc., an Ontario
corporation, in September 1995. In May 1996, Internet Liquidators International
Inc., an Ontario corporation, acquired all of the shares of Internet Liquidators
Inc. In January 1997, we were formed as an Ontario corporation by amalgamation
of Internet Liquidators Inc. and Internet Liquidators International Inc. In
June 1998, we changed our name from Internet Liquidators International Inc. to
Bid.Com International Inc. In March 1998, we converted our consumer brand URL
from www.Internetliquidators.com to www.bid.com.
Our principal business offices are located at 6725 Airport Road, Suite 201,
Mississauga, Ontario L4V 1V2, Canada.
RISK FACTORS
An investment in our common shares is risky. You should carefully consider
the following risks, as well as the other information contained in this annual
report. If any of the following risks actually occur, our business could be
harmed. In that case, the trading price of our common shares could decline, and
you might lose all or part of your investment.
Our limited operating history makes evaluating our business difficult.
We were founded in September 1995 and began conducting business-to-consumer
auctions on the Internet in April 1996. We began to actively advertise our Web
site in 1997 and we introduced our business-to-business auction enabling
strategy and related services during 1999. Accordingly, there is only a limited
operating history for you to base an evaluation of us and our business
prospects. Our business and prospects must be considered in light of the risks,
uncertainties, expenses and difficulties frequently encountered by companies in
their early stages of development, particularly companies in new and rapidly
evolving markets such as online commerce. Our business strategy may not be
successful and we may not successfully address those risks.
We will need additional capital in the future, and if we are unable to secure
additional financing when we need it, we may be required to curtail our
operations significantly, which would have a material adverse affect on our
business, financial condition and results of operations.
Since we began our operations, we have funded our operations primarily
through the sale of securities to investors in a series of private placements
and, to a limited extent, through cash flow from operations.
At this time, funds from operations are not sufficient to meet our
anticipated financial requirements. As of May 15, 2000, we had cash on hand and
marketable securities of approximately $10.2 million. Based on current plans,
we believe that current cash balances and anticipated funds from operations will
be sufficient to meet our needs until approximately October 1, 2000. However,
the actual amount of funds that will be required until that time will be
determined by many factors, some of which are beyond our control. As a result,
we may need funds sooner or in greater amounts than currently anticipated.
On May 19, 2000 we signed an agreement with Acqua Wellington Value Fund
Ltd. (which we refer to in this annual report as Acqua Wellington) under which
Acqua Wellington agreed to invest a minimum of U.S.$1.5 million and a maximum of
U.S.$6.5 million in our company. Under certain conditions, the amount which
Acqua Wellington will be required to invest will increase from U.S.$1.5 million
to up to U.S.$3.5 million. At least U.S.$3.0 million and, under certain
conditions, as much as U.S $5.0 million of the investment will be made at the
discretion of Acqua Wellington. Completion of the proposed Acqua Wellington
financing is subject to the satisfaction of various closing conditions and
regulatory and Toronto Stock Exchange approval. We cannot assure you that the
Acqua Wellington financing will be completed in a timely manner or at all, or
the exact amount that Acqua Wellington will invest. Even if Acqua Wellington
completes the investment we anticipate that we will need to raise additional
funds by approximately
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November 1, 2000, if Acqua Wellington invests U.S.$1.5 million, and by
approximately February 1, 2001, if Acqua Wellington invest US.$6.5 million.
Other than the Acqua Wellington financing, we do not have any committed
sources of additional financing at this time and we are uncertain whether
additional funding will be available when we need it on terms that will be
acceptable to us or at all. If we are not able to obtain financing when we need
it, we would be unable to carry out our business plan and would have to
significantly curtail our operations, which would have a material adverse effect
on our business, financial condition and results of operations. If we need to
obtain funds by October 1, 2000, or earlier, potential sources of financing
include strategic relationships, public or private sales of our shares or debt
or other arrangements. If we raise funds by selling additional capital shares,
including common shares or other securities convertible into common shares, the
ownership interests of our existing shareholders will be diluted. Because of our
potential long term capital requirements, we may seek to access the public or
private equity markets whenever conditions are favorable, even if we do not have
an immediate need for additional capital at that time.
We are not profitable and expect to continue to incur losses.
We have accumulated net losses of approximately $56.3 million as of March
31, 2000. For the year ended December 31, 1999 our net loss was approximately
$20.8 million. We have never achieved profitability and expect to continue to
incur losses for the foreseeable future.
Our operating losses, to date, have been attributable, in part, to our
promotional pricing strategy under which products were sold below cost or at
significantly reduced profit margins. We expect to continue to sell a limited
number of products at significantly reduced margins and, in the future, may from
time to time use promotional pricing programs in connection with the
introduction of new products and services, in response to competitive pressures
or for other business reasons. The use of promotional pricing strategies will
affect our ability to achieve profitability. We cannot assure you that we will
earn profits or generate positive cash flows from operations in the future.
As a result of our evolving business model, we may generate less revenue from
the business-to-consumer market and we may not be able to replace that
revenue with revenue from the business-to-business market.
During 1999 we began to shift our primary business focus from the
business-to-consumer market to the business-to-business market. During 2000 and
in the future we plan to devote significantly greater marketing resources to
developing our business-to-business related services. As a result, the revenue
we generate from our business-to-consumer auctions may decline and that decline
may be significant. During 1999, a substantial majority of our revenues were
generated from our business-to-consumer auctions and related services. We
cannot assure you that if our business-to-consumer generated revenues decline we
will be able to replace lost revenue with revenue from our business-to-business
services. If we are unable to replace lost revenue, our business, results of
operations, cash flow, financial condition and prospects could be materially
adversely affected.
Our marketing alliance with AOL has terminated which may reduce traffic to our
business-to-consumer Web site; we rely on alliances with other third
parties to drive traffic to our business-to-consumer Web sites, and if those
alliances terminate our business could be harmed.
We rely on alliances with Internet service and content providers and other
marketing partners to drive traffic to our online business-to-consumer auction
sites. These alliances are of limited duration or may be terminated at any time.
For example, our agreement with America Online expired on March 31, 2000. We
estimate that in 1997, 1998 and 1999 we earned a substantial portion of our
auction revenues from customers who accessed our auction site through America
Online. The termination of this agreement may result in a reduction in the
number of visitors to our business-to-consumer Web site, which in turn, may
result in a decrease in our revenues. Our agreement with Rogers Media may be
terminated by Rogers Media at any time upon 90 days' advance written notice,
subject to certain conditions. We cannot be certain that this or any of our
other existing marketing arrangements will be renewed upon expiration on
favorable terms or at all. If these arrangements are terminated prior to
expiration or are not renewed, we will have to enter into arrangements with
other marketing partners. We cannot be certain that we will be able to do so on
favorable terms or at all. The termination of these arrangements may have a
material adverse effect on our results of operations and financial condition if
we are unable to procure suitable substitute marketing arrangements.
To date, most of the marketing alliances we entered into in the United
States have not been exclusive or restricted as to location or technological
environment. Therefore, we have retained the necessary flexibility to
broaden our distribution by increasing the number of marketing alliances and
advertising relationships. We cannot assure you that future alliances with these
partners or others will provide us with the same flexibility.
Potential fluctuations in our Financial Results Makes Financial Forecasting
Difficult
Our operating results have varied on a quarterly basis in the past and may
fluctuate significantly as a result of a variety of factors, many of which are
outside our control. Factors that may affect our quarterly operating results
include:
. the amount and timing of operating costs and capital expenditures
relating to expansion of our business, operations and infrastructure;
. the availability and pricing of merchandise from vendors;
. the announcement or introduction of new sites, services and products by
us or our competitors;
15
. the timing of, and our ability to, integrate any future acquisition of
businesses, technologies or products or any strategic investments or
relationships into which we may enter; and
. general economic conditions as well as economic conditions specific to
the Internet and online commerce industries.
As a result of our limited operating history, the emerging nature of the
markets in which we compete and the inherent degree of variability in auctions,
it is difficult for us to accurately forecast our revenues or earnings from
auction and auction enabling activities. In addition, a significant portion of
our net revenues for a particular quarter are derived from auctions that are
conducted during that quarter. Our current and future expense levels are based
largely on our investment plans and estimates of future revenues and are, to a
large extent, fixed. We may be unable to adjust spending in a timely manner to
compensate for any unexpected revenue shortfall. Any significant shortfall in
revenues relative to our planned expenditures would have an immediate adverse
effect on our business, results of operations, cash flow and financial
condition. Further, as a strategic response to changes in the competitive
environment, we may from time to time make certain pricing, service or marketing
decisions that could have a material adverse effect on our business, results of
operations, financial condition and prospects.
Due to these factors, our quarterly revenues and operating results are
difficult to forecast. We believe that period-to-period comparisons of our
operating results may not be meaningful and should not be relied upon as an
indication of future performance. In addition, it is likely that in one or more
future quarters, our operating results will fall below the expectations of
securities analysts and investors. In such event, the trading price of our
common shares would almost certainly be materially adversely affected.
Our business-to-consumer operations would be adversely affected if we are unable
to maintain relationships with vendors.
We are dependent upon third party vendors to supply us with merchandise for
sale in our business-to-consumer Internet auctions. The availability of
merchandise from most suppliers is unpredictable. We do not have long-term
contracts or arrangements with most of our vendors guaranteeing the availability
of merchandise for our auctions. We cannot assure you that our current vendors
will provide merchandise for sale in our auctions or that we will be able to
establish new vendor relationships that ensure merchandise will be available for
auction on our Web site. We also rely on many of our vendors to process and
ship merchandise to customers. We have limited control over the shipping
procedures of our vendors, and shipments by these vendors may be subject to
delays. During 1999, four unrelated suppliers of computers and other products
provided approximately 21%, 15%, 13% and 10%, respectively, of the merchandise
offered for sale in our business-to-consumer auctions. For 2000, we anticipate
that, at any given time, these or other suppliers may continue to supply a
significant percentage of our business-to-consumer product offerings.
16
Our markets are highly competitive and we may not be able to compete
effectively.
The online commerce market is new, rapidly evolving and intensely
competitive. We expect that online commerce competition in general, and online
auction competition in particular, will further intensify in the future.
Barriers to entry are minimal, and current and new competitors can launch new
sites and technologies at a relatively low cost. In addition, the broader
retail consumer product industry is intensely competitive. We compete with a
broad range of companies including:
. providers of business-to-business online auction software and dynamic
pricing solutions;
. providers of outsourced auction hosting services;
. providers of business-to-consumer and consumer-to-consumer online
auctions services;
. online communities and services that promote online commerce;
. providers of physical auctions of merchandise similar to ours;
. catalog companies with substantial customer data bases; and
. large retailers and other companies with strong brand recognition and
experience in online commerce.
Many of our competitors have longer operating histories, larger customer
bases, greater brand recognition and significantly greater financial, marketing
and other resources than we. We cannot not assure you that we will be able to
compete effectively.
We have expended significant resources to promote our brand which may not be
accepted by the marketplace.
We believe that strong brand recognition is necessary to achieving
widespread acceptance of our business-to-consumer Web site and to a lesser
extent, our business-to-business offerings. Our ability to promote and position
our brand will depend largely on the success of our marketing efforts and our
ability to offer a broad range of products and provide high quality, easy-to-
use, secure auction services. If vendors do not perceive our Web site as an
effective marketing and sales channel or technology for their goods and
services, or if customers do not perceive our platform as offering a secure and
user-friendly means to purchase goods and services, we will be unsuccessful in
promoting and maintaining our brand. Similarly, if our business-to-business
customers do not perceive our on-line auction technology, e-commerce platform
and related services as an effective means to conduct their auctions, we will
be unsuccessful in promoting and maintaining our brand.
Furthermore, to attract and retain customers for our business-to-consumer
auctions and to promote and maintain the Bid.Com brand, we must expend
significant resources. We cannot assure you that our brand promotion efforts
will result in increased revenues, or that resulting increased revenues would
offset the expenses incurred by us in promoting our brand. If we are unable to
promote or maintain our brand, our business, financial condition, results of
operations, cash flow and prospects would be materially and adversely affected.
We depend on our key personnel and we may not be able to attract or retain the
highly skilled personnel we need.
Our success is substantially dependent on the ability and experience of our
senior management and other key personnel. We do not have long term employment
agreements with any of our key personnel and maintain no "key person" life
insurance policies. Moreover, to accommodate our current size and manage our
anticipated growth, we must maintain and expand our employee base. Competition
for personnel, especially those with software development and other technical
expertise is intense. We cannot be certain we will be able to retain existing
personnel or hire additional, qualified personnel. Our inability to retain and
attract the necessary personnel or the loss of services of any of our key
personnel could have a material adverse effect on us.
17
We may not be able to manage our growth.
We have recently experienced, and may continue to experience, growth in our
operations, financial systems and the number of our employees. This growth
places significant demands on our management, administrative, operating and
financial resources. In order to manage our current operations and any future
growth effectively, we will need to continue to implement and improve our
operational, financial and management information systems and to hire, train,
motivate, manage and retain our employees. We cannot assure you that we will be
able to manage our growth effectively, that our management, personnel or systems
will be adequate to support our operations, or that we will be able to achieve
levels of revenue commensurate with the increased levels of operating expenses
associated with such growth.
We plan to continue to expand internationally and are subject to risks
associated with global expansion.
We currently operate in the United States, Canada, Ireland and Australia.
We plan to expand our international presence. We may incur significant costs in
connection with our international expansion. There are also risks inherent in
doing business on a global level, including:
. various laws and regulatory requirements;
. tariffs, customs, duties and other trade barriers;
. longer payment cycles;
. export and import restrictions;
. political risks;
. currency and foreign exchange controls;
. seasonal reductions in business activity during the summer months in
Europe and elsewhere; and
. potentially adverse tax consequences.
Any of these risks could adversely affect the success of our global operations.
Any future acquisitions of companies or technologies may result in disruptions
to our business and/or the distraction of our management.
As part of our business strategy, in the future we may seek to acquire or make
investments in complementary businesses or technologies. We may not be able to
acquire or manage additional businesses profitably or to successfully integrate
any acquired businesses with our business. Businesses that we acquire may have
liabilities that we underestimate or do not discover during our pre-acquisition
investigations. Certain liabilities, even if we do not expressly assume them,
may be imposed on us as the successor to the business. Further, each
acquisition may involve other special risks that could cause the acquired
businesses to fail to meet our expectations. For example:
. the acquired businesses may not achieve expected results;
. we may not be able to retain key personnel of the acquired businesses;
. we may incur substantial, unanticipated costs, delays or other
operational or financial problems when we try to integrate businesses we
acquire with our own;
. our management's attention may be diverted; or
. our management may not be able to manage the combined entity effectively
or to make acquisitions and grow our business internally at the same
time.
In addition, we may incur debt or issue equity securities to pay for any future
acquisitions or investments, which could dilute the ownership interest of our
existing shareholders.
If we are unable to successfully protect our intellectual property or obtain
certain licenses, our competitive position may be harmed.
Our performance and ability to compete are dependent in part on our
proprietary technology. We rely on a combination of patent, copyright,
trademark and trade secret laws as well as confidentiality agreements and
technical measures, to establish and protect our proprietary rights. In March
1999, we received a patent from the U.S. Patent and Trademark Office covering
our process for conducting Dutch auctions over electronic distribution channels.
We have a patent application pending in Canada covering the same technology. We
cannot assure you that the patent under application in Canada will result in a
patent being issued in Canada. In addition, we cannot guarantee that any patents
issued to us will afford meaningful protection for our technology. Competitors
may develop similar technologies which do not conflict with our patents, others
may challenge our patents and, as a result, our patents could be narrowed or
invalidated.
Our proprietary software is protected by common law copyright laws,
as opposed to registration under copyright statutes. Common law protection may
be narrower than that which we could obtain under registered copyrights. As a
result, we may experience difficulty in enforcing our copyrights against certain
third party infringements. The source code for our proprietary software is
protected as a trade secret. As part of our confidentiality-protection
procedures, we generally enter into agreements with our employees and
consultants and limit access to, and distribution of, our software,
documentation and other proprietary information. We cannot assure you that the
steps taken by us will prevent misappropriation of our technology or that
agreements entered into for that purpose will be enforceable. The laws of other
countries may afford us little or no protection of our intellectual property.
18
We also rely on a variety of technology that we license from third
parties, including our database and Internet server software, which is used in
our Web site to perform key functions. We cannot assure you that these third
party technology licenses will continue to be available to us on commercially
reasonable terms, if at all. If we are unable to maintain these licenses or
obtain upgrades to these licenses, we could be delayed in completing some
products or services or unable to complete our proprietary software
enhancements.
Others could claim that we infringe on their intellectual property rights, which
may result in costly and time consuming litigation.
Our success will also depend partly on our ability to operate without
infringing upon the proprietary rights of others, as well as our ability to
prevent others from infringing on our proprietary rights. We may be required at
times to take legal action in order to protect our proprietary rights. Also,
from time to time, we receive notice from third parties claiming that we may
infringe their patent or other proprietary rights. Despite our best efforts, we
may be sued for infringing on the patent or other proprietary rights of others.
Such litigation is costly, and even if we prevail, the cost of such litigation
could harm us. If we do not prevail, in addition to any damages we might have
to pay, we could be required to stop the infringing activity or obtain a
license. We cannot be certain that any required license would be available to
us on acceptable terms, or at all. If we fail to obtain a license, or if the
terms of a license are burdensome to us, our business, financial condition and
results of operations could be materially harmed.
Changes in government regulations may result in increased expenses, which could
decrease the demand for our services and negatively impact our results.
We are not currently subject to direct regulation by any governmental
agency, other than regulations applicable to businesses generally and laws and
regulations directly applicable to access to or commerce on, the Internet.
However, a number of legislative and regulatory proposals under consideration by
federal, state, provincial, local and foreign governmental organizations may
lead to laws or regulations concerning various aspects of the Internet,
including but not limited to, on-line content, user privacy, taxation, access
charges and liability for third-party activities. Additionally, it is uncertain
how existing laws governing issues such as property ownership, copyright, trade
secrets, libel and personal privacy will be applied to the Internet. The
adoption of new laws or the broader application of existing laws may expose us
to significant liabilities and additional operational requirements and expenses
and may decrease the growth in the use of the Internet, which could in turn
decrease the demand for our products and increase our cost of doing business.
Our business may be affected by evolving tax regulations.
With the exception of sales to bidders in Florida, California and Georgia,
the states in which we have, or in the past had, a physical presence, we do not
collect sales or other similar taxes in respect of goods sold through our hosted
auctions. However, one or more states may seek to impose sales tax collection
obligations on out-of-state companies that engage in or facilitate online
commerce. Also, a number of proposals have been made at the state and local
level that would impose additional taxes on the sale of goods and services
through the Internet. Such proposals, if adopted, could substantially impair
the growth of electronic commerce, and could adversely affect our opportunity to
derive financial benefit from such activities.
In the United States, the Internet Tax Freedom Act, limiting the ability of
the states to impose certain taxes on Internet-based transactions, was enacted
in October 1998. Pursuant to such legislation, a general three-year moratorium
expiring in October 2001 was implemented banning the imposition of state and
local taxes on Internet access (unless such taxes were generally imposed and
actually enforced prior to October 1, 1998) and discriminatory or multiple
taxes on e-commerce. It is possible that the moratorium may not be renewed when
it terminates in October 2001. Failure to renew the moratorium could allow
state and local government to impose taxes on Internet based sales, and such
taxes could have a material adverse effect on our business, financial condition,
results of operation, cash flow and prospects.
19
If we are unable to expand our systems to meet demand our business would suffer.
Any substantial increase in the traffic volume on our Web site will require
us to expand our technology, transaction processing systems and network
infrastructure. We may not be able to project accurately the rate or timing of
increases in the use of our services or expand our systems and infrastructure in
a timely manner to accommodate such increases. If we are unable to expand our
systems in a timely manner we may lose customers, we may be unable to attract
new systems and our operating results will suffer.
We may have to expend significant resources to keep pace with rapid
technological change.
The Internet and e-commerce industries are characterized by rapid
technological change, changes in user and customer requirements, frequent new
service or product introductions embodying new technologies and the emergence of
new industry standards and practices. Any of these could render our existing
Web site and proprietary technology obsolete. Our performance will depend, in
part, on our ability to:
. develop new proprietary technology that address the increasingly
sophisticated and varied needs of our existing and prospective
customers;
. 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
services in response to evolving market demands; and
. license leading technologies;
We may be required to make substantial expenditures to accomplish the
foregoing and to modify or adapt our services or infrastructure.
Our long-term viability is substantially dependent upon the widespread
acceptance and use by consumers and businesses of the Internet as a medium of
commerce.
Our future success depends in part on the continued growth and reliance by
consumers and businesses on the Internet, particularly the growth of online
auctions in the consumer and business-to-business markets. Use and growth of
the Internet will depend in significant part on continued rapid growth in the
number of households and commercial, educational and governmental institutions
with access to the Internet. The use and growth of the Internet will also
depend on the number and quality of products and services designed for use on
the Internet.
20
Because use of the Internet as a source of information, products and services is
a relatively recent phenomenon, it is difficult to predict whether the number of
users drawn to the Internet will continue to increase and whether the market for
commercial use of the Internet will continue to develop and expand. Internet use
patterns may decline as the novelty of the medium recedes. We cannot predict the
extent to which consumers and businesses will be willing to shift their
purchasing habits from traditional retailers and distributors to online
retailers and distributors.
The Internet may not be commercially viable for a number of reasons,
including potentially inadequate development of the necessary network
infrastructure, delayed development of enabling technologies and inadequate
performance improvements. In addition, the Internet's viability as a commercial
marketplace could be adversely affected by delays in the development of services
or due to increased government regulation. Changes in or insufficient
availability of telecommunications services to support the Internet also could
result in slower response times and adversely affect usage of the Internet
generally and our business in particular. Moreover, adverse publicity and
consumer concern about the security of transactions conducted on the Internet
and the privacy of users may also inhibit the growth of commerce on the
Internet. If the use of the Internet does not continue to grow or grows more
slowly than expected, or if the infrastructure for the Internet does not
effectively support growth that may occur, our business would be materially and
adversely affected.
In addition, even if consumers and businesses accept the use of the
Internet as a viable medium of commerce, we cannot assure you that Internet
auctions generally will develop successfully or achieve widespread acceptance.
If the market for Internet-based online auctions fails to develop, or develops
more slowly than expected or becomes saturated with competitors, our business,
financial condition, results of operations, cash flow and prospects would be
materially adversely affected.
If the Web infrastructure is unable to support user demand or if our connection
to the Internet is interrupted our business may be harmed.
The success of our branded auction service and our business-to-business
offerings will depend, to a significant degree, upon the development and
maintenance of the Web infrastructure and reliable Web access and services. The
Web has experienced, and is expected to continue to experience, significant
growth in the numbers of users and amount of traffic. There can be no assurance
that the Web infrastructure will continue to be able to support the demands
placed on it by this continued growth or that such growth will not adversely
affect the performance or reliability of the Web.
Furthermore, from time to time, the Web has experienced a variety of
outages and other delays as a result of damage to portions of its
infrastructure, and could face such outages and delays in the future. These
outages and delays could adversely affect the level of Web usage and the level
of traffic and the processing of on-line auctions. In addition, we do not own a
gateway onto the Internet. Instead, we rely on Internet service providers to
connect our Web site to the Internet. From time to time, we have experienced
temporary interruptions in our Web site connection and in our telecommunications
access. Continuous or prolonged interruptions in our Web site connection or in
our telecommunications access would have a material adverse effect on our
operations.
In addition, the Web could lose its viability due to delays in the
development or adoption of new standards and protocols to handle increased
levels of activity. If the necessary infrastructure, standards, protocols or
complementary products, services or facilities are not developed, our business,
results of operations, cash flow and financial condition will be materially and
adversely affected.
Systems failures or breaches of security could cause a significant disruption to
our business, damage our reputation and expose us to liability.
We believe our reputation for providing reliable and efficient services is
critical to our future success. Our systems are vulnerable to a number of
factors that may cause interruptions in our auctions and our ability to enable
or host third party auctions and our other services, including, among others:
. damage from human error, tampering and vandalism;
. breaches of security;
21
. fire and power losses;
. telecommunications failures and capacity limitations; and
. software or hardware defects.
We have developed a redundant system and a formal disaster recovery plan.
Despite the precautions we have taken and plan to take, the occurrence of any of
these events or other unanticipated problems could result in service
interruptions, which could damage our reputation, subject us to loss of business
and significant repair costs. Advances in computer capabilities, new
discoveries in the field of cryptography, or other events or developments may
result in a compromise or breach of the algorithms we use to protect customer
transaction data, including credit card information. Security breaches could
expose us to a risk of loss or litigation and possible liability for failing to
secure confidential customer information. These factors could expose us to
liabilities which could exceed our insurance coverage. Service disruptions
could also damage our reputation, cause us to lose existing customers and make
it difficult to attract new ones. Extensive repair costs could also affect our
ability to operate. Although we continue to take steps to enhance the security
and redundancy of our systems, our systems are not now, nor will they ever be,
fully secure and redundant.
We are subject to risks associated with exchange rate fluctuations.
We transact substantially all of our purchases and sales in U.S. dollars
while the majority of our operating expenses are in Canadian dollars. We have
recently opened offices in Ireland and Australia and plan to expand to other
countries. As a result in the future we may earn revenues and incur expenditures
in the currencies of these countries and in other foreign currencies. We do not
have any hedging programs in place to manage the potential exposure to
fluctuations in the U.S./Canadian dollar exchange rate. Fluctuations in the
U.S./Canadian dollar exchange rate or the exchange rate of other currencies
against the U.S. or Canadian dollars could have a material adverse effect on our
earnings and cash flows.
Potential Year 2000 Problems could harm our business or the businesses of some
of our significant suppliers or customers or damage our reputation and force us
to divert resources away from the operation our business.
Prior to January 1, 2000, there was a great deal of concern regarding the
ability of computers to adequately recognize 21st century dates due to the two-
digit date fields used by many systems. Most reports to date, however, are that
computer systems are functioning normally and the compliance and remediation
work accomplished leading up to January 1, 2000 was effective to prevent any
problems. Computer experts have nevertheless warned that there may still be
residual consequences of the change in centuries.
We have not experienced any material Year 2000 problems to date and we are
not aware of any material Year 2000 problems which our significant suppliers
have experienced that are reasonably likely to materially affect our business.
Nevertheless, in the future, our equipment and technology or that of our
significant suppliers could be significantly impaired or cease to operate due to
Year 2000 problems or we or our significant suppliers could experience other
Year 2000 problems. Any residual Year 2000 difficulties or problems which we or
our significant suppliers experience could materially harm our business.
Our preference shares could prevent or delay a takeover that some or a majority
of shareholders consider favorable.
Our board of directors, without any further vote of our shareholders, may
issue preference shares and determine the price, preferences, rights and
restrictions of those shares. The rights of the holders of common shares will
be subject to, and may be adversely affected by, the rights of the holders of
any series of preference shares that may be issued in the future. That means,
for example, that we can issue preference shares with more voting rights, higher
dividend payments or more favorable rights upon distribution of common shares.
If we issue certain types of preference shares in the future, it may also be
more difficult for a third party to acquire a majority of our outstanding voting
shares and may, in certain circumstances, deter or delay mergers, tender offers
or other possible transactions that may be favored by some or a majority of our
shareholders.
22
The volatility of our share price could adversely affect our shareholders.
Our common shares are listed on The Toronto Stock Exchange under the symbol
BII and are quoted on the Nasdaq National Market under the symbol BIDS. The
trading price of our common shares on The Toronto Stock Exchange and Nasdaq has
fluctuated significantly in the past and may be highly volatile and could be
subject to wide fluctuations in the future. Further, the stock markets, in
general, and the market for Internet-related and technology companies, in
particular, have experienced extreme price and volume fluctuations that have
often been unrelated or disproportionate to the operating performance of
companies. Broad market and industry factors may materially and adversely
affect the market price of our common shares, regardless of our operating
performance.
In the past, following periods of volatility in the market price of a
company's securities, securities class-action litigation has often been
instituted against that company. Such litigation, if instituted against us,
could result in substantial costs and a diversion of management's attention and
resources, which could have a material adverse effect on our business, results
of operations, cash flow, financial condition and prospects.
Our common shares may become subject to "penny stock" regulations which may
affect your liquidity in our common shares.
Our common shares were first quoted on the Nasdaq National Market on April
20, 1999. Since then, our common shares have traded at prices below US$5.00 from
time to time. Should our common shares continue to be traded below U.S.$5.00,
our common shares could become characterized as "penny stocks" which could
severely affect market liquidity. The Securities Enforcement and Penny Stock
Reform Act of 1990 requires additional disclosure relating to the market for
penny stocks in connection with trades in any stock defined as a penny stock.
Securities and Exchange Commission regulations generally define a penny stock to
be an equity security that has a market price of less than U.S.$5.00 per share,
subject to certain exceptions. Such exceptions include any equity security
listed on Nasdaq or a national securities exchange and any equity security
issued by an issuer that has:
. net tangible assets of at least US$2,000,000, if such issuer has been in
continuous operation for three years
. net tangible assets of at least US$5,000,000, if such issuer has been in
continuous operation for less than three years; or
. average annual revenue of at least US$6,000,000, if such issuer has been
in continuous operation for less than three years
Unless an exception is available, the regulations require that, prior to
any transaction involving a penny stock, delivery of a disclosure schedule
explaining the penny stock market and the risks associated therewith. The penny
stock regulations would adversely affect the market liquidity of our common
shares by limiting the ability of broker/dealers to trade the shares and the
ability of purchasers of our common shares to sell in the secondary market.
U.S. investors in our company could suffer adverse tax consequences if we are
characterized as a passive foreign investment company.
We may be treated as a passive foreign investment company, or PFIC, for
United States federal income tax purposes during our 2000 tax year or in
subsequent years. We would be a PFIC if 75% or more of our gross income in a
taxable year is passive income. We would also be a PFIC if at least 50% of our
assets averaged over the taxable year produce, or are held for the production
of, passive income. For these purposes, the value of our assets would be
calculated based on our market capitalization. Passive income includes, among
other items, interest, dividends, royalties, rents and annuities. We may be
deemed a PFIC because previous financings combined with proceeds of future
financings may produce, or be deemed to be held to produce, passive income.
If we are or become a PFIC, many of our U.S. shareholders will be subject
to the following adverse tax consequences:
. they will be taxed at the highest ordinary income tax rates in effect
during their holding period on certain distributions on our capital
shares, and gains from the sale or other disposition of our capital
shares;
23
. they will be required to pay interest on taxes allocable to prior
periods; and
. the tax basis of our capital shares will not be increased to fair market
value at the date of their death.
If we become a PFIC, U.S. shareholders could avoid these tax consequences
by making a qualified electing fund election or a mark-to-market election.
These elections would need to be in effect for all taxable years during which we
were a PFIC and during which you held our capital shares. A U.S. shareholder
who makes a qualified electing fund election, will be taxed currently on our
ordinary income and net capital gain (unless a deferral election is in effect).
A U.S. shareholder who makes a mark-to-market election will include as ordinary
income each year an amount equal to the excess of the fair market value of our
capital shares over the adjusted tax basis as of the close of each year (with
certain adjustments for prior years).
If we become a PFIC, our U.S. shareholders will generally be unable to
exchange our capital shares for shares of an acquiring corporation on a tax-
deferred basis under the reorganization rules of the Internal Revenue Code, and
the benefits of many other nonrecognition provisions of the Internal Revenue
Code will not apply to transfers of our capital shares. In addition, if we
become a PFIC, pledges of our capital shares will be treated as sales for U.S.
federal income tax purposes. U.S. citizens should note that state and local
taxes may also apply if amounts are included in U.S. federal taxable income
under the PFIC rules of the Internal Revenue Code. The PFIC rules are very
complex. U.S. citizens are strongly encouraged to consult with their tax
advisors concerning all of the tax consequences of investing in our common
shares and the possible benefits of making a tax election given their
circumstances. Additionally, U.S. citizens should review the section entitled
"Taxation--U.S. Federal Income Tax Considerations--Tax Status of the Company--
Passive Foreign Investment Companies" contained in this annual report for a more
detailed description of the PFIC rules and how those rules may affect their
ownership of our capital shares.
Future sales by existing shareholders may lower the price of our common shares
which could result in losses to our shareholders.
As of April 27, 2000, there were 53,028,854 common shares outstanding. Of
these shares, 48,608,833 common shares are freely tradable. The remaining
common shares and common shares issuable upon exercise of options and warrants
outstanding are eligible for sale to the public market in the United States as
follows:
. Our affiliates own 2,047,150 shares that may be sold subject to volume
restrictions imposed by Rule 144. Our affiliates also own options to acquire
an additional 2,265,000 shares. The shares to be issued upon exercise of
these options may be freely sold under Rule 701, to the extent applicable. In
addition, we plan to file a registration statement on Form S-8 covering all
of these shares. After the registration statement is filed all of these
shares may be freely sold when issued.
. Our employees and consultants who are not deemed affiliates hold options to
buy a total of 1,107,650 shares. The shares to be issued by exercise of these
options may be sold freely under Rule 701, to the extent applicable. The
remaining shares may be freely sold after we file our registration statement
on Form S-8.
. We may issue options to purchase up to an additional 3,134,800 shares under
our stock option plans. The shares to be issued upon exercise of these
options may be freely sold when issued, provided that we have filed a
registration statement on Form S-8.
. We have issued an additional 2,372,871 shares to non-affiliates which will
become eligible for resale under Rule 144 at various times over the next 10
months.
. We have issued warrants to purchase a total of 2,490,146 shares. We have
registered 2,040,146 shares issuable upon execution of warrants for resale in
Canada. The shares issued upon exercise of the outstanding warrants may be
freely sold subject to the provisions of Rule 144, beginning one year after
issuance.
In addition, we have agreed with Acqua Wellington to register the common
shares which they will purchase in the Acqua Wellington financing. Upon
completion of the registration, all of the shares which they purchase may be
freely sold.
Sale of substantial amounts of shares into the public market may lower the
market price of our common shares.
In general, under Rule 144 as currently in effect, a person (or
persons whose shares are required to be aggregated) who has beneficially owned
restricted shares for at least one year (including the holding period of any
prior owner except an affiliate) would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of (i) 1% of
the number of our common shares then outstanding (approximately 530,288 shares)
or (ii) the average weekly trading volume of our common shares during the four
calendar weeks preceding the filing of a Form 144 with respect to such sale.
Sales under Rule 144 are also subject to certain manner of sale provisions and
notice requirements and to the availability of current public information about
us. Under Rule 144(k), a person who is not deemed to have been an affiliate of
us at any time during the three months preceding a sale, and who has
beneficially owned the shares proposed to be sold for at least two years
(including the holding period of any prior owner except an affiliate), is
entitled to sell such shares without complying with the manner of sale, public
information, volume limitation or notice provisions of Rule 144.
Rule 701 under the Securities Act permits resales of shares in reliance
upon Rule 144 but without compliance with certain restrictions of Rule 144,
including the holding period requirement. Any of our employees, officers,
directors or consultants who, prior to April 14, 1999, purchased his or her
shares or received options to purchase common shares, pursuant to a written
24
Rule 701 further provides that non-affiliates may sell such shares in reliance
on Rule 144 without having to comply with the holding period, public
information, volume limitation or notice provisions of Rule 144.
It may be difficult for you to enforce civil liabilities on us or our officers
or directors.
We are incorporated under the laws of the Province of Ontario, Canada.
Certain of our directors and officers are residents of Canada and a substantial
part of our assets and all or a substantial portion of the assets of such
persons are located outside the United States. As a result, it may be difficult
for holders of common shares to effect service of legal process within the
United States upon those directors and officers who are not residents of the
United States or to realize in the United States upon judgments of courts of the
United States predicated upon civil liability under the Securities Act of 1933,
as amended, or the Exchange Act or the rules and regulations promulgated under
such statutes. We believe, based on advice of our Canadian counsel, that a
judgment of a United States court predicated solely upon civil liability under
such U.S. federal securities laws would probably be enforceable in Canada if the
United States court in which the judgment was obtained had a basis for
jurisdiction in the matter that was recognized by a Canadian court for such
purposes. However, we believe, based on such counsel's advice, that there is
substantial doubt whether an action could be brought successfully in Canada in
the first instance on the basis of liability predicated solely upon such U.S.
federal securities laws.
We have never paid dividends.
We have paid no cash dividends on any of our shares of capital stock and
have no plans to pay dividends in the foreseeable future. We currently intend
to retain all earnings, if any, for working capital and general corporate
purposes.
ITEM 2 - DESCRIPTION OF PROPERTY
Our principal administrative, engineering, merchandising and marketing
facilities total approximately 10,165 square feet and are located on two floors
of an office building in Mississauga, Ontario, Canada, under a lease that
terminates on October 31, 2001. We also lease offices in Tampa, Florida where
four employees are located. We believe that we have adequate space for our
current needs. As we expand, we expect that suitable additional space will be
available on commercially reasonable terms. We also maintain offices in Dublin,
Ireland with -4 employees and Melbourne, Australia with one employee. We do not
own any real estate nor do we currently own or lease warehouse space. We rely,
instead, on direct shipments from vendors or contract warehouses for our
fulfillment and logistics requirements.
ITEM 3 - LEGAL PROCEEDINGS
Neither we, nor any of our subsidiaries, is a party to, or the subject of,
any material legal proceedings.
ITEM 4 - CONTROL OF REGISTRANT
To our knowledge, no person beneficially owns, directly or indirectly, or
exercises control or direction over more than 10% of our issued and outstanding
common shares. As of April 27, 2000, our directors and officers as a group (12
persons) owned 4,002,983 common shares, representing 7.6% of our shares. This
includes a total of 1,955,833 common shares issuable upon exercise of options
and warrants exercisable within 60 days from April 27, 2000 by certain directors
and executive officers. It does not include a total of 409,167 shares issuable
upon exercise
25
of options and warrants held by directors and officers that are first
exercisable more than 60 days after April 27, 2000.
We are not aware of any arrangements which may result in a change in
control of our company.
ITEM 5 NATURE OF TRADING MARKET
Our common shares are quoted on the Nasdaq National Market and are listed
on The Toronto Stock Exchange. Our common shares have been quoted on Nasdaq
since April 20, 1999 under the symbol "BIDS." Our common shares began trading
on The Toronto Stock Exchange on February 9, 1998 under the symbol "ILI" and,
since July 18, 1998, our common shares traded under the symbol "BII". From June
6, 1996 to February 9, 1998, our common shares were quoted for trading on the
Canadian Dealing Network under the symbol "ILII."
The following tables set forth the range of high and low sales prices
(rounded to the nearest hundredth) as reported by Canadian Dealing Network
(through February 8, 1998), The Toronto Stock Exchange (beginning February 8,
1998) and Nasdaq (beginning April 20, 1999) during the calendar quarters
indicated:
The Toronto Stock Exchange
1998 High Low
---- ---- ---
(Cdn $) (Cdn $)
1st Quarter 3.90 1.95
2nd Quarter 3.80 1.12
3rd Quarter 2.08 0.65
4th Quarter 6.00 0.56
1999 High Low
---- ---- ---
(Cdn $) (Cdn $)
1st Quarter 17.60 3.65
2nd Quarter 33.65 10.65
3rd Quarter 13.05 4.90
4th Quarter 8.95 5.65
2000 High Low
---- ---- ---
(Cdn $) (Cdn $)
1st Quarter 13.10 5.85
2nd Quarter 9.20 3.11
(April 1, 2000 to
May 18, 2000)
Nasdaq
1999 High Low High Low
---- ---- --- ---- ---
(Cdn$) (Cdn$) (US$) (US$)
2nd Quarter 28.56 10.72 19.13 7.13
3rd Quarter 12.54 5.59 8.53 3.75
4th Quarter 8.85 5.63 6.00 3.84
2000 High Low High Low
---- ---- --- ---- ---
(Cdn$) (Cdn$) (US$) (US$)
26
1st Quarter 13.30 5.75 9.13 3.70
2nd Quarter 9.69 3.01 6.50 2.06
(April 1, 2000 to
May 18, 2000)
United States dollar amounts are converted to Canadian dollars at the noon
buying rate in New York City for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York for the
date of such sales prices.
As of April 28, 2000, we had 1,360 shareholders of record holding
53,028,854 common shares, of which 369 shareholders holding 6,109,392 common
shares had an address of record in the United States. Common shares held by the
principal depositary in the United States on such date amounted to 5,426,188 or
10.2% of our issued common shares, which shares are held for participants'
accounts.
ITEM 6 EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS
There is no law, government decree or regulation in Canada restricting the
export or import of capital or affecting the remittance of dividends, interest
or other payments to a non-resident holder of common shares, other than
withholding tax requirements.
There is no limitation imposed by Canadian law or by the articles or other
charter documents on the right of a non-resident to hold or vote common shares
or preference shares with voting rights, other than as provided in the
Investment Canada Act, as amended by the World Trade Organization Agreement
Implementation Act. The Investment Canada Act generally prohibits
implementation of a reviewable investment by an individual, government or agency
thereof, corporation, partnership, trust or joint venture that is not a
"Canadian," as defined in the Investment Canada Act (a "non-Canadian"), unless,
after review, the minister responsible for the Investment Act is satisfied that
the investment is likely to be a net benefit to Canada.
An investment in our voting shares by a non-Canadian (other than a "World
Trade Organization Investor," as defined below) would be reviewable under the
Investment Canada Act if it were an investment to acquire direct control of our
company, and the value of our assets were $5.0 million or more. An investment
in our voting shares by a World Trade Organization Investor would be reviewable
under the Investment Canada Act if it were an investment to acquire direct
control of our company, and the value of our assets equaled or exceeded $192.0
million. A non-Canadian, whether a World Trade Organization Investor or
otherwise, would acquire control of us for purposes of the Investment Canada Act
if he or she acquired a majority of our voting shares. The acquisition of less
than a majority, but at least one-third of our voting shares, would be presumed
to be an acquisition of control of our company, unless it could be established
that we were not controlled in fact by the acquirer through the ownership of
voting shares. In general, an individual is a World Trade Organization Investor
if he or she is a "national" of a country (other than Canada) that is a member
of the World Trade Organization ("World Trade Organization Member") or has a
right of permanent residence in a World Trade Organization Member. A
corporation or other entity will be a World Trade Organization investor if it is
a "World Trade Organization investor-controlled entity" pursuant to detailed
rules set out in the Investment Canada Act. The United States is a World Trade
Organization Member.
Certain transactions involving our voting shares would be exempt from the
Investment Canada Act, including: (a) an acquisition of our voting shares if
the acquisition were made in connection with the person's business as a trader
or dealer in securities; (b) an acquisition of control of our company in
connection with the realization of a security interest granted for a loan or
other financial assistance and not for any purpose related to the provisions of
the Investment Canada Act; and (c) an acquisition of control of our company by
reason of an amalgamation, merger, consolidation or corporate reorganization,
following which the ultimate direct or indirect control in fact of our company,
through the ownership of voting interests, remains unchanged.
27
ITEM 7 TAXATION
Canadian Federal Income Tax Considerations
The following summary describes material Canadian federal income tax
consequences generally applicable to a holder of our common shares who is not a
resident of Canada, and who, for purposes of the Income Tax Act (Canada), (i)
holds such shares as capital property and (ii) deals at arm's length with us.
Generally, common shares will be considered capital property to a holder
provided that such holder does not hold such securities in the course of
carrying on a business and has not acquired such securities in a transaction or
transactions considered to be an adventure or concern in the nature of trade
which includes a transaction or transactions of the same kind and carried on in
the same manner as a transaction or transactions of an ordinary trade or dealer
in property of the same kind.
This summary is based upon the current provisions of the Income Tax Act and
the regulations thereunder and on an understanding of the published
administrative practices of the Canadian Customs and Revenue Agency. This
summary does not take into account or anticipate any possible changes in law, or
the administration thereof, whether by legislative, governmental or judicial
action, except proposals for specific amendment thereto which have been publicly
announced by the Canadian Minister of Finance prior to the date hereof.
This summary does not address all aspects of Canadian federal income tax
law that may be relevant to shareholders based upon their particular
circumstances, and does not deal with provincial, territorial or foreign income
tax consequences, which might differ significantly from the consequences under
Canadian federal income tax law.
Shareholders are advised to consult their tax advisors regarding the
application of the Canadian federal income tax law to their particular
circumstances, as well as any Canadian provincial, territorial or other tax
consequences or any U.S. federal, state or local tax consequences or other
foreign income tax consequences of the acquisition, ownership and disposition of
our common shares.
Taxation of Dividends.
A holder of a common share who is not resident in Canada for purposes of
the Income Tax Act will be subject to Canadian withholding tax on dividends paid
or credited, or deemed under the Income Tax Act to be paid or credited, to the
holder of the common share. The rate of withholding tax under the Income Tax Act
on dividends is 25% of the amount of the dividend. Such rate may be reduced
under the provisions of an applicable international tax treaty to which Canada
is a party. Under the tax treaty that Canada has entered into with the United
States, the rate of Canadian withholding tax applicable in respect of dividends
paid or credited by a Canadian corporation to a shareholder resident in the
United States, is generally reduced to 15%, or 5% in the case of a corporate
holder which owns 10% or more of the voting shares. A foreign tax credit for the
tax withheld may be available to a holder resident in the United States against
U.S. federal income taxes. Moreover, pursuant to Article XXI of the Canada-U.S.
Treaty, an exemption from Canadian withholding tax generally is available in
respect of dividends received by certain trusts, companies and other
organizations whose income is exempt from tax under the laws of the United
States.
Disposition of common shares.
A non-resident holder of a common share will not be subject to tax under
the Income Tax Act in respect of a capital gain realized on the disposition of a
common share unless the common share constitutes or is deemed to constitute
"taxable Canadian property" (as defined in the Income Tax Act). Shares of a
corporation that are listed on a prescribed stock exchange (which includes
shares traded on a U.S. stock exchange and the Nasdaq are generally not
considered to be taxable Canadian property. However, such shares can be taxable
Canadian property if, at any time during the 60 month period immediately
preceding their disposition, 25% or more of our issued shares of any class
belong to the non-resident together with persons with whom the non-resident did
not deal at arm's length.
An option to acquire common shares or other securities convertible into or
exchangeable for common shares, or otherwise having an interest in common
shares, could constitute taxable Canadian property if the common shares that
could be acquired upon the exercise of the option, the conversion or exchange
rights or in which there is
28
such interest. Taxable Canadian property also includes any common share held by
a non-resident if the non-resident used the common share in carrying on a
business (other than an insurance business) in Canada, or, if the Non-Resident
is a non-resident insurer, any common share that is its "designated insurance
property" for the year. A non-resident whose common shares constitute or are
deemed to constitute taxable Canadian property will realize upon the disposition
or deemed disposition of a common share, a capital gain (or a capital loss) to
the extent that the proceeds of disposition are greater than (or less than) the
aggregate of the adjusted cost base to the holder of a common share and any
reasonable costs of disposition.
Two-thirds of any capital gain realized by a holder (a taxable capital
gain) will be included in computing the holder's income. Two-thirds of any
capital loss realized by a holder may, subject to certain restrictions
applicable to holders that are corporations, normally be deducted from the
holder's taxable capital gains realized in the year of disposition, the three
preceding taxation years or any subsequent taxation years, subject to detailed
rules contained in the Income Tax Act.
A purchase by us of our common shares (other than a purchase of our common
shares on the open market in a manner in which shares would normally be
purchased by any member of the public in the open market) will give rise to a
deemed dividend under the Income Tax Act equal to the difference between the
amount we paid on the purchase and the paid-up capital of such shares determined
in accordance with the Income Tax Act. The paid-up capital of such shares may be
less than the cost of such shares to the holder. The amount of any such deemed
dividend will reduce the proceeds of disposition of the common shares to the
holders for the purpose of computing the amount of the capital gain or loss
under the Income Tax Act of the holder. Any such dividend deemed to have been
received by a non-resident holder will be subject to non-resident withholding
tax as described above. The amount of any such deemed dividend will reduce the
proceeds of disposition of the common share to the non-resident holder for the
purpose of computing the amount of the non-resident holder's capital gain or
loss under the Income Tax Act.
Even if the common shares constitute taxable Canadian property to a non-
resident holder and their disposition would give rise to a capital gain, an
exemption from tax under the Income Tax Act may be available under the terms of
an applicable international tax treaty to which Canada is a party. A holder
resident in the United States for purposes of the Canada-U.S. Treaty will
generally be exempt from Canadian tax in respect of a gain on the disposition of
common shares provided that the value of the common shares is not derived
principally from real property situated in Canada. Article XIII paragraph 5 of
the Canada-U.S. Treaty provides that the treaty provision which normally exempts
U.S. residents from Canadian tax on the sale of property (paragraph 4) such as
shares does not apply where the U.S. resident was a Canadian resident for 120
months during any period of 20 consecutive years preceding the time of the sale
and the individual was resident in Canada at any time during the ten years
immediately preceding the sale. If the exemption from such Canadian tax in
respect of such gain is not available under the Canada-U.S. Treaty, a foreign
tax credit may be available for U.S. federal income tax purposes. Non-residents
are advised to consult their tax advisers with regard to the availability of a
treaty exemption.
U.S. Federal Income Tax Considerations
The following summary describes material United States federal income tax
consequences arising from the purchase, ownership and sale of common shares.
This summary is based on the provisions of the Internal Revenue Code of 1986, as
amended, final, temporary and proposed United States Treasury Regulations
promulgated thereunder, and the administrative and judicial interpretations
thereof, all as in effect as of the date of this annual report and all of which
are subject to change, possibly on a retroactive basis. The consequences to any
particular investor may differ from those described below by reason of that
investor's particular circumstances. This summary does not address the
considerations that may be applicable to any particular taxpayer based on such
taxpayer's particular circumstances (including potential application of the
alternative minimum tax), to particular classes of taxpayers (including
financial institutions, broker-dealers, insurance companies, taxpayers who have
elected mark-to-market accounting, tax-exempt organizations, taxpayers who hold
ordinary shares as part of a straddle, "hedge" or "conversion transaction" with
other investments, investors who own (directly, indirectly or through
attribution) 10% or more of our company's outstanding voting stock, taxpayers
whose functional currency is not the U.S. dollar, persons who are not citizens
or residents of the United States, or persons which are foreign corporations,
foreign partnerships or foreign estates or trusts as to the United States) or
any aspect of state, local or non-United States tax laws. Additionally, the
discussion does not consider the tax treatment of persons who hold common shares
29
through a partnership or other pass-through entity or the possible application
of United States federal gift or estate tax. This summary is addressed only to a
holder of common shares who is (i) a citizen or resident of the United States
who owns less than 10% of our company's outstanding voting stock, (ii) a
corporation organized in the United States or under the laws of the United
States or any state thereof, (iii) an estate, the income of which is includable
in gross income for United States federal income tax purposes regardless of
source, or (iv) a trust, if a court within the United States is able to exercise
primary supervision over the administration of the trust and one or more U.S.
persons have the authority to control all substantial decisions of the trust (a
"U.S. Holder"). This summary is for general information purposes only and does
not purport to be a comprehensive description of all of the tax considerations
that may be relevant to a decision to purchase common shares. This summary
generally considers only U.S. Holders that will own their common shares as
capital assets.
Each shareholder should consult with such shareholder's own tax advisor as
to the particular tax consequences to such shareholder of the purchase,
ownership and sale of their common shares including the effects of applicable
state, local, foreign or other tax laws and possible changes in the tax laws.
Treatment of Dividend Distributions
Subject to the discussion below under "Tax Status Of The Company - Passive
Foreign Investment Companies," a distribution by our company to a U.S. Holder in
respect of the common shares (including the amount of any Canadian taxes
withheld thereon) will generally be treated for United States federal income tax
purposes as a dividend to the extent of our company's current and accumulated
earnings and profits, as determined under United States federal income tax
principles. To the extent, if any, that the amount of any such distribution
exceeds our company's current and accumulated earnings and profits, as so
computed, it will first reduce the U.S. Holder's tax basis in the common shares
owned by him, and to the extent it exceeds such tax basis, it will be treated as
capital gain from the sale of common shares.
While it is not anticipated that our company will pay dividends in the
foreseeable future, the gross amount of any distribution from our company
received by a U.S. Holder which is treated as a dividend for United States
federal income tax purposes (before reduction for any Canadian tax withheld at
source) will be included in such U.S. Holder's gross income, will be subject to
tax at the rates applicable to ordinary income and generally will not qualify
for the dividends received deduction applicable in certain cases to United
States corporations. For United States federal income tax purposes, the amount
of any dividend paid in Canadian dollars by our company to a U.S. Holder will
equal the U.S. dollar value of the amount of the dividend paid in Canadian
dollars, at the exchange rate in effect on the date of the distribution,
regardless of whether the Canadian dollars are actually converted into United
States dollars at that time. Canadian dollars received by a U.S. Holder will
have a tax basis equal to the U.S. dollar value thereof determined at the
exchange rate on the date of the distribution. Currency exchange gain or loss,
if any, recognized by a U.S. Holder on the conversion of Canadian dollars into
U.S. dollars will generally be treated as U.S. source ordinary income or loss to
such holder. U.S. Holders should consult their own tax advisors concerning the
treatment of foreign currency gain or loss, if any, on any Canadian dollars
received which are converted into dollars subsequent to distribution.
A U.S. Holder generally will be entitled to deduct any Canadian taxes
withheld from dividends in computing United States taxable income, or to credit
such withheld taxes against the United States federal income tax imposed on such
U.S. Holder's dividend income. No deduction for Canadian taxes may be claimed,
however, by a noncorporate U.S. Holder that does not itemize deductions. The
amount of foreign taxes for which a U.S. Holder may claim a credit in any year
is subject to complex limitations and restrictions, which must be determined on
an individual basis by each shareholder. Distributions with respect to common
shares that are taxable as dividends will generally constitute foreign source
income for purposes of the foreign tax credit limitation. The limitation on
foreign taxes eligible for credit is calculated separately with respect to
specific classes of income. For this purpose, dividends distributed by our
company with respect to the common shares will generally constitute "passive
income." Foreign income taxes exceeding a shareholder's credit limitation for
the year of payment or accrual of such tax can be carried back for two taxable
years and forward for five taxable years, subject to the credit limitation
applicable in each of such years. Additionally, the foreign tax credit in any
taxable year may not offset more than 90% of a shareholder's liability for
United States individual or corporate alternative minimum tax. The total amount
of allowable foreign tax credits in any year generally cannot exceed regular
U.S. tax liability for the year attributable to foreign source taxable income. A
U.S. Holder will be denied a foreign tax credit with respect to Canadian income
30
tax withheld from dividends received on the common shares to the extent such
U.S. Holder has not held the ordinary shares for at least 16 days of the 30-day
period beginning on the date which is 15 days before the ex-dividend date or to
the extent such U.S. Holder is under an obligation to make certain related
payments with respect to substantially similar or related property. Any days
during which a U.S. Holder has substantially diminished its risk of loss on the
common shares are not counted toward meeting the 16 day holding period required
by the statute.
Sale or Exchange of a Common Share
Subject to the discussion below under "Tax Status Of The Company - Passive
Foreign Investment Companies," the sale or exchange by a U.S. Holder of a common
share generally will result in the recognition of gain or loss by the U.S.
Holder in an amount equal to the difference between the amount realized and the
U.S. Holder's basis in the common share sold. Such gain or loss will be capital
gain or loss provided that the common share is a capital asset in the hands of
the holder. The gain or loss realized by a noncorporate U.S. Holder on the sale
or exchange of a common share will be long-term capital gain or loss subject to
tax at a maximum tax rate of 20% if the common share had been held for more than
one year. If the common share had been held by such noncorporate U.S. Holder for
not more than one year, such gain will be short-term capital gain subject to tax
at a maximum rate of 39.6%. Finally, gain realized by a noncorporate U.S. Holder
with respect to common shares acquired after December 31, 2000 and held for more
than five years, shall be taxed at a maximum rate of 18%. Gain realized by a
corporate U.S. Holder will be subject to tax at a maximum rate of 35%. Gains
recognized by a U.S. Holder on a sale, exchange or other disposition of common
shares generally will be treated as United States source income for United
States foreign tax credit purposes. A loss recognized by a U.S. Holder on the
sale, exchange or other disposition of common shares generally is allocated to
U.S. source income under recently finalized regulations. However, those
regulations require such loss to be allocated to foreign source income to the
extent certain dividends were received by the taxpayer within the 24-month
period preceding the date on which the taxpayer recognized the loss. The
deductibility of a capital loss recognized on the sale, exchange or other
disposition of common shares is subject to limitations. A U.S. Holder that
receives foreign currency upon disposition of common shares and subsequently
converts the foreign currency into U.S. dollars generally will have foreign
exchange gain or loss based on any appreciation or depreciation in the value of
the foreign currency against the U.S. dollar. U.S. Holders should consult their
own tax advisors regarding treatment of any foreign currency gain or loss on any
Canadian dollars received in respect of the sale, exchange or other disposition
of common shares.
Tax Status of the Company
Personal Holding Companies. A non-U.S. corporation may be classified as a
personal holding company for United States federal income tax purposes if both
of the following two tests are satisfied: (i) if at any time during the last
half of the company's taxable year, five or fewer individuals (without regard to
their citizenship or residency) own or are deemed to own (under certain
attribution rules) more than 50% of the stock of the corporation by value and
(ii) 60% or more of such non-U.S. corporation's gross income derived from U.S.
sources or effectively connected with a U.S. trade or business, as specifically
adjusted, is from certain passive sources such as dividends and royalty
payments. Such a corporation generally is taxed (currently at a rate of 39.6% of
"undistributed personal holding company income") on the amounts of such passive
source income, after making adjustments such as deducting dividends paid and
income taxes, that are not distributed to shareholders. We believe that our
company was not a personal holding company in 1999 and is not currently a
personal holding company. However, no assurance can be given that either test
will not be satisfied in the future.
Foreign Personal Holding Companies. A non-U.S. corporation will be
classified as a foreign personal holding company for United States federal
income tax purposes if both of the two following tests are satisfied: (i) five
or fewer individuals who are United States citizens or residents own or are
deemed to own (under certain attribution rules) more than 50% of all classes of
the corporation's stock measured by voting power or value and (ii) the
corporation receives at least 60% (50% if previously an foreign personal holding
company) of its gross income (regardless of source), as specifically adjusted,
from certain passive sources. If such a corporation is classified as a foreign
personal holding company, a portion of its "undistributed foreign personal
holding company income" (as defined for United States federal income tax
purposes) would be imputed to all of its shareholders who are U.S. Holders on
the last taxable day of the corporation's taxable year, or, if earlier, the last
day on which it is classifiable as a foreign personal holding company. Such
income would be taxable as a dividend, even if no cash dividend is actually
paid. U.S. Holders who dispose of their shares prior to such date would not be
subject to tax under these
31
rules. We believe that our company was not a personal holding company in 1999
and is not currently a personal holding company. However, no assurance can be
given that our company will not qualify as a foreign personal holding company in
the future.
Passive Foreign Investment Companies. A company will be a passive foreign
investment company if 75% or more of its gross income (including the pro rata
share of the gross income of any company (United States or foreign) in which the
company is considered to own 25% or more of the shares (determined by market
value)) in a taxable year is passive income. Alternatively, the company will be
considered to be a passive foreign investment company if at least 50% of the
value of the company's assets (averaged over the year) (including the pro rata
share of the value of the assets of any company in which the company is
considered to own 25% or more of the shares (determined by market value)) in a
taxable year are held for the production of, or produce, passive income. For
these purposes, the value of our assets is calculated based on our market
capitalization. Passive income generally includes, among others, interest,
dividends, royalties, rents and annuities.
If our company is a passive foreign investment company for any taxable
year, a U.S. Holders, in the absence of an election by such U.S. Holder to treat
our company as a "qualified electing fund" (a "QEF election"), as discussed
below, would, upon certain distributions by our company and upon disposition of
the common shares at a gain, be liable to pay tax at the highest tax rate on
ordinary income in effect for each period to which the income is allocated, plus
interest on the tax, as if the distribution or gain had been recognized ratably
over the days in the U.S. Holder's holding period for the common shares during
which our company was a passive foreign investment company. Additionally, if our
company is a passive foreign investment company, U.S. Holders who acquire
ordinary shares from decedents would be denied the normally available step-up of
the income tax basis for such common shares to fair market value at the date of
death and instead would have a tax basis equal to the decedent's basis, if
lower.
If our company is treated as a passive foreign investment company for any
taxable year, U.S. Holders should consider whether to make a QEF election for
United States federal income tax purposes. If a U.S. Holder has a QEF election
in effect for all taxable years that such U.S. Holder has held the common shares
and our company was a passive foreign investment company, distributions and gain
will not be recognized ratably over the U.S. Holder's holding period or subject
to an interest charge, gain on the sale of common shares will be characterized
as capital gain and the denial of basis step-up at death described above would
not apply. Instead, each such U.S. Holder is required for each taxable year that
our company is a qualified electing fund to include in income a pro rata share
of the ordinary earnings of our company as ordinary income and a pro rata share
of the net capital gain of our company as long-term capital gain, subject to a
separate election to defer payment of taxes, which deferral is subject to an
interest charge. Consequently, in order to comply with the requirements of a QEF
election, a U.S. Holder must receive from our company certain information. We
intend to supply U.S. Holders with the information needed to report income and
gain pursuant to a QEF election in the event our company is classified as a
passive foreign investment company. The QEF election is made on a shareholder-
by-shareholder basis and can be revoked only with the consent of the Internal
Revenue Service. A shareholder makes a QEF election by attaching a completed
IRS Form 8621 (including the passive foreign investment company annual
information statement) to a timely filed United States federal income tax return
and by filing such form with the IRS Service Center in Philadelphia,
Pennsylvania. Even if a QEF election is not made, a shareholder in a passive
foreign investment company who is a U.S. Holder must file a completed IRS Form
8621 every year.
As an alternative to making a QEF election, a U.S. Holder may elect to make
a mark-to-market election with respect to the common shares owned by him. If the
mark-to-market election were made, then the rules set forth above would not
apply for periods covered by the election. Under such election, a U.S. Holder
includes in income each year an amount equal to fair market value of the common
shares owned by such U.S. Holder as of the close of the taxable year over the
U.S. Holder's adjusted basis in such shares. The U.S. Holder would be entitled
to a deduction for the excess, if any, of such U.S. Holder's adjusted basis in
his common shares over the fair market value of such shares as of the close of
the taxable year; provided however, that such deduction would be limited to the
extent of any net mark-to-market gains with respect to the common shares
included by the U.S. Holder under the election for prior taxable years. The U.S.
Holder's basis in his common shares is adjusted to reflect the amounts included
or deducted pursuant to this election. Amounts included in income pursuant to
the mark-to-market election, as well as gain on the sale or exchange of the
common shares, will be treated as ordinary income. Ordinary loss treatment
applies to the deductible portion of any mark-to-market loss, as well as to any
loss realized on the actual
32
sale or exchange of the common shares to the extent that the amount of such loss
does not exceed the net mark-to-market gains previously included with respect to
such common shares.
The mark-to-market election applies to the tax year for which the election
is made and all later tax years, unless the common shares cease to be marketable
or the IRS consents to the revocation of the election.
We do not believe our company was a passive foreign investment company
during 1999. However, there can be no assurance that our company will not be
classified as a passive foreign investment company in 2000 or thereafter because
the tests for determining passive foreign investment company status are applied
annually and it is difficult to make accurate predictions of future income and
assets, which are relevant to this determination. U.S. Holders who hold common
shares during a period when our company is a passive foreign investment company
will be subject to the foregoing rules, even if our company ceases to be a
passive foreign investment company, subject to certain exceptions for U.S.
Holders who made a QEF election. U.S. Holders are urged to consult with their
own tax advisors about making a QEF election or mark-to-market election and
other aspects of the passive foreign investment company rules.
Back-Up Withholding and Information Reporting
U.S. Holders generally are subject to information reporting requirements
with respect to dividends paid in the United States on common shares. Under
existing regulations, such dividends are not subject to back-up withholding.
U.S. Holders generally are subject to information reporting and back-up
withholding at a rate of 31% on proceeds paid from the disposition of common
shares unless the U.S. Holder provides IRS Form W-9 or otherwise establishes an
exemption.
Treasury regulations generally effective January 1, 2001 may alter the
rules regarding information reporting and back-up withholding. In particular,
those regulations generally would impose back-up withholding on dividends paid
in the United States on common shares unless the U.S. Holder provides IRS Form
W-9 or otherwise establishes an exemption. Prospective investors should consult
their tax advisors concerning the effect, if any, of these Treasury regulations
on an investment in common shares. The amount of any back-up withholding will be
allowed as a credit against a U.S. or Non-U.S. Holder's United States federal
income tax liability and may entitle such Holder to a refund, provided that
certain required information is furnished to the IRS.
ITEM 8 SELECTED FINANCIAL DATA
The selected financial data set forth below should be read in conjunction
with, and are qualified by reference to, our consolidated financial statements,
and notes thereto, and Management's Discussion and Analysis of Financial
Condition and Results of Operations included elsewhere in this annual report.
The consolidated statement of operations data for the years ended 1997, 1998 and
1999 and consolidated balance sheet data as of December 31, 1998 and 1999, as
set forth below, are derived from our consolidated audited financial statements,
including the notes thereto, included elsewhere in this annual report. The
consolidated statement of operations data for the year ended 1996 and for the
four months ended December 31, 1995 and the consolidated balance sheet data as
at December 31, 1996 and 1995 have been derived from our audited financial
statements not included in this annual report. We have prepared our audited
financial statements in accordance with accounting principles generally accepted
in Canada, which differ in certain respects from generally accepted accounting
principles in the United States. However, as applied to us, for all fiscal
periods for which financial data are presented in this annual report, Canadian
GAAP and U.S. GAAP were substantially identical in all material respects, except
as disclosed in Note 14 to our consolidated financial statements and as
described below.
Our financial statements and the selected financial data set forth below
are presented in Canadian dollars. Where applicable, financial data presented
in this table for the year ended December 31, 1999 has been translated from
Canadian dollars into U.S. dollars for convenience purposes at the
representative exchange rates of $1.444 to US$1.00, the noon buying rate in New
York City on December 31, 1999 for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York. Such
translation should not be construed as a representation that the Canadian dollar
amount represents, or has been converted into, U.S. dollars at this or any other
rate.
33
Statement of Operations
Data:
Year Ended Year Ended Four
December 31 ----------- Months
----------- December 31 Ended
----------- Dec 31
1999 1999 1998 1997 1996 1995(1)
---- ---- ---- ---- ---- -------
(Cdn$) (U.S.$) (Cdn$) (Cdn$) (Cdn$) (Cdn$)
(Audited)
(in thousands except for per share data)
Revenues................ 31,001 21,469 20,001 2,619 51 -
Expenses 26,696 18,488 19,361 2,916 12 -
Direct expenses.........
Advertising and 11,870 8,220 12,594 2,521 403 12
promotion..............
General & administrative 12,405 8,591 5,751 3,157 1,453 112
Software development 1,001 693 889 661 194 10
and technology..........
Depreciation and 621 430 201 122 100 1
amortization
Interest (income) (767) (531) (88) (33) - -
Total expenses.......... 51,826 35,891 38,708 9,344 2,162 135
Loss from operations.... (20,825) (14,422) (18,707) (6,725) (2,111) (135)
Net (loss).............. (20,825) (14,422) (18,707) (6,725) (2,111) (135)
Loss per common share... (0.42) (0.29) (0.79) (0.55) (0.21) (0.01)
Weighted average number 50,682 50,682 23,819 12,297 9,598 3,375
of
common shares
Balance Sheet Data:(2)
As at December 31
--------------------------------------------------
1999 1999 1998 1997 1996 1995
------- ------- ------- ------ ------ ------
(Cdn$) (U.S.$) (Cdn$) (Cdn$) (Cdn$) (Cdn$)
(in thousands)
Working capital........................ 21,523 14,905 17,929 5,088 (559) 62
Total assets........................... 36,743 25,445 21,047 6,886 471 145
Long-term Deferred Revenue............. 1,289 893 - - - -
Shareholders equity.................... 28,985 20,072 18,622 5,563 (209) 116
____________________________
(1) We commenced our present business in September 1995.
(2) We have not paid dividends since our formation.
34
ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We offer auction enabling technology and related services for the business-
to-business market directly and through a series of strategic partnerships and
alliances and for the business-to-consumer market through our Web site located
at www.bid.com.
We offer a comprehensive suite of services, including fixed price,
traditional rising price auction, real time or live Dutch auction, and request
for quotation/proposal formats.
In September 1995, our business was commenced by Internet Liquidators Inc.,
an Ontario corporation. In May 1996, Internet Liquidators USA Inc., a wholly
owned subsidiary of Internet Liquidators Inc., was incorporated under the laws
of Florida, and Internet Liquidators International Inc., an Ontario Corporation,
acquired all of the shares of Internet Liquidators Inc. In January 1997, our
Company formed, as an Ontario corporation, by amalgamation of Internet
Liquidators Inc. and Internet Liquidators International Inc. In June 1998, we
changed our name from Internet Liquidators International Inc. to Bid.Com
International Inc.
From incorporation through April 1996, we had no revenues. During this
period, we focused on development of our proprietary technology and computer
infrastructure and the initial planning and development of our Web site and
operations. We launched our auction Web site in April 1996 under the URL
www.internetliquidators.com, but did not begin to actively promote or advertise
our Web site until May 1997. From April 1996 until May 1997, we focused on
securing our initial relationships with America Online and The Toronto Star,
which were concluded in February 1997, and developing an advertising and
promotion plan for our business, while continuing to develop our technology and
Web site and build our business infrastructure. We generated only minimal
revenues during this period.
In May 1997, we initiated our marketing and advertising campaign and, as a
result, began generating more significant commercial revenues for auctions
conducted at our Web site. In March 1998, we changed our Web site address to
www.bid.com. Since launching our Bid.Com brand name, our customer base has
increased significantly. As of May 15, 2000, we had approximately 204,000
registered bidders, representing a 716% increase in registered bidders from
January 1, 1998.
Business-to-Business. Building on our significant experience in the
delivery of on-line dynamic price solutions, we enable other businesses to enjoy
the advantages of an on-line distribution strategy. Because of the modular
nature of our software, the mix of products and services may be tailored to the
needs of each client. Our software includes an ascending auction, live or real-
time Dutch auction, request for proposal/quote auction, or fixed price format.
We also offer a wide range of services, including consulting, research, training
and implementation services. Customization and implementation may, depending
upon the client, take several months, depending upon the objective of the
customer, the complexity of the customer's information technology environments,
and the resources directed by the customers to the implementation projects. The
revenue structures and particular services provided vary depending upon the
needs of the client, and we typically participate in a share of revenue or net
revenue from each auction. The term of the agreements vary, and revenue from
software licenses is deferred and amortized
Commencing in 1999, we began to refocus our strategic sales agenda in favor
of an international entry to business-to-business markets. New business to
business alliances were created in which we typically secured an ongoing revenue
sharing arrangement. We also established new offices in Dublin and Melbourne.
For a further discussion of the impact of this shift in our primary business
focus, see "Item 1 - Description of Our Business - Overview" and "Risk Factors -
As a result of our evolving business model, we may generate less revenue from
the business-to-consumer market and we may not be able to replace the revenue
with revenues from the business-to-business market: and " - Our marketing
alliance with AOL has terminated which may reduce traffic to our
business-to-consumer Web site; we rely on alliances with other third parties to
drive traffic to our business-to-consumer Web sites, and if those alliances
terminate our business could be harmed."
Business-to-Consumer. Our policy is, generally, not to purchase
inventory from merchandise vendors for resale on our auctions at www.bid.com.
Rather, we usually acquire the right to sell the merchandise under
35
arrangements with our vendors. These arrangements typically provide that the
supplier will reserve for sale by us specified quantities of products for a
fixed period of time without obligating us to purchase these products until
sales are made to our customers. Prior to sale, we negotiate a reserve price
with a particular vendor. When an auction is completed, we charge the successful
bidder's credit card. We typically purchase merchandise from suppliers only
after a customer has purchased and paid for the product. Title to the inventory
passes to us at the time the goods are shipped to the customer. We record the
gross amount as revenue upon verification of the credit card authorization and
shipment of the merchandise to the customer. Inventory on our balance sheets
reflect sales returns in transit and some inventory for resale. Both are valued
at the lower of cost and net realizable value. Sales returns in transit may, at
our option, be returned to suppliers for credit or held for resale.
Historically, we have offered lower margin categories of products, such as
computers, computer accessories and computer upgrades. While we plan to
continue offering these product categories, we have shifted our product mix and
increased the number and variety of goods in higher margin product categories,
such as consumer electronics, toys, games, sporting goods, memorabilia, jewelry,
collectible sports and entertainment cards and travel and entertainment products
and services.
In connection with the introduction of our marketing program in the third
and fourth quarters of 1997, we initiated a promotional pricing strategy under
which products were sold below cost or at significantly reduced profit margins.
Due to competitive pressures we continued that approach throughout most of 1998
and 1999. As a result, our earnings were significantly impacted. We recorded
advertising and promotional expenses related to our promotional pricing strategy
of $698,000 for the year ended December 31, 1997, $3.52 million for the year
ended December 31, 1998 and $4.0 million for the year ended December 31, 1999.
We further expect that we may, in the future, in response to competitive
pressures or for other business reasons, from time to time use promotional
pricing programs and free shipping programs. In such cases, we anticipate that
our earnings will be reduced and such reductions may be significant.
We have entered into agreements to market a variety of new consumer items,
including jewelry, talking sports memorabilia and video games, on our consumer
auction site. In November 1999, we reached a significant milestone with the two
millionth visitor to our Canadian consumer Web site in November, 1999.
Results of Operations
Comparison of Years Ended December 31, 1999 and December 31, 1998
Revenues. Revenues are comprised of services and auction enabling
activities, and the sale of merchandise plus shipping revenue. Revenues
increased to $31.001 million for the year ended December 31, 1999 from $20.001
million for the year ended December 31,1998, an increase of 55.0%. The increase
is due to higher revenues from our Web site and from service and auction
enabling activities during the year. From January 1, 1999 to December 31, 1999,
our customer base grew substantially as reflected by a 106% increase in
registered bidders from approximately 87,000 to almost 179,000. Quarterly
revenues for 1999 were $5.015 million in the first quarter, $6.250 million in
the second quarter, $8.330 million in the third quarter, and $11.406 million in
the fourth quarter representing quarter over quarter growth of over 24.6% in the
second quarter, 33.3% in the third quarter, and 36.9% in the fourth quarter.
Direct Expenses. Direct expenses reflect negotiated reserve prices with
vendors for the supply of goods sold by us. Direct expenses were $26.696
million (86.1% of revenues) for the year ended December 31, 1999, as compared to
$19.361 million (96.8% of revenues) for the year ended December 31, 1998. The
increase in direct expenses reflects the significant growth of revenues during
the year ended December 31, 1999 as compared to the year ended December 31,
1998. We anticipate that our direct expenses will vary as a percentage of
revenues in future quarters as we attempt to continue to reduce the number of
high cost/low contribution products and increased services and auction enabling
activities.
Advertising and Promotion Expenses. Advertising and promotion expenses
consist primarily of advertising and marketing fees, promotional pricing
expenses, and expenses paid to strategic and marketing partners and other third
parties from which we purchase advertising space, but does not include salaries
and related expenses of our sales and marketing personnel which are included in
general and administrative expenses. Advertising and promotion expenses were
$11.870 million for the year ended December 31, 1999, as compared to $12.594
million
36
for the year ended December 31, 1998, a decrease of 5.7%. As a percentage of
revenues, advertising and promotion expenses fell to 38.3% of revenues for the
year ended December 31, 1999 from 63.0% during the year ended December 31, 1998.
Advertising and promotion expenses for the year ended December 31, 1999 include
$4.044 million (13.0% of revenue) attributable to promotional pricing expenses
and $3.548 million (11.4% of revenue) for expenses related to America Online in
accordance with our marketing agreement with America Online. Advertising and
promotion expenses for the year ended December 31, 1998 included $3.520 million
(17.6% of revenue) for promotional pricing expenses and $7.0 million (35.0% of
revenue) for expenses related to America Online in accordance with the America
Online marketing agreement. The decrease in advertising and promotional pricing
expenses during 1999, reflects the substantial impact of advertising and
marketing which the Company undertook in 1998 to promote the Bid.Com brand name,
attract track traffic to our Web site and enlarge our customer base. Reduction
of advertising and promotion expenses as a percentage of revenue reflects the
significant growth in revenues from 1999 over 1998. Payments to America Online
ceased March 31, 2000 with the expiry of the America Online agreement.
General and Administrative Expenses. General and administrative expenses
include, primarily: all salaries and related expenses (including benefits and
payroll taxes) other than fees to independent contractors for research and
development, and technology staff compensation, which are included in software
and development expenses; facility costs; foreign exchange expenses;
professional fees; insurance costs; investor relations; computing and
communications expenses; regulatory filing fees and travel and related costs.
General and administrative expenses increased to $12.405 million for the year
ended December 31, 1999 from $5.751 million for the year ended December 31,
1998, an increase of 115.7%. As a percentage of revenues, general and
administrative expenses increased to 40.0% of revenues for the year ended
December 31, 1999 from 28.8% of revenues for the year ended December 31, 1998.
The increase in general and administrative expenses is attributable to an
increase in salary and related expenses resulting from staff hired to
accommodate the growth in business and increased focus on business-to-business
opportunities during 1999, increased legal and other fees relating to the
attainment of a Nasdaq listing, regulatory filing fees, investor relations fees,
live video streaming production expenses, rent, communication and other
ancillary costs due primarily to the Company's growth during 1999.
Software Development and Technology Expenses. Software development and
technology expenses consist of costs associated with acquired and internally
developed software, license agreements and research and development expenses,
including fees to independent contractors and salaries and related expenses of
our personnel engaged in these activities. Software development and technology
expenses increased to $1.001 million for the year ended December 31, 1999 from
$889,000 for the year ended December 31, 1998, a 12.6% increase. As a
percentage of revenues, software development and technology expenses decreased
to 3.2% of revenues during 1999 from 4.4% during 1998. The increase in software
development and technology expenses is attributable primarily to the increased
expenses incurred in connection with the redesign of our Web page, development
of a fixed price site and the development of business-to-business auction
technology. The decrease in software development and technology expense as a
percentage of revenues is attributable to the significant growth in revenues
during the period.
Depreciation and Amortization. Depreciation and amortization expense was
$621,000 for the year ended December 31, 1999 as compared to $201,000 for the
year ended December 31, 1998, an increase of 209.0%. This increase was
primarily due to amortization expenses relating to goodwill as a result of the
investment in Point 2 Internet Systems Inc. as well as a significant increase in
equipment, computers, furniture and fixtures acquired by us during 1999 as the
result of our growth.
Interest Income. Interest income was $767,000 for the year ended December
31, 1999 as compared to $88,000 for the year ended December 31, 1998. Interest
income reflects interest from investments in cash and marketable securities.
Comparison of Years Ended December 31, 1998 and December 31, 1997
Revenues. Revenues were comprised of transactional revenues from the sale
of merchandise plus shipping revenue. Revenues (excluding interest income)
increased to $20.001 million for the year ended December 31, 1998 from $2.619
million for the year ended December 31, 1997, an increase of 663.7%. The
increase reflected commercial sales for the full year ending December 31, 1998
as compared to only eight months (May to December)
37
during the period ended December 31, 1997. In addition, the increase was
attributable to the introduction of our Bid.Com brand name in March 1998, and a
significant increase in marketing and advertising expenditures and marketing
relationships during the year ending December 31, 1998 as compared to the same
period in 1997. From January 1, 1998 to December 31, 1998, our customer base
grew substantially as reflected by a 335.0% increase in registered bidders from
approximately 20,000 to over 87,000.
Direct Expenses. Direct expenses reflect negotiated reserve prices with
vendors for the supply of goods sold by us. Direct expenses were $19.361
million (96.8% of revenues) for the year ended December 31, 1998 resulting in a
gross margin of $640,000 or 3.2%, as compared to $2.916 million (111.3% of
revenues) for the year ended December 31, 1997, resulting in a negative gross
margin of $297,000 or 11.3%. The increase in direct expenses reflected the
significant growth of revenues during the year ended December 31, 1998 as
compared to the year ended December 31, 1997. Improvement in the gross margin
for the year ended December 31, 1998 reflected the commencement of our efforts
to change our product mix to include sales of higher margin goods. During 1998,
gross margins were 2.0% in the first quarter, 0.9% in the second quarter, 3.2%
in the third quarter and 5.6% in the fourth quarter.
Advertising and Promotion Expenses. Advertising and promotion expenses
consisted primarily of advertising and marketing fees, promotional pricing
expenses, and expenses paid to strategic and marketing partners and other third
parties from which we purchase advertising space, but did not include salaries
and related expenses of our sales and marketing personnel which are included in
general and administrative expenses. Advertising and promotion expenses were
$12.594 million for the year ended December 31, 1998, as compared to $2.521
million for the year ended December 31, 1997, an increase of 399.6%. As a
percentage of revenues, advertising and promotion expenses fell to 63.0% of
revenues for the year ended December 31, 1998 from 96.3% during the year ended
December 31, 1997. Advertising and promotion expenses for the year ended
December 31, 1998 included $3.52 million (17.6% of revenue) attributable to
promotional pricing expenses and $7.0 million (35.0% of revenue) paid to America
Online pursuant to the America Online Marketing Agreement. Advertising and
promotion expenses for the year ended December 31, 1997 included $698,000 (26.7%
of revenue for the year ended December 31, 1997) for promotional pricing
expenses and $442,000 (16.9% of revenue) for payments to America Online pursuant
to the America Online Marketing Agreement. The increase in advertising and
promotion expenses reflected the substantial increase in advertising and
marketing which we undertook in order to promote our Bid.Com brand name, attract
track traffic to our Web site and enlarge our customer base. Reduction of
advertising and promotion expenses as a percentage of revenue reflects the
significant growth in revenues from 1997 to 1998 and a reduced amount of
promotional pricing activity.
General and Administrative Expenses. General and administrative expenses
include, primarily: all salaries and related expenses (including benefits and
payroll taxes) other than fees to independent contractors for research and
development, and technology staff compensation, which are included in software
and development expenses; facility costs; foreign exchange expenses;
professional fees; insurance costs; investor relations; computing and
communications expenses; regulatory filing fees and travel and related costs.
General and administrative expenses increased to $5.751 million during the year
ended December 31, 1998 from $3.157 million in the year ended December 31, 1997,
an increase of 82.2%. As a percentage of revenues, general and administrative
expenses decreased to 28.8% of revenues in 1998 from 120.5% of revenues in 1997.
The increase in general and administrative expenses was attributable to an
increase in salary and related expenses resulting from staff hired to
accommodate the growth in business during 1998, and an increase in office
supplies, rent, communication and other ancillary costs due primarily to our
growth during 1998, and losses due to foreign exchange expenses. The reduction
in general and administrative expenses as a percentage of sales reflected
economies of scale achieved as a result of a significant growth of revenues
during the year ended December 31, 1998.
Software Development and Technology Expenses. Software development and
technology expenses consist of costs associated with acquired and internally
developed software, license agreements and research and development expenses,
including fees to independent contractors and salaries and related expenses of
our personnel engaged in these activities. Software development and technology
expenses increased to $889,000 for the year ended December 31, 1998 from
$661,000 for the year ended December 31, 1997, a 34.5% increase. As a
percentage of revenues, software development and technology expenses decreased
to 4.4% of revenues during the year ended December 31, 1998 from 25.2% during
the year ended December 31, 1997. The increase in software development and
technology expenses was attributable primarily to the increased expenses
incurred in connection with the
38
redevelopment of our auction platform, the purchase of a new accounting software
package and the purchase and implementation of the personalization software
engine. The reduction in software development and technology expense as a
percentage of revenues was attributable to the significant growth in revenues
during the period, and resulting economies of scale.
Depreciation and Amortization. Depreciation and amortization expense was
$201,000 for the year ended December 31, 1998 as compared to $122,000 for the
year ended December 31, 1997, an increase of 64.8%. This increase was a result
of a significant increase in equipment, computers, furniture and fixtures
acquired by us during 1997 as the result of our growth.
Liquidity and Capital Resources
Funding to Date. We have been funded to date primarily through a series of
private placements of equity, in one instance a convertible debenture, sales of
equity to and investments from strategic partners and cash flow from operations.
We have received aggregate gross proceeds of $77.9 million through our private
offerings, including, $16.0 million of net proceeds from the sale of the special
warrants in December 1999 and an aggregate of $34.7 million during 1999 from the
exercise of options and common share purchase warrants sold in private
offerings.
During 1998, we issued a common share warrant for an aggregate purchase
price of $1.9 million and 1,500,000 common shares for no additional
consideration to Rogers Media. The common share purchase warrant entitled
Rogers Media to acquire up to 100,000 common shares at a price of $1.40 per
common share. These warrants were fully exercised by September 30, 1999.
We also sold in a private placement a total of 8,100,000 special warrants
at a price of $1.40 per special warrant for aggregate gross proceeds of $11.3
million. The special warrants were exercised on September 30, 1998, for
8,100,000 common shares and 4,050,000 share purchase warrants, each exercisable
to purchase one common share at $1.65 per share. These warrants were fully
exercised by September 30, 1999 resulting in aggregate proceeds to us of $6.682
million.
We also granted to Yorkton Securities Inc., placement agent for the
offering, compensation warrants entitling Yorkton to receive, without payment of
any further consideration, options to purchase up to 860,000 units (each unit
consisting of one common share and one-half of one share purchase warrant) at a
price of $1.40 per unit at any time until November 4, 1999. The options were
exercised for 860,000 common shares and 430,000 share purchase warrants
resulting in proceeds to us of $1.204 million. These warrants were fully
exercised by September 30, 1999 resulting in proceeds to us of $709,500.
On November 30, 1998, we sold in a private placement 5,714,984 special
warrants at a price of $1.75 per special warrant. We received proceeds of
$10.001 million. The special warrants issued by us were exercised on January
28, 1999 for 5,714,984 common shares and 1,428,746 share purchase warrants, each
exercisable to purchase one common share at $1.75 per share. As at December 31,
1999, all remaining share purchase warrants had been exercised.
We also granted to Yorkton, the placement agent for this offering,
compensation warrants which entitled Yorkton to receive, without payment of
additional consideration, options to purchase up to 611,498 units at a price of
$1.75 per unit at any time prior to December 31, 1999. In January 1999, Yorkton
exercised the options for units consisting of 611,498 common shares and 152,875
common share purchase warrants, each exercisable to purchase one common share at
$1.75 per share, resulting in proceeds to us of $1,070,122. These share
purchase warrants were fully exercised by September 30, 1999 resulting in
proceeds to us of $267,531.
On September 30, 1999, we issued 1,854,678 special warrants at a price of
$9.25 per warrant which were exchangeable into 1,854,678 common shares and
1,854,678 share purchase warrants for no additional consideration. The share
purchase warrants, if and when exercised, are exercisable at a price of $10.00
per warrant until September 30, 2001 into an equivalent number of common shares.
Gross proceeds were $17,155,772 from which was deducted commission of $857,789
(5%) and estimated expenses of approximately $250,000 to yield net proceeds of
$16,047,983.
39
Fixed Assets. Additions to fixed assets during 1997 were $247,000,
respectively, primarily for computer hardware. During 1998, we invested
$351,000 in fixed assets, primarily for computer hardware, leasehold
improvements and furniture and fixtures, and $68,000 for trademarks. During
1999 we invested $693,000 in fixed assets primarily for computer hardware,
equipment, furniture and fixtures and leasehold improvements.
Other. In addition, during 1999 we issued $2.5 million of share capital for
a strategic investment in Point 2 Internet Systems Inc. in a heavy equipment
listing service company, resulting in goodwill of $2.0 million. We also made
strategic investments in SCS Solars, Megawheels.Com, and Globalstore.com.
We have an agreement with a financial institution that settles credit card
transactions for online auction sales. Under this agreement, we are required to
maintain a cash reserve account in an amount determined based on a percentage of
sales for the preceding six months. As of December 31, 1999, we were required
to maintain $1.52 million in this account.
Current Status. We have not earned profits to date and, at December 31,
1999, we had an accumulated deficit of $48.5 million. We also have incurred
negative cash flow from operations since inception and we have expended and
expect to continue to expend substantial funds to continue to develop our
technology, business-to-business auctions, multimedia auction platforms, the
distribution of specialty products and other areas of our business including the
acquisition of, or strategic investments in, complementary products, businesses
or technologies. As a result, we expect to incur losses for the foreseeable
future and there can be no assurance that we will ever achieve profitability.
Operating results have varied on a quarterly basis in the past and may fluctuate
significantly in the future as a result of a variety of factors, many of which
are outside of our control.
As of December 31, 1999 and May 15, 2000, we had cash on hand and
marketable securities of approximately $21.5 million and $11.5 million,
respectively. At this time, funds from operations are not sufficient to meet
our anticipated financial requirements. Based on current plans, we believe that
current cash balances and anticipated funds from operations will be sufficient
to meet our needs until approximately October 1, 2000. However, the actual
amount of funds that will be required during the interim period will be
determined by many factors, some of which are beyond our control. As a result,
we may need funds sooner or in greater amounts than currently anticipated.
On May 19, 2000 we signed an agreement with Acqua Wellington Value Fund
Ltd. under which Acqua Wellington agreed to invest a minimum of U.S.$1.5 million
and a maximum of U.S.$6.5 million in our company. Under certain conditions, the
amount which Acqua Wellington will be required to invest will increase from
U.S.$1.5 million to up to U.S.$3.5 million. At least U.S.$3.0 million and, under
certain conditions, as much as U.S $5.0 million of the investment will be made
at the discretion of Acqua Wellington. In exchange for its investment, we will
issue to Acqua Wellington units to acquire one common share and four-tenth (.4)
of a common share purchase warrant. Upon exercise of a whole purchase warrant,
we will issue one common share. The warrants will be exercisable for two years
at an exercise price equal to 115% of the purchase price of the unit. The
purchase price of a unit will be determined based on a market-based price
formula. Completion of the proposed Acqua Wellington financing is subject to the
satisfaction of various closing conditions, including regulatory and Toronto
Stock Exchange approval. We cannot assure you that the Acqua Wellington
financing will be completed in a timely manner or at all or the exact amount
that Acqua Wellington will invest. Even if Acqua Wellington completes the
investment we anticipate that we will need to raise additional funds by
approximately November 1, 2000, if Acqua Wellington invests U.S.$1.5 million,
and by approximately February 1, 2001, if Acqua Wellington invests US.$6.5
million.
Other than the Acqua Wellington financing, do not have committed sources of
financing at this time and we cannot assure you that we will be able to obtain
financing when needed on commercially reasonable terms or at all. If adequate
funds are not available or not available on acceptable terms when needed, our
business, operations, financial condition and future prospects will be
materially adversely affected. If additional funds are raised through the
issuance of equity or convertible debt securities, the percentage ownership of
our shareholders will be reduced, shareholders may experience additional
dilution and such securities may have rights, preferences and privileges senior
to those of our common shares.
Net Operating Losses for Tax Purposes. We have available an aggregate of
approximately $48.8 million of net operating losses for tax purposes that may be
used to reduce taxable income in future years, of which $113,000 expires in
2002, $1.9 million expires in 2003, $6.4 million expires in 2004 and $19.8
million expires in 2005 and
40
$20.5 million expires in 2006. Our net operating losses are subject to
assessment of our tax returns by taxation authorities.
Year 2000
In 1999, as the Year 2000 approached, an issue existed for companies that
relied on computers as a result of the computer industry's past practice of
using two digits rather than four digits to identify the applicable year.
Consequently, many software applications and programs may not have properly
recognized calendar dates beginning in the Year 2000. If not corrected, these
applications and programs could have failed or created erroneous results. To
correctly identify the Year 2000, a four-digit year code field was required to
be what is commonly termed "Year 2000 compliant."
During 1999, we conducted a comprehensive examination of our information
technology and communications systems and software applications to determine
Year 2000 compliance. We hired a Year 2000 consultant to review our examination
and the consultant's review was completed in November, 1999 assigning a low risk
rating to our operations. We contacted significant suppliers and third-party
service providers to identify Year 2000 problems and develop contingency plans
to prevent the disruption of our business activities.
Total costs attributable to Year 2000 compliance efforts, were
approximately $260,000. As of April 27, 2000, we have experienced no
detrimental effects as a result of the Year 2000 compliance issue.
Foreign Currency Fluctuations
We purchase substantially all of our products from suppliers, and sell
substantially all of our products to customers, in U.S. dollars. We also incur
a significant amount of advertising and marketing expenses in U.S. dollars.
However, the majority of our other operating expenses are in Canadian dollars.
Fluctuations in the U.S./Canadian dollar exchange rate with respect to our
operations are a function, primarily, of:
the relative value of the Canadian dollar to the U.S. dollar at any given time,
and
the relationship between the amount of revenues and financing received by us in
U.S. dollars and the amount of our expenditures being paid in Canadian dollars,
on the one hand, and the amount of revenues and financing received by us in
Canadian dollars and the amount of our expenditures being paid in U.S. dollars,
on the other hand.
We do not have any hedging programs in place to manage the potential
exposure to fluctuations in the U.S./Canadian dollar exchange rate.
We incurred net losses from foreign currency exchange fluctuations of
$271,000 in the year ended December 31, 1999, $675,000 in 1998 and $39,000 in
1997. The decrease in losses resulted from the overall increase in the value of
the Canadian dollar compared to the U.S. dollar during the year ended December
31, 1999 as compared to 1998.
Euro Conversion
In June 1999, we opened an office in Dublin, Ireland to provide auction
enabling and related services to European-based companies. Effective January 1,
1999, 11 of the 15 member countries of the European Union adopted the euro as
their common legal currency and each participant established fixed conversion
rates between their sovereign, or legacy currencies and the common euro
currency. The legacy currencies of the individual countries are scheduled to
remain legal tender as denominations of the euro until January 1, 2002 (the
"transition period"), when euro-denominated bills and coins will be introduced.
During the transition period, public and private parties may choose to pay for
goods and services using either the euro or the participating country's legacy
currency. However, conversion rates no longer will be computed directly from
one legacy currency to another. Instead, a "triangular" calculation must be
utilized whereby an amount denominated in one legacy currency is first converted
into a euro amount, and then the euro amount is converted into the second legacy
currency. By July 1, 2002, the legacy currencies will be phased out entirely as
legal tender.
41
We currently conduct business operations in U.S. and Canadian dollars.
Since our information systems and processes generally accommodate multiple
currencies, we anticipate that any necessary modifications to our information
systems, equipment and processes to accommodate euro transactions will be made
on a timely basis and do not expect any failures that would have a material
adverse effect on our financial position or results of operations, or that the
costs of such modifications will have a material effect on our financial
position or results of operations. We spent approximately $422,000 during 1999
to open and operate the Dublin office, including salaries, office rent and other
expenses, including computers and telephones. These expenses included
purchasing or modifying appropriate business software and arranging for banking
relationships to allow us to invoice and accept payments, and pay our own
suppliers, in legacy currencies and in euro.
The auction enabling software that we provide in Europe is designed to be
multi-currency capable. The software is capable of performing multiple currency
conversions, including triangular conversions. During the euro transition
period, we anticipate that partners to whom we will provide our auction enabling
services will initially designate the currency zones in which they operate, and
we can supplementally add zones to the auction software platform as these
partners expand or move operations into other European countries. The cost of
including the initial currency zones and of adding zones will be included within
the fees. Licensees will therefore be able to price auction products in legacy
currencies and euro denominations. In order to accept credit card payments in
euro and legacy currencies, our customers will be required to enter into
arrangements with local banking vendors that can support their auction
operations with respect to euro transactions on a timely basis.
We do not have in place any hedging programs to manage the potential
exposure to fluctuations in the euro/Canadian dollar exchange rate. As European
operations expand, we may need to evaluate our currency exchange costs and rate
exposure with respect to the euro during and after the transition period.
42
ITEM 9A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
(a) Quantitative Information about Market Risk
Not applicable.
(b) Qualitative Information about Market Risk
Not applicable.
ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth the name, age and position of each of our
directors and executive officers.
Name Age Position
- ---- --- --------
Paul Godin4 47 Chairman of the Board of Directors
Jeffrey Lymburner 43 Director, President and Chief Executive
Officer
T. Christopher Bulger1,2 42 Director
Dr. Duncan Copeland1,2,3 43 Director
Azim Fancy 58 Director
David Pamenter3 52 Director and Assistant Secretary
Charles S. Walker1,2 64 Director
Jim Moskos 37 Director, President, Bid.Com Technology Group
Mark Wallace 41 Chief Operating Officer
Paul Hart 44 Chief Financial Officer
Peter Sprukulis 40 Senior Vice-President, Sales, Marketing and
Business Development
Robert W.A. Joynt 51 Vice President, Consumer Sales and Marketing
John Mackie 35 Vice President, General Counsel and Secretary
David Kirkconnell 39 Vice-President, Human Resources
Gregory Bewsh 48 Vice-President, Investor Relations
________________________
(1) Member of Audit Committee
(2) Member of the Management Resources and Compensation Committee
(3) Member of the Corporate Governance Committee. There is presently one
vacancy on this committee.
(4) Mr. Godin has indicated that he will resign as Chairman of the Board
effective June 14, 2000.
Mr. Godin will remain a director.
The business experience of each of our directors and executive officers for
at least the last five years is as follows:
Paul Godin has served as Chairman of the board of directors since June 17, 1996
and is one of our founding shareholders. Mr. Godin served as Chief Executive
Officer from August 28, 1998 until August 1, 1999 and served as our President
from September 1995 until August 28, 1998. Mr. Godin has 20 years of marketing
experience in the retail and wholesale electronics and computer industries.
From 1994 to 1995, Mr. Godin was Senior Vice President--Corporate Sales and
Marketing for Completely Mobile Inc., a Canadian company which designs and
implements wireless data systems. From 1993 to 1994, he was Vice President and
General Manager of Casio Canada Inc., makers of calculators and household
electronic goods. From 1990 to 1993 Mr. Godin was Vice President--Sales and
Marketing, for Alpine Electronics of Canada Inc. and, prior to that, he
privately consulted to
43
Canadian Airlines, H.J. Heinz, and Clarion Canada. Mr. Godin has indicated that
he will step down as Chairman effective June 14, 2000. Mr. Godin is the founding
shareholder, and a director and officer of The Art Vault International Limited.
Jeffrey Lymburner is our Chief Executive Officer and one of our founding
shareholders. Mr. Lymburner became Chief Executive Officer on August 1, 1999,
has served as our President from August 28, 1998, our Executive Vice President
from September 1995 until August 1998 and has served as a director since
September 1995. Mr. Lymburner is also President of Internet Liquidators USA
Inc., our subsidiary operating as Bid.Com, USA. From 1990 to 1995, Mr.
Lymburner was President of Completely Mobile Inc., and prior to that, he served
in various management positions with Multitech Warehouse Direct, a Canadian
consumer electronics retail chain.
T. Christopher Bulger has served as a director since June 1996. He has served
as our Executive Vice President from September 1998 to December 1, 1999 and as
Assistant Secretary from September 1996 to December 1, 1999. Mr. Bulger served
as our Chief Financial Officer from April 1996 to September 1998. Mr. Bulger was
an officer and a partner with HDL Capital Corporation, a Toronto-based merchant
bank from 1993 until 1999. Mr. Bulger is currently the Chief Executive Officer
and a director of eLab Technology Ventures Inc.
Dr. Duncan Copeland has served as a director since September 1995. Dr. Copeland
is the President of Copeland & Company, a Washington D.C.-based international
consultancy firm, and served as Visiting Professor of business at Georgetown
University from September 1997 to May 1999. From July 1989 to June 1996, Dr.
Copeland served on the faculty of the Richard Ivey School of Business at the
University of Western Ontario as a professor of Information Management and as
Chief Information Officer of the institution.
Azim Fancy became a director on October 14, 1999. Mr. Fancy started his
business career as Managing Director with the Steel Corporation of Pakistan in
1967. From 1972 to 1977, Mr. Fancy served as President of the Gulf Group of
Companies. In 1977, Mr. Fancy established International Trading and Sales Inc.
based in New York City, New York. The company owned and chartered vessels for
the movement of its bulk cargoes throughout the world. Mr. Fancy has also been
extremely active on several professional, community and charitable boards. Most
recently, Mr. Fancy was appointed to the Board of Directors of the Ontario Film
Development Corporation as well as an Advisory Board Member to SCS Solars
Computing Systems Inc. Mr. Fancy is a director of The Art Vault International
Limited.
David Pamenter has served as our Director since June 1997 and as an Assistant
Secretary since January 1997. Since July 1995, Mr. Pamenter has been a partner
in the Toronto, Ontario law firm of Gowling, Strathy & Henderson, Barristers &
Solicitors, and from 1977 to 1995, Mr. Pamenter was a partner in the Toronto law
firm of Lang Michener, Barristers & Solicitors.
Charles S. Walker has served as our Director since February 1999. Since January
1968, Mr. Walker has served as the President and Chief Executive Officer of the
Walker Group, Inc., a privately owned company involved in manufacturing,
administration, fulfillment services and marketing to the automotive and
consumer goods industries. Mr. Walker is currently a director of Megawheels.com
Inc. and a director of SCS Solars Computing Systems Inc.
Jim Moskos has served as a director and President of the Bid.Com Technology
Group since October 19, 1999. Mr. Moskos served as the Vice President--
Technology of the Company from September 1997 to October 19, 1999. From
September 1994 to August 1997, Mr. Moskos was Senior Technology Manager for the
Canadian Department of Indian Affairs and Northern Development (the
"Department") responsible for setting the technical direction for all aspects of
application development. From 1992 to 1994, Mr. Moskos was Client Services
Manager for the Department.
Mark Wallace became our Chief Operating Officer in November, 1999 and was
previously Executive Vice-President, General Counsel and Secretary of the
Company. Prior to joining the Company in May 1999, Mr. Wallace was Vice-
President, General Counsel and Secretary of AT&T Canada Long Distance Services
Company. In that capacity, he was principal advisor to that company on all
legal, regulatory and corporate governance issues, and served as corporate
secretary to its board of directors. Mr. Wallace joined AT&T Canada in 1991.
Prior to joining AT&T Canada, Mark worked for 4 years in private practice as a
corporate commercial lawyer.
44
Paul Hart has served as our Chief Financial Officer since October 1998 and
Senior Vice President - Finance from August 1998 to September 1998. From March
1995 to July 1998, Mr. Hart was Vice President-Finance of Canadian Automatic
Data Processing Services, Limited, and from June 1990 to February 1995, Mr. Hart
served as Vice President and Treasurer of Simcoe Erie Investor Limited, an
insurance company and part of the GAN Group.
Peter Sprukulis joined us in December 1999 as Senior Vice President of Sales,
Marketing and Business Development. In this position, Mr. Sprukulis is
responsible for all activities relating to the development of our global
business-to-business group. From March 1999 to December 1999, Mr. Sprukulis was
the Global Vice President of Marketing for Hummingbird Communications Inc.
responsible for the global efforts in Business Intelligence. From January, 1996
to March 1999, Mr. Sprukulis was the Vice President of Marketing for Oracle
Corporation responsible for Canada and Latin America. Prior to January 1996, he
was Manager of Communications and Campaign Strategies for the Software Division
of IBM Canada Ltd.
Robert W.A. Joynt has served as our Vice President--Consumer Sales and Marketing
since January 1996. From July 1994 to December 1995, Mr. Joynt was Vice
President--Sales and Marketing of Logitech Electronics Inc., a consumer
electronics company and from September 1984 to June 1994, he served as President
of Koss Limited and Vice President of Koss Corporation, a consumer electronics
company.
John Mackie joined us in November, 1999 as Vice-President, General Counsel and
Corporate Secretary. Prior to joining us, Mr. Mackie was Assistant General
Counsel and Assistant Secretary for Imax Corporation. From August 1997 to June
1998, Mr. Mackie was a member of the legal department of AT&T Canada Long
Distance Services Company (now AT&T Canada Corp.), serving as Associate General
Counsel from January 1998 to June 1998. Prior to August 1997, Mr. Mackie was an
associate with the law firm of Fraser & Beatty (now Fraser Milner).
David Kirkconnell has been our Vice-President, Human Resources since February
2000. Mr. Kirkconnell has approximately fourteen years human resource management
experience in a variety of industries. He acted as a consultant to various
businesses on Human Resources matters from October 1998 to February 2000. Prior
to that time, he served as VP, Human Resources (from February 1997 to May 1998)
and Director Human Resources (from October 1991 to February 1997) for Ault Foods
Ltd. Mr. Kirkconnell holds an Economics degree from the University of Western
Ontario and a Master of Industrial Relations from the University of Toronto.
Gregory Bewsh is our Vice-President, Investor Relations. Mr. Bewsh has
approximately 20 years experience in finance, treasury and investor relations.
He was Vice-President and Treasurer of Chemical Bank of Canada from 1985 to
1994; Managing Director, Commercial Banking of Canadian Imperial Bank of
Commerce from 1994 to 1997 and Director, Investor Relations of Clearnet
Communications Inc. from 1997 to 1999. Mr. Bewsh holds an MBA in Finance.
Under Canadian law, a majority of our board of directors must be residents
of Canada. Each of our directors holds office until the next annual meeting of
shareholders or until his successor has been elected and qualified. Our
executive officers are appointed by our board of directors and serve at the
discretion of our board of directors.
ITEM 11 - COMPENSATION OF DIRECTORS AND OFFICERS
Summary Compensation Table
The following table provides a summary of compensation earned during the
fiscal year ended December 31, 1999 by our Chief Executive Officer and the five
highest paid executives who earned in excess of $100,000.
Annual Compensation Long Term Compensation
45
Awards Payouts
----------------------------------------------------------------------------------------
Other Restricted
Annual Shares or All Other
Compen- Options Restricted LTIP Compen
Name And Principal Year Salary Bonus sations Granted Share Payout sation
Position ($) ($) ($)(2) (#) Units ($) ($) ($)
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Paul Godin 1999 260,000 Nil 12,000 160,000 Nil Nil Nil
Chairman(3) 1998 178,300 Nil 250,000(1.2,000 50,000 Nil Nil Nil
1997 135,000 11,500 75,000 Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Jeffrey Lymburner 1999 225,684 Nil Nil 170,000 Nil Nil Nil
President and CEO 1998 170,500 Nil Nil 100,000 Nil Nil Nil
1997 135,000 200,000(1) 7,000 50,000 Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Christopher Bulger 1999 175,017 Nil 11,000 160,000 Nil Nil Nil
Director(4) 1998 132,000 100,000 12,000 125,000 Nil Nil Nil
1997 111,500 Nil 2,000 75,000 Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
Robert W.A. Joynt 1999 163,022 Nil 6,000 55,000 Nil Nil Nil
Vice-President, Consumer 1998 154,300 8,500 6,000 35,000 Nil Nil Nil
Sales and Marketing 1997 103,700 Nil 3,000 25,000 Nil Nil Nil
- -----------------------------------------------------------------------------------------------------------------
James I. Moskos(5) 1999 188,500 Nil 12,000 225,000 Nil Nil Nil
President, Technology 1998 102,000 Nil 4,500 100,000 Nil Nil Nil
Group
- -----------------------------------------------------------------------------------------------------------------
Paul Hart(6) 1999 132,290 14,374 12,000 50,000 Nil Nil Nil
Chief Financial Officer
- -----------------------------------------------------------------------------------------------------------------
__________
(1) Received upon the waiver of rights to the historically established 10%
profit sharing plan, to certain performance operations pursuant to
employment contracts, and to the exercise of pre-emptive rights co-incident
with the special warrants issued pursuant to the subscription agreements
accepted by Bid.Com International Inc. on October 3, 1997.
(2) Received on account of car reimbursement expenses and other expenses.
(3) Has indicated his intention to resign as Chairman of our board of directors
effective June 14, 2000.
(4) Resigned December 1, 1999 as Executive Vice -President, Business
Development.
(5) Joined our company in September 1997.
(6) Joined our company in August 1998.
During 1999, we did not provide any pension, retirement or similar benefits
to our directors and officers.
Each of Paul Godin and Jeffrey Lymburner has entered into a non-competition
and salary protection agreement with our company, dated February 21, 1997, which
provides, among other things, that he (i) will not compete with our company for
a period of 12 months, which may be extended by us to 24 months, following the
termination of his employment with our company, in consideration of which we
will pay his full annual salary during such period; and (ii) if his employment
with us is terminated other than by reason of death, disability or cause (as
such terms are defined in such agreements), we will continue to pay his full
annual salary for 12 months (or 24 months if we exercise our option to extend
the non-competition restrictions for 24 months) following the date of
termination.
Mark Wallace, our Chief Operating Officer has entered into a written
agreement with our company which provides, among other things, that in the event
of termination of his employment other than by death, disability or cause, his
previous 12 months salary level is guaranteed for the 12 months after
termination.
46
Stock Option Plan
We have adopted a stock option plan pursuant to which we grant options to
purchase our common shares. The purpose of the stock option plan is to afford
directors, executive officers and key employees of our Company and subsidiaries
who are responsible for our continued growth an opportunity to acquire an
ownership interest in us, and, thus, create in such persons an increased
interest in, and a greater concern for, the welfare of our Company and that of
our subsidiaries.
The stock option plan is administered by our board of directors under the
guidance of the management resources and compensation committee of the board.
The board of directors determines those individuals who will receive options,
the time period during which the options may be partially or fully exercised and
the number of common shares that may be purchased under each option. Options
may be granted for a term not to exceed ten years. The board of directors may
determine the exercise price of options granted under the stock option plan,
provided that the options may not have an exercise price of an amount less than
the closing market price of the common shares on the trading day prior to the
date of the grant.
There are 4,961,168 common shares available for option grants under the
plan. The granting of options under the stock option plan is subject to the
following conditions: (i) not more than 10% of the number of common shares
issued and outstanding from time to time may be reserved for the granting of
options to insiders within a one-year period; and (ii) not more than 5% of the
outstanding issue may be issued to any one insider in a one-year period.
Options granted under the stock option plan are not transferable. Except under
certain circumstances such as death, disability or retirement and unless
otherwise specified by the board of directors, options granted under the stock
option plan become null and void following the termination of an option holder's
employment with us. Subject to shareholder approval in most cases, the board of
directors may amend the stock option plan.
We have granted options to purchase a total of 4,960,700 common shares
under this plan of which 2,918,150 are outstanding. The exercise price for such
options range from $1.00 to $12.45 and they expire at different times between
June 30, 2000 and November 26, 2003. An aggregate of 2,265,000 options are held
by our officers and directors as a group. We have also granted options to
purchase 604,500 common shares outside the plan. We intend, upon shareholder
approval of the amendment to the plan described below, to deem these and any
further options granted outside of the plan to be subject to its terms and
conditions.
The board of directors has approved an increase in the number of shares
reserved for issue under the plan from 4,961,168 to 8,700,000 subject to the
approval of our shareholders at the annual and special shareholders meeting
scheduled for June 14, 2000.
Options Granted to Executive Officers During Fiscal Year Ended December 31, 1999
The following table sets forth the stock options granted to the Executive
Officers pursuant to the stock option plan during the fiscal year ended December
31, 1999.
Market Value of
Securities
% of Total Underlying
Securities Underlying Options/SARs Options/SARs
Options/SARs Granted to Exercise or Base on the Date of
Granted Employees in Price Per Grant Expiration
Name (#) Fiscal Year ($/Security) ($/Security) Date
- ---- --- ----------- ------------ ------------ ----
Paul Godin 60,000 2.5% 5.05 5.05 1/25/02
100,000 4.2% 6.10 6.10 8/12/02
Jeffrey Lymburner 70,000 2.9% 5.05 5.05 1/25/02
100,000 4.2% 6.10 6.10 8/12/02
Christopher Bulger 60,000 2.5% 5.05 5.05 1/25/02
100,000 4.2% 6.10 6.10 8/12/02
47
Market Value of
Securities
% of Total Underlying
Securities Underlying Options/SARs Options/SARs
Options/SARs Granted to Exercise or Base on the Date of
Granted Employees in Price Per Grant Expiration
Name (#) Fiscal Year ($/Security) ($/Security) Date
- ---- --- ----------- ------------ ------------ ----
Robert W. A. Joynt 5,000 0.2% 5.05 5.05 1/25/02
50,000 2.1% 6.10 6.10 8/12/02
James I. Moskos 50,000 2.1% 5.05 5.05 1/25/02
75,000 3.1% 6.10 6.10 8/12/02
100,000 4.2% 5.95 5.95 11/11/02
Paul Hart 50,000 2.1% 6.10 6.10 8/12/02
Options Exercised By Executive Officers During Fiscal Year Ended December 31,
1999
The following table sets forth certain information regarding stock options
exercised by our executive officers during the fiscal year ended December 31,
1999.
Value of
Unexercised
in-the-Money
Unexercised Options/SARs
Options/SARs at at FY End
Securities FY-End ($)
Acquired Aggregate Value
On Exercise Realized(1) Exercisable/ Exercisable/
Name (#) ($) Unexercisable Unexercisable
---- --- --- ------------- -------------
Paul Godin 100,000 534,750 210,000/0 319,000/0
Jeffrey Lymburner 75,000 380,000 270,000/0 523,000/0
T. Christopher Bulger 300,000 1,473,500 160,000/0 79,000/0
Robert W. A. Joynt 22,500 389,650 80,000/0 107,000/0
James I. Moskos 125,000 2,322,000 250,000/0 210,000/0
Paul Hart 10,000 189,000 90,000/50,000 213,000/260,000
(1) Aggregate value realized is calculated as the difference between market value at exercise and the exercise price.
ITEM 12 OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
As of April 27, 2000, options and warrants to purchase 6,512,796 common
shares (see Note 1 below) were outstanding as follows:
Issued Under Stock Option Plan
Optionee Number of Shares Date of Grant Exercise Price $ Expiry Date
- -------- ---------------- ------------- ---------------- -----------
48
Issued Under Stock Option Plan
Exercise
Number of Price
Optionee Shares Date of Grant ($) Expiry Date
- -------- --------- --------------------- ------------ ------------------------
Executive Officers 75,000 June 23, 1998 1.40 June 30, 2000
(9 persons) 125,000 January 25, 1999 5.05 January 25, 2002
90,000 October 22, 1998 1.00 August 16, 2002
100,000 April 22, 1999 10.00 April 22, 2002
50,000 July 12, 1999 6.10 July 12, 2002
350,000 August 12, 1999 6.10 August 12, 2002
450,000 November 11, 1999 5.95 November 11, 2002
150,000 November 26, 1999 6.15 November 26, 2000
50,000 January 31, 2000 6.65 January 31, 2004
25,000 February 8, 2000 6.35 February 8, 2003
85,000 March 1, 2000 7.60 March 1, 2003
---------
1,550,000
Directors who are not 65,000 June 23, 1998 1.40 June 30, 2000
Executive Officers 165,000 January 25, 1999 5.05 January 25, 2002
(6 persons) 285,000 August 12, 1999 6.10 August 12, 2002
25,000 August 12, 1999 9.25 August 12, 2002
25,000 August 13, 1999 7.10 August 13, 2002
250,000 February 8, 2000 6.35 February 8, 2003
-------
815,000
Other 30,600 June 23, 1998 1.40 June 30, 2000
(38 persons) 14,800 January 25, 1999 5.05 January 25, 2002
20,000 April 22, 1999 12.45 April 22, 2002
31,250 July 1, 1999 6.10 June 15, 2001
193,500 August 12, 1999 6.10 August 12, 2002
18,000 August 12, 1999 7.00 August 12, 2002
75,000 August 12, 1999 9.25 August 12, 2002
100,000 August 12, 1999 10.00 August 12, 2002
20,000 November 11, 1999 6.20 November 11, 2002
50,000 November 11, 1999 6.50 November 11, 2002
-------
553,150
Issued Under Other Securities Exemptions
Exercise
Number of Price
Optionee Shares Date of Grant ($) Expiry Date
- -------- --------- --------------------- ------------ ------------------------
Note 1 Note 1 June 28, 1999 Note 1 December 28, 2000
Canaccord Capital Corporation 185,468 September 30, 1999 9.25 September 30, 2001
Note 2 1,854,678 September 30, 1999 10.00 September 30, 2001
Employees Outside Plan 484,500 March 1, 2000 7.60 March 1, 2003
Employees Outside Plan 70,000 March 8, 2000 11.50 March 8, 2004
General Electric Capital 1,000,000 April 10, 2000 7.90 April 10, 2003
Corporation (Commercial
Equipment Finance Division)
-----------
3,594,646(1)
-----------
6,512,796(1)
-----------
(1) A warrant which is exerciseable into $1,000,000 of our common shares was
issued to shareholders of Point2 Internet Systems Inc. in connection with our
acquisition of a controlling interest in Point2. These warrants are exercisable
for no additional consideration.
(2) Share purchase warrants issued in connection with our September 30, 1999
Canaccord Capital Corporation financing.
ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
We have entered into a 15 year agreement with The Art Vault International
Limited under which we will provide our online auction technology and related
services to enable the implementation of The Art Vault's online auction of art
and antiquities. In consideration for our license and services, subsequent to
year-end, we received 2,500,000 shares of The Art Vault (approximately 12.7% of
The Art Vault's outstanding common shares) and a share of future profits. Mr.
Paul Godin, the Chairman of the Corporation, is the founding shareholder, sole
officer and director of The Art Vault. Mr. Azim Fancy, our director is
49
a director and shareholder of The Art Vault. Messrs. Charles Walker and James
Moskos are directors of our company and shareholders of The Art Vault.
In June 1999, we entered into a strategic alliance with SCS Solars
Computing Systems Inc., a developer and marketer of online travel information. A
newly formed and wholly owned subsidiary of SCS Solars has licensed our online
auction technology, which will allow travel consolidators to offer travel agents
these discount travel products. We will host and enable these transactions. Mr.
Charles Walker, our director, is a director and shareholder of SCS Solars.
PART II
ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED
Not Applicable.
PART III
ITEM 15 - DEFAULTS UPON SENIOR SECURITIES
Not Applicable.
ITEM 16 - CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS
Not applicable.
PART IV
ITEM 17 - FINANCIAL STATEMENTS
Attached. See Item 19(a).
ITEM 18 - FINANCIAL STATEMENTS
Not applicable.
ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS
(a) Consolidated Financial Statements filed as part of this Annual Report.
Auditors' Report for the periods ended December 31, 1999 and 1998.................................. F-1
Consolidated Balance Sheets as at December 31, 1999 and 1998....................................... F-2
Consolidated Statements of Operations for the periods ended December 31, 1999, 1998 and 1997...
F-3
Consolidated Statements of Deficit for the periods ended December 31, 1999,
1998 and 1997...................................................................................... F-4
Consolidated Statements of Cash Flows for the periods ended December 31, 1999, 1998 and 1997.....
F-5
Notes to the Consolidated Financial Statements for the periods ended December 31, 1999,
50
1998 and 1997......................................................................................
F-6
(b) Exhibits filed as part of this Annual Report.
1.1 Articles of Incorporation of the Company.(1)
1.2 By-laws of the Company.(2)
3.1 Underwriting Agreement dated September 30, 1999, between the Company
and Canaccord Capital Corporation.
3.2 Warrant Indenture dated September 30, 1999, between the Company and
CIBC Mellon Trust Company.
3.3 Special Warrant Indenture dated September 30, 1999, between the
Company and CIBC Mellon Trust Company.
3.4 Supplemental Warrant Indenture dated December 8, 1999, between the
Company and CIBC Mellon Trust Company.
3.5 Supplemental Special Warrant Indenture dated December 8, 1999, between
the Company and CIBC Mellon Trust Company.
____________________
(1) Incorporated by reference from Exhibit 1.1 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 29, 1999.
(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 29, 1999.
51
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the registrant certifies that it meets all of the requirements for filing
on Form 20-F and has duly caused this annual report to be signed on its behalf
by the undersigned, thereunto duly authorized.
BID.COM INTERNATIONAL INC.
Dated: May 19, 2000 By: /s/ Jeffrey Lymburner
----------------------
Name: Jeffrey Lymburner
Title: President and Chief Executive
Officer
Auditors' Report
To the Shareholders of
Bid.Com International Inc.
We have audited the consolidated balance sheets of Bid.Com International Inc. as
at December 31, 1999 and 1998, and the consolidated statements of operations,
deficit and cash flows for each of the three years in the period ended December
31, 1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in Canada. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at December 31, 1999
and 1998 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1999 in accordance with accounting
principles generally accepted in Canada.
Chartered Accountants
Toronto, Ontario
February 18, 2000
F-1
BID.COM INTERNATIONAL INC.
Consolidated Balance Sheets
(in thousands of Canadian dollars)
=========================================================================================================
December 31,
1999 1999 1998
- ---------------------------------------------------------------------------------------------------------
Convenience
translation into
U.S. $ (Note 16)
- ---------------------------------------------------------------------------------------------------------
ASSETS
CURRENT
Cash $ 5,019 $ 3,476 $ 9,792
Marketable securities 16,478 11,411 6,806
Accounts receivable 1,761 1,220 1,102
Special warrants receivable (Note 6) - - 2,311
Inventory (Note 3) 155 107 169
Deposits and prepaid expenses 4,579 3,171 174
- ---------------------------------------------------------------------------------------------------------
27,992 19,385 20,354
- ---------------------------------------------------------------------------------------------------------
CAPITAL ASSETS - AT COST 1,758 1,218 1,049
Less accumulated depreciation 781 541 404
- ---------------------------------------------------------------------------------------------------------
977 677 645
- ---------------------------------------------------------------------------------------------------------
INVESTMENTS 5,386 3,730 -
TRADEMARKS AND INTELLECTUAL
PROPERTY (NET) 503 348 48
GOODWILL (NET) 1,885 1,305 -
- ---------------------------------------------------------------------------------------------------------
7,774 5,383 48
- ---------------------------------------------------------------------------------------------------------
$ 36,743 $ 25,445 $ 21,047
=========================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 3,604 $ 2,496 $ 2,155
Accrued liabilities 1,900 1,316 133
Deferred revenue 965 668 137
- ---------------------------------------------------------------------------------------------------------
$ 6,469 $ 4,480 $ 2,425
- ---------------------------------------------------------------------------------------------------------
NON CURRENT DEFERRED REVENUE $ 1,289 893 -
- ---------------------------------------------------------------------------------------------------------
$ 7,758 $ 5,373 2,425
=========================================================================================================
SHAREHOLDERS' EQUITY
Share capital (Note 5) 77,488 53,662 37,217
Special warrants - - 9,083
Deficit (48,503) (33,590) (27,678)
- ---------------------------------------------------------------------------------------------------------
28,985 20,072 18,622
- ---------------------------------------------------------------------------------------------------------
$ 36,743 $ 25,445 $ 21,047
=========================================================================================================
F-2
BID.COM INTERNATIONAL INC.
Consolidated Statement of Operations
(in thousands of Canadian dollars, except per share amount)
====================================================================================================================
Year ended December 31,
- --------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
Convenience
translation into
U.S.$
(Note 16)
- --------------------------------------------------------------------------------------------------------------------
Revenue $ 31,001 $ 21,469 $ 20,001 $ 2,619
- --------------------------------------------------------------------------------------------------------------------
Direct expenses 26,696 18,488 19,361 2,916
Advertising and promotion (Note 11) 11,870 8,220 12,594 2,521
General and administrative 12,405 8,591 5,751 3,157
Software development and
Technology expense 1,001 693 889 661
Depreciation and amortization 621 430 201 122
Interest expense (767) (531) (88) (33)
- --------------------------------------------------------------------------------------------------------------------
$ 51,826 $ 35,891 $ 38,708 $ 9,344
- --------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE YEAR $(20,825) $(14,422) $(18,707) $(6,725)
====================================================================================================================
LOSS PER SHARE $ (0.42) $ (0.29) $ (0.79) $ (0.55)
====================================================================================================================
F-3
BID.COM INTERNATIONAL INC.
Consolidated Statement of Deficit
(in thousands of Canadian dollars)
=================================================================================================================
Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Convenience
translation
into U.S.$
(Note 16)
- -----------------------------------------------------------------------------------------------------------------
DEFICIT, BEGINNING OF YEAR $(27,678) $(19,168) $ (8,971) $(2,246)
NET LOSS FOR THE YEAR (20,825) (14,422) (18,707) (6,725)
=================================================================================================================
DEFICIT, END OF YEAR $(48,503) $(33,590) $(27,678) $(8,971)
=================================================================================================================
F-4
BID.COM INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(in thousands of Canadian dollars)
======================================================================================================================
Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
1999 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------
Convenience
translation into
U.S.$
(Note 16)
- ----------------------------------------------------------------------------------------------------------------------
NET INFLOW (OUTFLOW) OF CASH RELATED TO THE
FOLLOWING ACTIVITIES
OPERATING
Net loss for the year $(20,825) $(14,422) $(18,707) $(6,725)
Item not affecting cash
Depreciation and amortization 621 430 201 122
- ----------------------------------------------------------------------------------------------------------------------
(20,204) (13,992) (18,506) (6,603)
Changes in non-cash operating
working capital items (Note 10) 738 511 1,702 (1,085)
- ----------------------------------------------------------------------------------------------------------------------
(19,466) (13,481) (16,804) (7,688)
- ----------------------------------------------------------------------------------------------------------------------
INVESTING
Purchase of capital assets (693) (480) (351) (247)
Investments (5,386) (3,730) - -
Purchase of trademarks and intellectual
property (555) (384) (68) -
Marketable securities (9,672) (6,698) (5,648) (1,158)
- ----------------------------------------------------------------------------------------------------------------------
(16,306) (11,292) (6,067) (1,405)
- ----------------------------------------------------------------------------------------------------------------------
FINANCING
Issuance of common shares (Note 5) 37,771 26,157 31,077 4,103
Issuance of special warrants
(net of expenses) (Note 6) (9,083) (6,290) 689 8,394
Special warrants receivable 2,311 1,601 (122) (2,189)
Loan payable - - - (258)
- ----------------------------------------------------------------------------------------------------------------------
30,999 21,468 31,644 10,050
- ----------------------------------------------------------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW)
DURING THE YEAR (4,773) (3,305) 8,773 957
CASH, BEGINNING OF YEAR 9,792 6,781 1,019 62
======================================================================================================================
CASH, END OF YEAR $ 5,019 $ 3,476 $ 9,792 $ 1,019
======================================================================================================================
SUPPLEMENTAL DISCLOSURE OF
CASH PAYMENTS
Interest Expense $ - $ - $ - $ -
Income Taxes - - - -
Fixed Assets 693 480 351 247
F-5
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
1. DESCRIPTION OF BUSINESS
Bid.Com International Inc. ("Bid.Com") is a sales and marketing company
striving to become the pre-eminent online auction service and a leading E-
tailer. The Company has completed the development of a business-to-business
auction service and intends to operate business-to-business auctions in
selected vertical industry sectors. The Company seeks to license its
proprietary online auction technology to support private brand online
auctions and the implementation of global e-commerce solutions for business
clients. The Company also operates business-to-consumer online auctions at
its Web site, www.bid.com and at other URLs.
The Company is constituted under the laws of Ontario by Articles of
Amalgamation dated January 9, 1997, which amalgamated Internet Liquidators
Inc., and Internet Liquidators International Inc. Internet Liquidators Inc.
was incorporated by Articles of Incorporation under the laws of Ontario on
September 1, 1995. The business of the Company was developed and carried on
by Internet Liquidators Inc. prior to the formation of Internet Liquidators
International Inc. Internet Liquidators International Inc. changed its name
to Bid.Com International Inc. pursuant to Articles of Amendment dated June
25, 1998.
2. SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying consolidated financial statements are prepared in
accordance with accounting principles generally accepted in Canada which
are substantially the same as generally accepted accounting principles in
the United States (United States GAAP) (see Note 14).
Principles of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly owned subsidiaries and its proportionate share
of the assets, liabilities, revenues and expenses of a jointly controlled
company. All material inter-company transactions have been eliminated.
Marketable Securities
Marketable Securities consist of interest bearing certificates carried at
cost plus accrued interest which also represents market value.
Inventory
The Company's operating policy is not to purchase inventory for resale but
to ship direct from suppliers. Title to the inventory passes to the Company
at the time that the goods are shipped to the customer. Inventory of sales
returns in transit are valued at the lower of cost and net realizable value
and, at the option of the Company, are held for resale or returned to
suppliers for credit.
Inventory purchased for resale is valued at the lower of cost determined on
the first-in first-out basis and net realizable value.
F-6
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Advertising
The Company expenses the costs of producing advertisements at the time
production occurs, and expenses the costs of communicating advertising in
the period in which the advertising space or airtime is used. Internet
advertising expenses are recognized based on specifics of the individual
agreements, but generally using the greater of (i) the ratio of the number
of impressions delivered over the total number of impressions and (ii) the
straight-line basis over the term of the contract. This policy complies
with the requirements of Statement of Position No. 93-7, "Reporting on
Advertising Costs" issued by the American Institute of Certified Public
Accountants.
Capital assets and depreciation
Capital assets are carried at cost less accumulated depreciation.
Depreciation is calculated on a straight-line basis in amounts sufficient
to amortize the cost of capital assets over their estimated useful lives as
follows:
Equipment 20% per year
Furniture and fixtures 20% per year
Computer hardware 30% per year
Leasehold improvements 3 years
Investments
Investments are carried at cost. Management has assessed the carrying value
of the investments and determined that no permanent impairment exists.
Trademarks and intellectual property
Trademarks and intellectual property are recorded at cost and amortized on
a straight-line basis over two years.
Goodwill
The excess of the cost over the net assets arising on the acquisition of
the jointly controlled company acquired in 1999 is being amortized over 7
years. Management has assessed the carrying value of the goodwill and
determined that no permanent impairment exists based on future income
expectations.
Software development costs
The costs of acquired software and internally developed software are
expensed as incurred.
F-7
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Translation of foreign currencies
The accompanying consolidated financial statements are prepared in Canadian
dollars. All foreign denominated transactions are translated using the
temporal method whereby monetary assets and liabilities are translated at
the rates in effect on the balance sheet date, non-monetary items at
historical rates and revenues and expenses at the average monthly rate.
Gains or losses from exchange translations are included in the statements
of operations.
Loss per share
The basic loss per share calculation is based on the weighted average
number of shares outstanding during the year. No fully diluted calculation
is included, as it would reduce the loss per share.
Revenue Recognition
a) Sale of products and related activities
Revenue from product sales, commissions, shipping and handling are
recognized when the goods are shipped to customers.
b) License revenues
License revenues consist primarily of revenues from software license
agreements and are amortized over the lesser of three years and the
term of the agreement. Revenue from net revenue sharing arrangements is
recorded as received.
c) Service revenues
Service revenues consist of professional services from contracts to
develop applications, conduct research and provide implementation,
consulting services, training, etc. Contract revenues are recognized
based on percentage of completion for each phase of the project plan.
Deferred Revenue
Deferred revenue is comprised of payments received on goods which have
not been shipped to customers and of the unrecognized portion of
license fees and service contracts.
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. Actual results could differ from those
estimates.
F-8
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Stock based compensation
Under Canadian generally accepted accounting principles, stock based
compensation is not recorded in the accounts of the Company. Stock based
compensation under United States GAAP is accounted for in accordance with
the provisions of Accounting Principles Board (APB) Opinion No. 25,
"Accounting for Stock Issued to Employees". Accordingly, under both
Canadian and US GAAP no accounting recognition is given to stock options
granted at fair market value until they are exercised. Upon exercise, the
net proceeds are credited to shareholders' equity. 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 United States GAAP.
3. INVENTORY
-------------------------------------------------------------------------------------------
1999 1998 1997
-------------------------------------------------------------------------------------------
(in thousands)
Inventory purchased for resale $ 14 $ - $ -
Inventory held for resale or refund 141 169 201
-------------------------------------------------------------------------------------------
$ 155 $ 169 $ 201
-------------------------------------------------------------------------------------------
4. INCOME TAXES
The Company's non-capital loss carryforwards as at December 31, 1999, the
benefit of which has not been recognized in the financial statements,
expire as follows:
(in thousands)
2002 $ 113
2003 1,924
2004 6,401
2005 19,828
2006 20,500
-------
$48,766
=======
5. SHARE CAPITAL
a) Authorized
Unlimited number of common shares
Unlimited number of preference shares - issuable in series
F-9
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
5. SHARE CAPITAL (continued)
b) Common shares
-----------------------------------------------------------------------------------------------------------
1999 1998
-----------------------------------------------------------------------------------------------------------
Common Common
Shares Amount Shares Amount
---------------------------------------------------------------------
(in thousands of shares and dollars)
Opening balance 37,167 $37,217 14,188 $ 6,140
Issued for Cash:
Exercise of options (Notes 5(c) 1,434 2,164 615 681
Exercise of warrants (Note 5(d) 6,262 10,521 5,989 9,393
Exercise of special warrants 7,570 25,086 14,435 18,578
Other - - 1,940 2,425
Acquisition of Point 2 214 2,500 - -
(see Note 12 (ii))
-----------------------------------------------------------------------------------------------------------
Closing balance 52,647 $77,488 37,167 $37,217
===========================================================================================================
c) Stock options
(i) The Company has a stock option plan which provides for the issuance
to employees of incentive stock options, 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 purchase price for options outstanding at December 31,
1999 was approximately $15.0 million. The Stock Option Committee
reserves the right to attach vesting periods to stock options
granted. Certain of the stock options outstanding at the end of 1999
are exercisable immediately while the remainder have vesting periods
attached which range from six months to thirty-two months. The
options expire between 1999 and 2002.
F-10
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
c) Stock options (continued)
A summary of changes in the stock option plan for the two years ended
December 31, 1999 is as follows:
Number of Options Average Price
----------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Opening balance 1,441 651 $1.55 $1.15
Granted 2,290 916 5.91 1.76
Exercised (1,004) (115) 1.69 .98
Cancelled (8) (11) 1.72 2.35
-------------------------------------------------------------------------------------------------------
Closing balance 2,719 1,441 $5.51 $1.55
=======================================================================================================
Exercisable,
end of year 1,575 1,251 $5.11 $1.60
=======================================================================================================
Shares reserved for
issuance under
stock option plan 410 326 - -
=======================================================================================================
Number Weighted Number
Outstanding -Average Weighted Exercisable Weighted
Range of at Remaining -Average at -Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 1999 Life Price 1999 Price
=================================================================================================
$1-$3 473,500 0.4 years $1.61 423,400 $ 1.69
$3-$6 759,300 2.4 years $2.78 309,300 $ 5.05
$6-$9 1,261,500 2.7 years $6.14 792,000 $ 6.11
$9-$10 225,000 2.5 years $9.92 50,000 $10.00
=================================================================================================
Totals 2,719,300 1,574,700
=================================================================================================
(ii) The Company also had stock options outstanding to third parties for
the year ended December 31, 1999. The aggregate purchase price for
third party stock options outstanding at December 31, 1999 was $
943,000. These options expire in 2002.
F-11
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
5. SHARE CAPITAL (continued)
c) Stock options (continued)
(iii) A summary of changes in the stock options to third parties for
the two years ended December 31, 1999 is as follows:
Number of Options Average Price
----------------- -------------
1999 1998 1999 1998
---- ---- ---- ----
(in thousands)
Opening balance 490 640 $1.08 $1.14
Granted 95 350 9.92 1.06
Exercised (430) (500) 1.10 1.14
Cancelled (60) - 1.00 -
----------------------------------------------------------------------------------------------------
Closing balance 95 490 $9.92 $1.08
====================================================================================================
Exercisable,
end of year 95 490 - -
====================================================================================================
d) Share purchase warrants under private placement equity issues.
A summary of changes in the warrants to investors for the two years
ended December 31, 1999 is as follows:
1999 1998
-------------------------------------------------------------------------------------------------------------
Warrants Amounts Warrants Amounts
-------------------------------------------------------------------------------------------------------------
(in thousands) (in thousands)
Opening balance 6,135 $ 10,305 4,301 $ 6,802
Granted 1,855 18,550 7,823 12,896
Cancelled (69) (121) - -
Exercised (6,066) (10,184) (5,989) (9,393)
-------------------------------------------------------------------------------------------------------------
Closing balance 1,855 $ 18,550 6,135 $10,305
=============================================================================================================
At December 31, 1998 a further 43,000 share purchase warrants
exercisable at $1.65 and 152,875 share purchase warrants exercisable
at $1.75 were subject to issuance upon the exercise of outstanding
compensation warrants and are not included in the above table. As of
December 31, 1999 these share purchase warrants have been exercised.
F-12
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
5. SHARE CAPITAL (continued)
e) As of December 31, 1999 there were two outstanding warrants, each of
which is exercisable, for no additional consideration, into $1,000,000
of common shares of Bid.Com (see Note 12 (ii)).
f) Compensation Warrants under private placement equity issues
As of December 31, 1999, there were 185,468 outstanding Compensation
Warrants, which will entitle the holder to receive Compensation
Options which were issued to an Underwriter for the September 30, 1999
private placement (see Note 6 (c)). These Compensation Options entitle
the Underwriter to acquire up to 185,468 units at a price of $9.25 per
unit at any time until September 30, 2001. Each unit consists of one
Common Share and one Share Purchase Warrant.
6. SPECIAL WARRANTS
(a) On November 30, 1998 the Company closed a private placement of
$10,001,000 in equity for net proceeds of $6,863,000 with the
remaining $2,311,000 of net proceeds held in trust pending the filing
of a final prospectus. The Company issued 5,714,984 special warrants,
each special warrant being exercisable to acquire one unit (subject to
adjustment in certain circumstances) for no additional consideration,
at a price of $1.75 per special warrant. Each unit consisted of one
common share of the Company and one quarter of one common share
purchase warrant. Each common share purchase warrant entitles the
holder to purchase one common share at a price of $1.75 per common
share up to December 31, 1999.
On January 21, 1999, the final prospectus was filed resulting in the
conversion of 5,714,984 special warrants into 5,714,984 common shares
and the issue of 1,428,746 common share purchase warrants.
The Company also issued 611,498 compensation warrants. Each
compensation warrant entitles the underwriter to purchase one unit,
consisting of one common share and one quarter of one common share
purchase warrant at a price of $1.75 per unit up to December 31, 1999.
(b) On September 30, 1999, Bid.Com issued 1,854,678 Special Warrants at a
price of $9.25 per warrant for a total net proceeds of $16,047,000
(after deducting the costs of issue estimated to be $251,000) to the
Company. Pursuant to the issuance of the Special Warrants, the Company
agreed to pay the underwriter a fee of $858,000, being 5% of the issue
price of the Special Warrants. Each Special Warrant entitles the
holder to acquire one unit for no additional consideration. Each unit
consists of one Common Share and one Share Purchase Warrant. Each
whole Share Purchase Warrant can be exercised to acquire one
additional common share at an exercise price of $10.00 up until
September 30, 2001.
On December 9, 1999, the final prospectus was filed resulting in the
conversion of 1,854,678 special warrants into 1,854,678 common shares
and the issue of 1,854,678 common share purchase warrants.
F-13
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
6. SPECIAL WARRANTS (continued)
(c) The Company has also issued Compensation Warrants to the Underwriter
entitling the Underwriter to receive Compensation Options. The
Compensation Options entitle the Underwriter to acquire up to 185,468
units at a price of $9.25 per unit at any time until September 30,
2001. Each unit consists of one Common Share and one Share Purchase
Warrant.
7. FINANCIAL INSTRUMENTS
Foreign exchange risk
The Company transacts substantially all of its product sales and purchases
in United States dollars and a significant portion of operating
expenditures are in United States dollars. The Company does not use
derivative instruments to manage exposure to foreign exchange fluctuations.
Interest rate risk
The Company has limited exposure to any fluctuation 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
obligations. The collection risk is minimized because the majority of sales
are settled before shipping by pre-authorized credit card payments through
a significant financial institution. In addition, the diverse customer base
minimizes any concentration of credit risk.
Fair value
Fair value of assets and liabilities approximate amounts at which they
could be exchanged between knowledgeable and unrelated persons. The amounts
recorded in the financial statements approximate fair value.
8. COMMITMENTS AND CONTINGENCIES
(a) As a condition of the agreement with a financial institution to settle
sales transactions through pre-authorized credit card payments, the
Company must maintain a cash reserve account based on a percentage of
sales for the preceding six months. At December 31, 1999, the Company
was required to maintain $1,520,000 in this reserve account (December
31, 1998 -$1,500,000).
(b) Minimum lease payments during the next three years are as follows:
2000 $369,000
2001 345,000
2002 74,000
F-14
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
8. COMMITMENTS AND CONTINGENCIES (continued)
(c) The Company is committed under an Interactive Marketing Agreement with
America On Line ("AOL") to expend $1,250,000 U.S. per quarter for
advertising and promotion with AOL to November 1, 1999. In February
1999 the AOL Interactive Marketing Agreement was re-negotiated,
resulting in a one-time payment of $1,250,000 U.S. and an insertion
order of $1,750,000 U.S. These amounts are being amortized over the
life of the agreement beginning February 1, 1999 and expiring March
31, 2000.
(d) The Company is committed during the term of the Agreement with Rogers
Media, to spend $200,000 annually on advertising.
9. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identity a year. Date-sensitive systems may recognize
the year 2000 as 1900 or some other date, resulting in errors when
information using year 2000 dates is processed. In addition, similar
problems may arise in some systems which use certain dates in 1999 to
represent something other than a date. Although the change in date has
occurred, it is not possible to conclude that all aspects of the Year 2000
Issue that may affect the entity, including those related to customers,
suppliers, or other third parties, have been fully resolved.
10. CHANGE IN NON-CASH OPERATING WORKING CAPITAL
1999 1998 1997
---- ---- ----
(in thousands)
Accounts receivable $ (543) $ (936) $ (117)
Inventory 14 32 (200)
Deposits and prepaid expenses (4,289) 1,504 (1,668)
Accounts payable 1,913 939 819
Accrued liabilities 1,525 26 81
Deferred revenue 2,118 - -
- ------------------------------------------------------------------------------
$ 738 $1,702 $(1,085)
- ------------------------------------------------------------------------------
11. OPERATIONS
In June 1997, the Company introduced special promotional pricing in order
to stimulate new bidder registrations and first time sales. This special
promotional pricing cost the Company approximately $4,044,000 in 1999,
$3,520,000 in 1998 and $698,000 in 1997 and has been included in
advertising and promotion.
F-15
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
11. OPERATIONS (continued)
In November 1997, the Company entered into an interactive marketing
agreement with AOL. Under the terms of the agreement the Company will be
provided with a specific number of advertising impressions featuring it as
the preferred provider of business-to-consumer auction services on AOL's
service. In consideration for the impressions, the Company has committed to
pay $10.0 million U.S. over the two-year term of the agreement. Of the
$10.0 million U.S. total commitment, $5.0 million U.S. was paid during the
first year of the contract. In February 1999, the agreement with AOL was
re-negotiated, thereby significantly reducing the contractual advertising
spent with AOL for 1999 in comparison to AOL advertising expenditures in
1998. The AOL Agreement is scheduled to expire in March, 2000.
In March 1998 the Company launched its new consumer brand "BID.COM".
12. ACQUISITION, LICENSING AND SERVICE AGREEMENTS
(i) During 1999 the Company entered into various agreements. The
agreements provide for a combination of up-front payments for services
provided license fees, and net revenue sharing arrangements. Payment
was in the form of either cash, promissory notes, common shares or a
combination thereof.
(ii) In June, 1999 and August, 1999 the Company issued $2,500,000 of common
shares and exercised an option to acquire a 51% interest in Point2
Internet Systems Inc. ("Point2"). Under the agreement, two warrants
for Bid.Com shares were issued each of which is exercisable into
$1,000,000 of common shares of Bid.Com for no additional consideration
and are exercisable by the shareholders of Point2 between December 28,
1999 and June 28, 2000 and after June 28, 2000 and before December 28,
2000 respectively, based on achieving certain targets consisting of
new dealers and total revenues.
Pursuant to the shareholders agreement among the Company and the
shareholders of Point2, the Company acquired 51% of the shares but can
only elect 50% of the board of directors. The investment in the
jointly controlled company is accounted for on a proportionate
consolidation basis and the Company has recorded its proportionate
shares of revenue and expenses since the date of acquisition. Of the
total purchase price, $134,000 was allocated to current assets,
$521,000 to non-current assets and $28,000 to current liabilities
resulting in goodwill of $2,044,000.
For the four months ended December 31, 1999, Point2 reported revenues
of $221,000, a net loss of $222,000 and a change in cash resources of
($185,000). A condensed balance sheet at December 31, 1999 was
comprised of current assets of $131,000, capital assets of
$102,000, intellectual property $905,000, current liabilities
$141,000, shareholder advances $80,000, and shareholders equity
$917,000.
(iii) In June, 1999 the Company entered into an agreement to enable the
online auction capability of a developer and marketer of online travel
information, thereby allowing travel consolidators to offer travel
agents discount travel products in an online auction format. The
agreement is valued at $1,500,000 and a share of net online auction
revenues.
F-16
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
12. ACQUISITION, LICENSING AND SERVICE AGREEMENTS (continued)
(iv) In September, 1999, an agreement was entered into with ValueVision
Interactive Inc. ("VV"), a U.S. corporation, for an initial term
ending September 30, 2002 with automatic additional one year renewal
periods unless 90 days prior notice is provided before the initial or
subsequent term(s). "VV" is pursuing the delivery of the brand
SnapTV.com as the first live, interactive, web-based shopping
experience in the U.S. Pursuant to the agreement, the Company will not
enter into any licensing, technology sharing or marketing agreements
with any home shopping television programming entity and will not
operate a separate Dutch Auction on its' U.S. web-site. In
consideration, the Company will receive a percentage of gross
transaction revenues, based on a declining amount as revenues
increase, from the SnapTV auction service. Technology service fees
will be paid by ValueVision to the Company at standard industry rates.
(v) In September, 1999 the Company invested $735,400 (US $500,000) to
acquire 490,909 common shares of Quackware Inc., a California based
company. Quackware is focused on leading edge application of voice
recognition technology and advanced internet spidering technology to
make the information of the internet accessible via the telephone. See
subsequent note 13 (c).
(vi) In September, 1999 the Company agreed to invest $1,000,000 in a
special warrant financing of Megawheels.Com Inc. Each special warrant
is comprised of a unit consisting of one common share and a warrant to
acquire an additional share at $1.50. In addition, the Company entered
into an agreement to enable the online auction capability of
Megawheels. The agreement is valued at $2,000,000 and a share of net
online auction revenues.
13. SUBSEQUENT EVENT
(a) Stock Option Plan
(i) The Stock Option Committee of the Board of Directors approved the
issue of 50,000 options to an employee on January 31, 2000,
exercisable at $6.65 per share until February 2, 2003.
(ii) During the period from January 1, 2000 to February 18, 2000, the
Company issued 213,900 common shares upon the exercise of options
at prices ranging from $1.40 to $6.10 per share for aggregate
consideration of $521,065.
(b) Related Party
In February, 2000, the Company entered into an agreement, valued at
C$1,500,000 in shares in Art Vault Limited, plus a hosting fee and a
share of net online auction revenues, under which it will provide its
online auction technology and related services to Art Vault in which
certain Directors and Officers of Bid.Com, in aggregate, have a
controlling interest.
F-17
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
13. SUBSEQUENT EVENT (continued)
(c) Investments
On January 18, 2000 the Company entered into an Agreement to purchase
a convertible subordinated debenture due January 18, 2001 for U.S.
$182,000. Under the terms of the debenture the outstanding principal
and all accrued and unpaid interest may be converted into shares of
Class A or Class B common stock at $0.01 par value per share.
14. RECONCILIATION OF UNITED STATES GAAP
As discussed in Note 2, the Company's accounting for its stock-based awards
to employees using the intrinsic value method is in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations.
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 since the Company's inception.
Under SFAS No. 123, 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 tradeable, 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 the following weighted average assumptions:
1999 1998 1997
----------------------------------------
Dividend yield - - -
Risk free interest rate 5.50% 4.80% 4.90%
Expected term, in years 2.51 1.18 1.40
If the computed minimum values of the Company's stock-based awards 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:
1999 1998 1997
-----------------------------------------
(in thousands)
Loss attributable to common shareholders
(in thousands)
As reported $(20,825) $(18,707) $(6,725)
Pro forma $(34,191) $(19,941) $(8,134)
Basic and diluted net loss per share:
As reported $ (0.42) $ (0.79) $ (0.55)
Pro forma $ (0.69) $ (0.84) $ (0.66)
F-18
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
================================================================================
14. RECONCILIATION OF UNITED STATES GAAP (continued)
Impact of new accounting pronouncements
In March 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-1, "Accounting for the Cost of Computer
Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1
provides guidance on accounting for the costs of computer software
developed or obtained for internal use. This pronouncement identifies the
characteristics of internal use of software and provides guidance on new
cost recognition principles. SOP 98-1 is effective for financial statements
for fiscal years beginning after December 15, 1998. The adoption of this
pronouncement did not have any effect upon its financial statements.
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("FAS 133"): The Financial
Accounting Standards Board ("FASB") has issued FAS 133 to be effective for
all fiscal quarters of fiscal years beginning after June 15, 2000. FAS 133
requires that an entity recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for changes in the fair value of
a derivative will depend on the intended use of the derivative and the
resulting designation. The Company is currently evaluating the impact of
FAS 133.
15. RECLASSIFICATION OF PRIOR YEARS
Certain prior year amounts have been reclassified to conform to the current
period basis of presentation.
16. CONVENIENCE TRANSLATION
The financial statements as at December 31, 1999 and for the year then
ended have been translated into U.S. dollars using the exchange rate of the
U.S. dollar at December 31, 1999 as published by the Federal Reserve Bank
of New York (U.S. $1.000 = Cdn. $1.444). The translation was made solely
for the convenience of readers in the United States. The translated U.S.
dollar figures should not be construed as a representation that the
Canadian currency amounts actually represent or could be converted into
U.S. dollars.
F-19