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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 20-F/A-2
[ X ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE
SECURITIES EXCHANGE ACT OF 1934
OR
[ ] 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.
48,125,396 Common Shares as of March 23, 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_____ No X
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Indicate by check mark which financial statement item the registrant has
elected to follow.
Item 17 X Item 18 ______
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TABLE OF CONTENTS
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EXCHANGE RATES..................................................................................1
FORWARD LOOKING STATEMENTS......................................................................1
PART I..........................................................................................2
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ITEM 1 - DESCRIPTION OF BUSINESS.............................................................2
RISK FACTORS..................................................................17
ITEM 2 - DESCRIPTION OF PROPERTY............................................................28
ITEM 3 - LEGAL PROCEEDINGS..................................................................29
ITEM 4 - CONTROL OF REGISTRANT..............................................................29
ITEM 5 - NATURE OF TRADING MARKET...........................................................30
ITEM 6 - EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.................31
ITEM 7 - TAXATION...........................................................................32
ITEM 8 - SELECTED FINANCIAL DATA............................................................36
ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................40
ITEM 9A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK...........................
ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT..............................................48
ITEM 11 - COMPENSATION OF DIRECTORS AND OFFICERS............................................50
ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES....................52
ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS....................................54
PART II........................................................................................56
ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED........................................56
PART III.......................................................................................57
ITEM 15 - DEFAULTS UPON SENIOR SECURITIES...................................................57
ITEM 16 - CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES
AND USE OF PROCEEDS.............................................57
PART IV........................................................................................57
ITEM 17 - FINANCIAL STATEMENTS..............................................................57
ITEM 18 - FINANCIAL STATEMENTS..............................................................57
ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS.................................................57
AUDITORS' REPORT..............................................................................F-1
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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 March 26, 1999, the exchange rate was
$1.00 (U.S.)= Cdn $1.5138. Certain financial information presented in this
Registration Statement has been translated from Canadian dollars to U.S. dollars
at an exchange rate of Cdn$1.5375 to US$1.00, the noon buying rate in New York
City on December 31, 1998 for cable transfers in Canadian dollars as certified
for customs purposes by the Federal Reserve Bank of New York.
Year Ended December 31,
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Rate 1994 1995 1996 1997 1998
- ---- ---- ---- ---- ---- ----
Last Day of year $.7128 $.7323 $.7301 $.6999 $.6504
Average(1) during year .7319 .7286 .7332 .7221 .6740
High during year .7632 .7527 .7513 .7487 .7105
Low during year .7103 .7023 .7235 .6945 .6341
(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:
. acceptance of BID.COM auction services in the marketplace
. the Company's marketing and sales plans
. the Company's expectations about the markets for its online auction
services
. the Company's future capital needs
. the acceptance of the Internet and/or online auctions as a viable
commercial medium
. the success of the Company's patent application and protection of its
proprietary technology
. Year 2000 compliance efforts and anticipated Year 2000 problems relating to
suppliers and service providers
. geographic expansion of the Company's business
The Company has based these forward-looking statements largely on its
expectations. Forward-looking statements are subject to risks and uncertainties,
certain of which are beyond the Company's control. Actual results could differ
materially from those anticipated as a result of the factors described in the
"Risks Factors" section beginning on page 18, including, among others:
. uncertainty about the acceptance of the Internet and/or online auctions as
a viable commercial medium
. uncertainty of market acceptance of the Company's auction services
. the timing of future capital needs and inability to raise additional
capital when needed
. the Company's ability to compete with other online retailing and auction
businesses
. 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 the Company relies
. inability of the Company, directly and/or through its marketing and
advertising alliances, to attract a sufficient number of customers to the
Company's Web site
. risk of system failure or interruption
. implementation and enforcement of government regulations the failure of the
Company's suppliers and strategic partners to resolve any Year 2000 issues
. problems which may arise in connection with the acquisition or integration
of new businesses, products, services, technologies or other strategic
relationships
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The Company does not undertake any obligation to publicly update or revise
any forward-looking statements contained in this Registration Statement, 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 Registration Statement might not transpire.
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PART I
ITEM 1 - DESCRIPTION OF BUSINESS
Unless otherwise indicated, all references in this Registration Statement
to "dollars" or "$" are references to U.S. dollars. The Company's financial
statements are expressed in Canadian dollars. Certain financial information
presented in this Registration Statement has been translated from Canadian
dollars to U.S. dollars at an exchange rate of Cdn$1.5375 to US$1.00, the noon
buying rate in New York City on December 31, 1998 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. Unless otherwise indicated, all references to
the "Company" or "BID.COM" in this Registration Statement are deemed references
to the Company and its subsidiaries and predecessor.
Overview
BID.COM International Inc. ("BID.COM" or the "Company") is a sales and
marketing company striving to become the pre-eminent online auction house and a
leading electronic retailer ("E-tailer"). The Company conducts
business-to-consumer auctions at its Web site, www.BID.COM, and at other uniform
resource locators ("URLs"). The Company's Web site has been operating online
since April 1996, and has progressed from the developmental stage to revenue
generation. The Company launched its BID.COM brand name auctions in March, 1998
and as of March 14, 1999, the Company had approximately 103,000 registered
bidders. In December 1998, the Company completed the development of a
business-to-business auction service. The Company plans to operate
business-to-business auctions in selected vertical industry sectors and to
conduct liquidation auctions for bankruptcy trustees and other liquidators. The
Company also seeks to license its proprietary online auction technology to
support private brand online auctions and interactive auctions in a variety of
other electronic media.
The Company's business is an entertaining and cost-effective method of
selling a wide array of goods and services to retail shoppers and businesses via
the Internet. BID.COM offers traditional rising price auctions and declining
price, or "Dutch," auctions. The Company's auctions combine the brand name
selection of a department store and the value of a discount superstore with the
excitement of an auction environment and the convenience and security of in-home
online shopping. The Company's auctions run on a proprietary state-of-the-art
E-commerce platform with an engaging format, scaleable transactional backbone
and efficient delivery system.
The Company has received a notice of allowance from the U.S. Patent and
Trademark Office ("PTO") for a patent application it filed seeking protection
for the process whereby the Company conducts Dutch auctions over electronic
distribution channels. Management believes that its capability within the
Dutch auction sector is a key point of differentiation in the online marketplace
that will grow in significance as more online shoppers and businesses become
familiar with this E-tailing platform.
The BID.COM business-to-consumer auctions sell a broad range of products at
prices that usually are lower than those charged by traditional retailers for
the same or similar items. The Company sells primarily brand name, front-line
products under manufacturers warranty, including computer hardware and software,
consumer electronics, toys, games, sporting goods, jewelry, memorabilia,
collectible sports and entertainment cards and travel and entertainment products
and services. The Company believes that manufacturers view the online auction as
a new distribution channel that complements existing retail, catalog,
telemarketing and other distribution channels. The Company offers products from
many brand name manufacturers, including: AST, Canon, Compaq, Creative Labs,
Dell, Epson, General Electric, Hewlett Packard, IBM, JVC, Koss, Magnavox,
Motorola, Nikon, Nintendo, Panasonic, Pentax, Samsung, Seagate, Sega, Seiko,
Sharp, Sony, Toshiba, U.S. Robotics, Western Digital and Zenith.
The Company is able to offer a broad range of products at low prices
because electronic retailing, or "E-tailing," significantly reduces or
eliminates many of the costs typically associated with retail store sales,
including costs of sales staff and store management, store rent and maintenance,
fixtures and merchandising. Similarly, manufacturers are able to eliminate many
of the distribution costs typically incurred in selling through retail stores
and, therefore, are able to sell goods to Etailers at lower prices. In addition,
retailing online enables the Company to purchase goods from suppliers only after
customers have ordered and paid for them, thereby allowing the Company to
eliminate significant inventory cost and risk. These cost savings help ensure
that the Company's overhead costs of operation remain relatively fixed and allow
the Company to pass on savings directly to customers.
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Industry Background
The Internet. The Internet is an increasingly significant global medium for
communications, information and commerce. In May 1998, International Data
Corporation ("IDC") estimated that the number of Web users worldwide will grow
from approximately 69.0 million in 1997 to approximately 320.0 million by the
end of 2002. The Company believes that Internet growth will result from a number
of factors, including the large and growing use of personal computers ("PCs") in
the workplace and home, increasing reliance on the Internet by the
business-to-business sector, advances in the performance and speed of PCs and
modems, improvements in network infrastructure, easier and cheaper access to the
Internet and increased awareness of the Internet among businesses and consumers.
Jupiter Communications LLC ("Jupiter") estimates that the number of online
households (households using e-mail, the Internet or a consumer online service)
in the United States will grow from an estimated 15.2 million household in 1996
to 57.0 million households, representing over 50% of U.S. households, by the
year 2002.
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 announced plans to acquire or invest in cable
television providers with the goal of 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, thereby eliminating the need for a user to dial
up access to the Internet. Forrester Research Inc. ("Forrester") 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.
The Company believes that a significant opportunity exists for online
business-to-consumer and business-to-business trade. In May 1998, IDC estimated
that the total value of goods and services purchased worldwide on the Internet
grew from approximately $296.0 million in 1995 to approximately $32.0 billion in
1998 and that worldwide sales of goods and services on the Internet will grow to
approximately $426.0 billion by 2002. Industry analysts predict that the
business-to-business sector will account for much of the growth of E-commerce
over the Internet. Forester projects that in the United States, intercompany
trade of hard goods over the Internet will hit $31.3 billion in 1998 and will
reach $983.0 billion by 2003 (in each case excluding trade in utilities and
petrochemicals).
The Internet has evolved into a unique marketing channel. By directly
operating their own Web sites, Internet retailers can interact with customers in
real-time by frequently adjusting their product mix, pricing and visual
presentation. In addition, the global reach of the Internet allows E-tailers to
build large, geographically-dispersed customer bases more quickly than
traditional retailers and catalog marketers. Unlike traditional marketing
channels, Internet retailers do not have the burdensome costs of a significant
retail store infrastructure, the continuous printing and mailing costs of a
catalog marketer or the store personnel or call center costs incurred by
traditional retailers and catalog marketers.
The Internet offers many data management and multimedia features which
enable consumers to search for products by category or brand. In addition, the
Internet allows consumers to access a wealth of information, including reviews
and competitive pricing and audio and video presentations which enhance static
catalog formats. Internet retailers 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 shopping
experience. Internet retailers also offer consumers the convenience of home
shopping and 24-hour-a-day, seven-days-a-week operations, available to any
location, foreign or domestic, that has access to the Internet.
Many traditional retailers are compelled, because of store size and other
factors, to limit the amount of inventory they carry at each store and focus on
a smaller selection of faster-selling products. Online retailers are able to
offer consumers a broader range of products because they have fewer space
constraints and because they are often able to purchase products from suppliers
only after products have been sold to the consumer. Online retailers can also
both test market new products and re merchandise existing products for sale,
with greater speed and for relatively nominal cost.
Internet Auctions. The Company believes that a number of characteristics of
online auctions make the sale of consumer goods via the Internet particularly
attractive relative to traditional retail stores or to static priced online
stores
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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 E-tailers regarding price-points that are attractive to
consumers. 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
predicts that online business-to-consumer auctions will result in sales of $3.2
billion worth of merchandise each year by 2002 and that online auction
purchasers in the United States will grow from 1.2 million in 1998 to 6.5
million in 2002. Due to the rapidly growing business-to-business sector, the
Company believes that online auctions servicing the business-to-business sector
will grow contemporaneously.
Business Strategy
The Company's business strategy is comprised of the following key components:
Diversifying Revenue Sources. The Company seeks to leverage its proprietary
auction technology to generate revenue opportunities in several distinct online
auction categories and selected other interactive auction media. While the
Company currently derives most of its revenues from business-to-consumer
auctions, the Company believes that by diversifying its revenue sources, it will
be able to expand its customer base and reduce reliance on any one source of
customer or auction category.
o Online Business-to-Consumer Auctions. The Company conducts
business-to-consumer auctions at its www.BID.COM Web site and at other URLs.
BID.COM offers rising price and declining price "Dutch" auctions. The Company's
Web site has been online since April 1996 and the Company has offered a wide
variety of business-to-consumer online auctions since May, 1997. The Company
launched its BID.COM brand name auctions in March 1998. As of March 14, 1999,
the Company had approximately 103,000 registered bidders. The Company currently
derives most of its revenues from business-to-consumer auctions.
o Online Business-to-Business Auctions. In December 1998, the Company
completed the development of a business-to-business auction service. The Company
plans to operate business-to-business auctions in selected vertical industry
sectors and plans to conduct liquidation auctions for bankruptcy trustees, banks
and other liquidators. The Company has been designated a preferred vendor by The
ASCII Group (Canada), a 340-member network of independent computer value-added
resellers ("VAR") and plans t conduct online auctions of products directed to
members of the VAR market. The Company also plans to seek licensing or
co-branding opportunities with distribution partners within a number of
additional business-to-business vertical markets. Management believes that its
Dutch auction proprietary technology will have wide application in the
business-to-business sector because it enables organizations to efficiently
conduct high volume transactions.
o Licensing Online Platform for Private Brand Auctions. The Company seeks
to license its online proprietary auction platform for private brand auctions in
local and regional markets that will not compete directly with the national
focus of the BID.COM auction site. The Company has licensed its auction platform
to, and contracted its operational services to support, a private brand online
auction for, Toronto Star Newspapers Limited ("Toronto Star") in Ontario.
Toronto Star has not yet launched its online auction. The Toronto Star is the
largest circulation newspaper in Canada. The Company plans to enter into similar
private brand auction arrangements with other local and regional newspapers,
retailers, charities, community based organizations and national affinity
groups. The Company believes that this licensing model will have particular
appeal in European and Pacific Rim countries. In April 1999, the Company plans
to open its first European office in Dublin, Ireland, to license the Company's
auction technologies and provide related support services to European-based
companies. See "--Licensing Proprietary Online Platform For Private Brand
Auctions."
o Licensing Technology and Co-branding BID.COM to Achieve Multi-Media
Distribution. The Company also seeks to license its technology and co-venture
with strategic partners to conduct interactive auctions in other electronic
communications media. In December 1998, the Company and American Interactive
Media, Inc. ("AIM") entered into a joint venture to develop auction
opportunities for broadband, set-top box/Web TV and network television, and to
develop technological improvements to enhance the consumer auction experience
offered through the narrowband Internet medium. The Company has licensed its
auction technology to AIM and will provide operational services for auctions to
be conducted on AIM's online and cable networks. See "--Licensing Technology and
Co-branding BID.COM to Achieve Multi-Media Distribution."
o Sales of Advertising on BID.COM Web Site. The Company seeks to promote
its Web site as an advertising medium for the products and services of other
companies and organizations. In December 1998, the Company entered
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into an agreement with 24/7 Media Inc. ("24/7"), a global online advertising and
direct marketing company, under which 24/7 sells advertising space on BID.COM's
Web site. Initially, the Company plans to offer banner advertisement placement
on various sections of its Web sites. The Company believes that the shopping
demographics of its registered bidder base creates a desirable target audience
for companies and advertising agencies.
Expanding the Company's Customer Base through Diverse Marketing Strategy.
The Company believes that the use of multiple marketing channels will increase
the number of people visiting the Company's Web sites and auction sites,
maximize brand awareness and reduce its reliance on any one source of customers.
The Company implements its marketing strategy by:
o Forming Strategic and Marketing Alliances with Internet Service and
Content Providers. The Company has initiated strategic and marketing alliances
with large Internet service and content providers that it believes will maximize
traffic to the Company's Web sites and enhance the awareness and credibility of
the Company's BID.COM brand. The Company believes that these relationships will
allow BID.COM to broadly expand its customer base as well as capitalize on new
advertising opportunities by leveraging the strong brand names and subscriber
bases of its alliance partners. These alliances also help attract a broad supply
of products and services from high quality vendors for sale in the Company's
auctions.
In July 1998, the Company entered into a strategic alliance with Rogers Media
Inc. ("Rogers Media"), a leading Canadian media company. Under this arrangement,
BID.COM granted Rogers Media the exclusive right to co-brand the Canadian
BID.COM auction and Rogers Media has 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. Rogers Media has also agreed to generate specified levels of
site traffic an advertising revenues for the Canadian BID.COM Web site, and has
committed to minimum levels of annual advertising. Rogers Media national media
properties include some of Canada's most widely read publications, Canada's only
television shopping network, a number of Canadian radio stations and several
leading Internet properties in Canada. Rogers Media's parent company owns the
largest cable network in Canada. In addition, Rogers Media publishes a number of
trade magazines which the Company may use to support the development of its
business-to-business online auctions. See "Marketing--Strategic and Marketing
Alliances with Major Content and Service Providers."
In November, 1997, the Company entered into a non-exclusive marketing
alliance with America Online, Inc. ("AOL" or "America Online") pursuant to which
the Company operates BID.COM, The Online Auction(R), for AOL subscribers and has
purchased or been granted advertising space on a number of AOL's current high
traffic pages and a variety of AOL's new Web pages. The terms of the alliance
were amended in March 1999. AOL is the world's largest online service provider,
with a subscriber base of more than 15.0 million people. See "--Marketing -
Strategic and Marketing Alliances With Major Content and Service Providers" and
"Risk Factors - Continuance of Existing Strategic and Marketing Alliances."
o Referral and Database Marketing; Key Word Advertising. The Company has
also adopted several cost effective marketing approaches to attract targeted
traffic to its Web sites. The Company pursues referral-based marketing
arrangements under which the Company pays referral sources in cash or kind for
the generation of registered bidders at BID.COM. In addition, the Company has
recently begun to access its own database of registered bidders to directly
market both auction and non-auction products to purchasers with demonstrated
purchasing histories. To reach audiences that have a propensity to buy goods and
services online, the Company has entered into, and continues to seek, key word
agreements with Internet service providers that promote BID.COM when a user
searches key words, such as "auction." The Company has an arrangement with
go2net, Inc. ("go2net") pursuant to which a banner advertisement and hyperlink
for clicking through to the BID.COM auction site is prominently positioned on
the pag when a user of the MetaCrawler search engine searches certain key words,
such as "auction" or "auctions." MetaCrawler is go2net's specialized search
engine that aggregates the results of other systems such as Yahoo!, Inc.
("Yahoo!") and Excite, Inc. ("Excite"). See "--Marketing--Referral and Database
Marketing and Key Word Advertising."
o Cause Marketing. The Company attempts to stimulate additional E-commerce
activity by operating online auctions for, and/or licensing its auction platform
to, charities and special causes. BID.COM has hosted the Digital City All
Charities Online Auction and Hootie and the Blowfish Monday After the Masters
Charity Auction. The Company has also built the international Web site for RADD
(Recording Artists Against Drunk Driving) and hosts the Canadian BACCHUS Web
site.
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Offering a Broad Range of Front Line Brand Name Products at Low Prices and Under
Manufacturers Warranty. The Company believes that Internet consumers are price
sensitive and seek to purchase brand name goods at discounts from prices charged
by retail stores and catalog companies. The Company offers a broad range of
brand name consumer goods from nationally recognized manufacturers at low prices
and under manufacturers warranty. Product offerings within categories are
rotated daily to enhance consumer interest. By operating online and purchasing
products from suppliers only after they have been ordered and paid for by the
customer, the Company is able to substantially reduce overhead costs typically
associated with retail stores and catalogs and is able to pass on the savings
directly to its customers. Historically, the Company has offered lower margin
categories of products, such as computers, computer accessories and computer
upgrades. While the Company plans to continue offering these product categories,
it has begun to shift its product mix and increase 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.
Seeking Exclusive Distribution of Unique Products. The Company seeks to obtain
electronic media distribution rights for select groups of unique products that
it can offer in its auctions as well as through database marketing and fixed
price merchandising. In December 1998, the Company entered into an exclusive,
worldwide Internet distribution agreement with Micra SoundCards Inc. ("Micra
SoundCards"), the inventor and producer of a patented collectible "talking"
trading card. The Company markets the cards, which play the actual sound of the
sports or entertainment event that is featured on the card, along with a card
player. The debut series of the talking cards distributed by the Company in
Canada include Paul Henderson's "Goal of the Century" commemorating the winning
goal in the 1972 Russia-Canada hockey series, and, in the United States, Michael
Jordan's winning basket in the 1998 NBA championship. See "--Products."
Providing a Proprietary State-of-the-Art Auction Platform that Is Entertaining,
Secure and Easy to Operate. The Company believes that to sustain consumer
interest in online auctions, it must provide an entertaining, secure and
easy-to-use E-commerce environment. The Company's 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. The Company's technology provides product
descriptions with catalog quality pictures and graphical representations. The
design allows the Company 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 products offered. On-screen real-time data provides customer
information about the current bid status of all bidders in order to facilitate
an interactive auction process. The Company has received a notice of allowance
from the PTO for a patent application it filed in the United States seeking
patent protection for the process of conducting its Dutch auctions over
electronic distribution channels. The Company has a patent application pending
in Canada covering the same technology. BID.COM uses leading security and
encryption systems to maintain the security of online purchases and customer
data. See "--Auction Operations" and "-Technology Platform."
Acquisitions and Strategic Investments. The Company plans to continue to expand
by seeking technologies, products, services and transaction formats that
compliment its existing business. If appropriate opportunities are available,
BID.COM may acquire businesses, technologies or products or enter into strategic
relationships that may further diversify revenue sources and product offerings,
expand the Company's customer base or enhance the Company's auction platform.
Auction Operations
The Company currently operates two national business-to consumer auction
sites, one in the United States and one in Canada, and operates other private
brand local or regional stand-alone auctions. Customers who access the online
auction through the Company's Web site or the Web sites or search engines of the
Company's strategic or advertising partners, are all channeled to one of the two
national auction sites, depending on the geographic location of the customer. In
this manner the Company is able to maximize the number of participants in each
auction and minimize the number of auctions which are operated concurrently. The
United States auction is conducted in U.S. dollars and the Canadian auction is
conducted in Canadian dollars. Customers participating in private brand auctions
operated by the Company access only the stand-alone auction site of the
Company's private brand customer.
The Company has generated most of its revenues to date from online auction
sales in the United States and limited revenues from online auction sales in
Canada. During 1998, revenues from online auction sales in Canada were
approximately Cdn$270,000.
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The Company's 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 merchandise at constantly changing prices.
The Company generates transactional revenues using the conventional rising
price auction format and the declining bid, or "Dutch," auction format.
Management believes that its capability within the Dutch auction sector is a key
point of differentiation in the online marketplace that will grow in
significance as more online shoppers and businesses become familiar with this
E-tailing platform.
Rising Price 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 merchandise by incrementally
adjusting their bid positions. The BID.COM 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
the Company's Bid Buddy(TM) tool, launched in October 1998, to place absentee
bids up to a pre-determined limit. This "intelligent" bidding agent will check
bid activity at regular intervals and increase 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 via the Company's Web site.
The interactive nature of the bid update system encourages continued
customer participation throughout the auction lifecycle. Customers can also use
the Company's Search Buddy(TM), a search tool introduced in October 1998, 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 Search Buddy
finds a match 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 "BID.COM Recommends," an affinity engine introduced in November 1998,
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.
The rising price auction initially was conducted over a seven day period,
but, with the growth of the Company's customer base, auction cycles have been
shortened to one day. The Company normally re-merchandises its United States and
Canadian Web sites daily and stages 24 hour auctions every day of the week.
Dutch Auctions. The Company also offers declining price, or "Dutch,"
auctions, an effective method of high volume merchandising. A starting price is
set and a limited time period is allocated for a fixed quantity of the product
to be auctioned (three to five minutes for most BID.COM items). As time
advances, the price drops in small increments. The longer one waits, the lower
the price. However, if a shopper 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. The BID.COM declining price auction was initially
introduced in April 1996 and was re-introduced over BID.COM's updated platform
in July 1998. The Company has received a notice of allowance from the PTO for a
patent application it filed in the United States seeking patent protection for
the process of conducting its Dutch auctions over electronic distribution
channels. The Company has a patent application pending in Canada covering the
same technology. This unique format lends itself to a multitude of consumer
products and services and special event auctions, particularly in the emerging
vertical markets of travel, entertainment and memorabilia. The Company believes
that the Dutch Auction format also will have wide application in the business-
to-business sector because it facilitates the efficient conduct of high volume
transactions. BID.COM has secured the URL www.dutchauction.com. which the
Company plans to use in the future in connection with certain online declining
auction offerings.
Introduction of Business-to-Business Platform. BID.COM completed the
development of a business-to-business auction service in December 1998. The
Company plans to introduce a series of online business-to-business auctions
tailored to selected vertical business markets that may benefit from expanding
the traditional physical auction audience to online participants. The Company
believes its proprietary Dutch auction technology will be particularly well
suited to this sector. In December 1998, th Company was designated a preferred
vendor by The ASCII Group (Canada), a network of 340 independent computer VARs,
and plans to conduct online auctions of products suited to the VAR market for
members of the ASCII Group. In addition, the Company plans to license or co-
brand business auctions with distribution partners within a number of additional
business-to-business vertical markets. This business niche creates potential for
new revenue streams without the costs associated with business-to-consumer
auctions, such as advertising, customer service, logistics and credit card
processing. The Company will also seek to
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introduce pure liquidation auctions on behalf of banks, bankruptcy trustees and
other liquidators. The Company believes that over time, the business-to-business
marketplace for online auctions (and consequently this segment of BID.COM's
transactional volume) will become larger than business-to-consumer auction
activity.
User-Friendly Design. The Company's 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 the Company 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 BID.COM 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. The Company uses the registration
information for processing successful bids into customer orders. Using this
information, the Company's data systems determine shipping and handling charges
and applicable taxes, charge customer credit cards, print order information,
transmit order information to the Company's contract warehouses and vendors and
provide transaction information for the Company's accounting system. Customers
are generally required to pay for purchased goods by commercial credit card,
thereby significantly reducing the Company's credit risk. See "Risk
Factors--Internet Commerce Security."
Limited Inventory. The Company normally obtains products for sale in its
auctions from suppliers under arrangements that allow the Company to purchase
merchandise only after the Company's customer has purchased and paid for the
product. These arrangements typically provide that the supplier will reserve for
sale by the Company specified quantities of products for a fixed period of time
without obligating the Company to purchase those products until sales are made
to the Company's customers. As a result, the Company does not usually stock
inventory and consequently has no liability for unsold merchandise. In certain
circumstances, the Company may place purchase orders in advance for unique
products. As part of its customer satisfaction policy, the Company may allow its
customers to return merchandise upon payment of a re-stocking fee, in which
case, the merchandise is returned to the supplier for credit or resold by the
Company. Transactional revenues from the sale of products create gross margin
for BID.COM either in the form of a negotiated commission based on the final
selling price of goods, or the difference between the actual selling price and
the reserve price negotiated by the Company with its suppliers. Sold products
are usually shipped directly from the supplier to the customer. Shipping,
handling and applicable taxes are added to the auction price and are paid by the
customer. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Licensing Proprietary Online Platform for Private Branded Auctions.
The Company seeks to license its online auction platform in local and
regional markets that will not compete directly with the national focus of the
BID.COM auction. The Company has licensed its auction platform and contracted
its operational services to support a private brand online auction for Toronto
Star Newspapers Limited and plans to enter into similar private brand auction
arrangements with other local and regional newspapers, retailers, charities and
community-based organizations. The Company believes that community-based content
is a fundamental trend in Internet programming and views local and regional
newspapers such as Toronto Star as ideal candidates for private brand auctions.
Newspapers in many major urban centers face potential loss of conventional paper
advertising revenue as advertisers allocate larger portions of their advertising
budgets to electronic advertising. By creating a credible Internet presence,
newspapers may be able to recapture advertising revenue that is being shifted
from paper to electronic advertising. In addition, by offering online auction
and cybermall services, newspapers may provide their advertising clients with an
opportunity to establish a Web presence without the need to develop their own
Web sites. Newspapers may also be able to generate commissions or other revenues
from sales and other transactions conducted through their private Web sites. The
Company believes there will be opportunities to license platforms to local
partners in many major urban centers and national affinity groups in the United
States as well as through local partners in the European and Pacific Rim
markets. In April 1999, the Company plans to open its first European office in
Dublin, Ireland, to license the Company's auction technologies and provide
related support services to European-based companies. The Company's technology
allows it to offer licensees a turnkey custom branded auction platform, as well
as a wide range of E-commerce support services.
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In February 1997, the Company entered into an E-Commerce Services Agreement
(the "Torstar Agreement") with Toronto Star Newspapers Limited, Canada's largest
circulation newspaper, to provide local auctions and cybermall services in the
Province of Ontario. These services provide the capability to extend Toronto
Star's City Search initiative to market online content in the Province of
Ontario by adding a Toronto Star online auction branded site. Toronto Star has
not yet launched its online auction. In addition, pursuant to the Torstar
Agreement, the Company granted to Toronto Star a non-exclusive license to use
the Company's technology for non-auction related uses, such as games and
contests. In return for such services, Toronto Star will share with the Company
all net revenues received in connection with the sale of products and services
using the Company's platform. The percentage of revenue payable to the Company
is a function of a number of factors, including the location of the purchaser
and whether the Company or Toronto Star has sourced the products and services
sold. In addition, Toronto Star is entitled to receive a percentage of certain
other sales made through the Company's platform in the Province of Ontario. The
Torstar Agreement expires on January 31, 2000, but will continue, unless earlier
terminated by the Company or Toronto Star, for consecutive one year periods,
upon terms to be mutually agreed upon by the Company and Toronto Star.
In connection with the Torstar Agreement, Toronto Star purchased an
aggregate of 1.5 million common shares of the Company ("Common Shares") for an
aggregate purchase price of Cdn$1.425 million. The Toronto Star is the largest
circulation newspaper in Canada with a daily circulation of approximately one
million readers.
Licensing Technology and Co-branding BID.COM to Achieve Multi-Media
Distribution.
The Company seeks to use its auction technology to support interactive
auctions in other electronic communications media. In December 1998, the Company
and AIM entered into a joint venture to develop auction opportunities outside
the Internet in broadband, set-top box/Web TV and network television, and to
develop technological improvements to enhance the consumer experience offered
through the narrowband Internet medium. The Company has licensed its technology
to AIM, which AIM intends to use in creating celebrity-hosted live television
auctions using the two-way interactive capabilities of set-top boxes. Initially,
AIM intends to introduce live auctions on ComedyNet, its 24 hour Internet comedy
network. Thereafter, AIM plans to launch a customized branded version of
BID.COM's dutch auction on a shopping network available through set-top boxes,
or Web TV. In addition, AIM plans to use the Company's technology to support
various E-commerce initiatives on AIM's other in-house internet and cable
networks and on AIM's customized affinity group internet portals. The license
agreement expires June 30, 2001.
AIM is the creator of a wide range of programming and services
incorporating video and audio information through an interactive environment
designed specifically for the Internet, digital cable and other electronic media
distribution platforms. AIM's first network, ComedyNet, has won various
independent awards.
The Company believes that a joint venture with AIM will broaden the
exposure of the Dutch auction as a means to provide consumers with an
entertaining shopping experience in a variety of electronic media platforms.
Additional goals of the joint venture include increasing the appeal to others to
license BID.COM technology and creating the potential for increased revenue.
BID.COM and AIM will share in the gross margin created through their joint
venture pursuant to a formula set forth in the license agreement.
Sales of Advertising on BID.COM Web Site
The Company seeks to promote its Web site as an advertising medium for the
products and services of other companies and organizations. In December 1998,
the Company entered into an agreement with 24/7 under which 24/7 sells
advertising space on BID. COM's Web site. Initially, the Company plans to offer
banner advertisement placement on various sections of the U.S. and Canadian
BID.COM Web sites. The Company believes that the shopping demographics of its
registered bidder base creates a desirable target audience for companies and
advertising agencies.
Marketing
BID.COM's marketing strategy is designed to increase traffic to the
Company's auction Web sites and promote awareness of its BID.COM brand. To
implement its strategy, the Company: (i) has developed strategic and marketing
relationships with Rogers Media and AOL and plans to enter into similar
arrangements with other major
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Internet service and content providers; (ii) is building its own BID.COM brand
and channeling potential bidders to its site through referral and database
marketing and key word advertising; and (iii) hosts co-branded and private
branded Cause Marketing events such as the 1998 Hootie & the Blowfish Monday
After the Masters Charity Auction at BID.COM.
Strategic and Marketing Alliances with Major Content and Service Providers
The Company has developed strategic and marketing alliances with Rogers
Media and AOL and is seeking similar relationships with other large Internet
service and content providers as well as other large, consumer-oriented
companies. The Company believes that these relationships will allow BID.COM to
broadly expand its customer base as well as capitalize on new advertising
opportunities by leveraging the strong brand names and subscriber bases of its
alliance partners. These alliances als increase traffic to the BID.COM sites due
to advertising carriage arrangements which usually include a combination of
hyperlink banner advertisements and the directing of key words such as "Auction"
and "Online Auction" to the BID.COM site. Since the launch of the BID.COM brand
name in March 1998, the Company's customer base has increased significantly. As
of March 14, 1999, the Company had approximately 103,000 registered bidders,
representing a 412.0% increase in registered bidders from January 1, 1998.
Steadily increasing distribution of the BID.COM E-commerce offering to a larger
audience of Internet users while establishing exclusivity in certain
distribution channels is an important component of the Company's marketing
strategy. The Company believes that the credibility of its current strategic and
marketing partners will strengthen its ability to enter into future business
alliances.
Rogers Media. In July 1998, the Company and Rogers Media, a subsidiary of
Rogers Media Communications Inc., entered into an E-Commerce and Promotion
Services Agreement (the "Rogers Media Agreement") pursuant to which BID.COM
granted Rogers Media the exclusive right within Canada to co-brand the Canadian
BID.COM auction, subject to the rights granted to the Toronto Star. See
"--Licensing Proprietary Online Platform for Private Branded Auctions." Rogers
Media has 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 has agreed to generate specified levels of site traffic
and advertising revenues, and has 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, its affiliates and certain non-affiliated media.
BID.COM and Rogers Media share equally in the revenue from all transaction and
advertisin sales generated through the co-branded site in Canada, net of all
taxes, costs, transaction fees, duties, and credits for returns or unpaid items.
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The Company believes that this exclusive national partnership with Rogers
Media will enable the Company to leverage Rogers Media numerous media properties
to establish the Canadian BID.COM auction as a leading online shopping
destination in Canada. In addition, the Company anticipates that trade magazines
published by Rogers Media may be used by the Company to support the development
of its business-to-business online auctions. Rogers Media's national media
properties include some of Canada's most widely read publications including
Macleans, Chatelaine, Flare, Canadian Business, Profit and Marketing Magazine;
numerous trade and professional magazines covering a broad range of industries;
"680 News" and other leading English language radio stations in Canada; CFMT - a
multi-lingual television station in Toronto; The Shopping Channel - Canada's
only television shopping network, and several Canadian radio stations and some
of the leading Canadian Internet properties such as Quicken.ca, Electric Library
Canada, Chatelaine Connects and Macleans Online. Rogers Media's parent company,
Rogers Media Communications Inc., owns Rogers Media Cablesystems, the largest
cable network in Canada, is in partnership with Shaw and Cogeco in @Home Canada,
a Canadian leader in offering broadband Internet service through cable networks,
and owns Cantel, Canada's largest national digital wireless company.
Rogers Media has purchased an aggregate of 1.5 million Common Shares of
BID.COM for an aggregate purchase price of Cdn$1.875 million. Rogers Media also
holds a warrant to purchase an additional 100,000 Common Shares at Cdn$1.40 per
share. A representative of Rogers Media currently serves as a member of the
Company's Board of Directors. See "Directors and Officers of Registrant,"
"Options to Purchase Securities From Registrant and Subsidiaries" and "Interest
of Management in Certain Transactions."
America Online. In February 1997, the Company entered into an agreement
with AOL to provide AOL subscribers with access to the Company's auction sites.
AOL is the world's largest online service provider with a subscriber base of
over 15.0 million people. BID.COM's Web site initially went live with an AOL
branded interface, the "AOL Online Auction." Satisfied with its initial
relationship with AOL, the Company entered into a non-exclusive Interactive
Marketing Agreement (the "AOL Marketing Agreement") with AOL in November 1997
under which the Company agreed to purchase $1.25 million (Cdn$1.75 million) of
advertising and promotion from AOL each quarter through October 1999. The AOL
Marketing Agreement provided BID.COM with anchor tenant positioning in a number
of AOL's E-commerce offerings, plus various keywords such as "Online Auction."
In March 1998, the brand the Company used within AOL was changed from Online
Auction to BID.COM The Online Auction, and was supported by substantial online
advertising. Pursuant to the AOL Marketing Agreement, the Company provided
product procurement, transactional processing and order fulfillment services to
AOL in connection with BID.COM The Online Auction. The agreement also provided
that after the Company reached certain revenue thresholds or received a
specified number of cumulative impressions on AOL Web sites, AOL would be
entitled to receive 50% of the Company's excess gross profit earned from such
revenues or impressions. The AOL Marketing Agreement was to expire on November
1, 1999.
In March 1999, the Company and AOL terminated the AOL Marketing
Agreement and entered into a new non-exclusive agreement. Under the new
agreement, AOL continues to provide BID.COM with anchor tenant positioning in a
number of AOL's E-Commerce offerings, plus various key words such as "Online
Auctions," and the Company will continue to provide product procurement,
transactional processing and order fulfillment services to AOL in connection
with BID.COM The Online Auction. Under the new agreement and related
arrangements, the Company's advertising payments to AOL are reduced to $3.0
million for the 13 month period of the agreement from $5.0 million annually
under the old agreement. In addition, the new agreement eliminates the revenue
sharing arrangement. Prior to the termination of the old agreement, the revenue
sharing thresholds had not been reached. The new agreement expires on March 31,
2000.
In February 1997 AOL purchased an aggregate of 1.0 million Common Shares
for an aggregate purchase price of Cdn$1.0 million, which was paid by AOL
extending to the Company advertising credits in the same amount. A
representative of AOL currently serves as a member of the Company's Board of
Directors. See "Directors and Officers of Registrant" and "Interest of
Management in Certain Transactions."
Referral and Database Marketing and Key Word Advertising
After launching its BID.COM brand in March 1998, the Company initially
relied, in part, on broad-based banner advertising arrangements with Internet
service providers such as Yahoo! and Excite to promote brand awareness of
BID.COM. The Company has recently implemented a more selective marketing
approach that blends brand promotion with lower cost customer acquisitions and
retention through referral marketing, database marketing and key word
advertising. The Company believes that this approach will more effectively and
efficiently target potential bidders who have a propensity to buy products
online.
Referral Marketing. The Company pursues referral based marketing
arrangements which reward individuals and companies for referring bidders to the
Company's Web site. By utilizing specialized referral software, the Company can
track the source of new registrations for its auction sites and reimburse these
sources based on the number of new registrations referred to BID.COM. Potential
referral services include hyperlinks from other Web sites and the Company's
existing registered bidders. Payments may be made in cash, return referral
registrations from BID.COM's site traffic, or a combination of cash and in-kind
arrangements.
Database Marketing. While the Company does not disclose registered bidder
data to third parties, the Company has recently begun to access its own database
of registered bidders to directly market both auction and non-auction products
to purchasers with demonstrated purchasing histories. The Company plans to offer
registered bidders by e-mail special promotions of auction and unique
non-auction products, such as the "talking" collectible sports and entertainment
cards.
Key Word Advertising. The Company's experience with AOL and other Internet
service providers has demonstrated that key word advertising is another
effective method of reaching an audience that has a propensity to buy goods and
services online. The Company has entered into, and continues to seek, key word
agreements with Internet service providers that promote BID.COM when a user
searches key words, such as "auction." The Company has an arrangement with
go2net pursuant to which a banner advertisement and hyperlink for clicking
through to the BID.COM auction site is prominently positioned on the page when a
user of the MetaCrawler search engine searches certain key words, such as
"auction" or "auctions." The go2net agreement expires in January 2000.
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Cause Marketing
The Company attempts to stimulate additional E-commerce activity by
operating online auctions for, and/or licensing its auction platform to,
charities and special causes. These special event auctions provide a positive
contribution to communities and offer cross-promotional opportunities with
celebrities and other popular figures, and often involve special products that
typically are attractive to emerging demographic segments of the Internet user
market. The Company believes many auction participants bookmark BID.COM once
they participate in an auction, and, therefore, have a high probability of
becoming repeat customers. The Company views these promotional events as
marketing opportunities especially in the 18 to 30 year old consumer sector
which is Internet user friendly and is likely to gain increasing purchasing
power in the near future.
In April 1998, BID.COM hosted the Hootie & the Blowfish Monday After The
Masters Charity Auction. In June 1997, BID.COM hosted the Digital City All
Charities Online Auction in partnership with Digital Cities Inc., a
community-based Internet content subsidiary of AOL, as well as over 50 community
groups and six media partners in the Dallas/Ft. Worth area. BID.COM also built
the international Web site for RADD, an organization chaired by David Niven Jr.,
with approximately 300 tier one recording artist members including Paul
McCartney, Elton John, Rod Stewart, KISS and Melissa Etheridge. BID.COM also
hosts the Canadian BACCHUS Web site, which is part of an international charity
promoting responsible use of alcoholic beverages, with over 100 Canadian and 750
U.S. affiliated organizations.
Fixed Price Sales
The Company's technology also allows for online fixed price retail shopping
and provides online customers static-priced storefront merchandising. The
Company offers Micra SoundCards collectible sports and entertainment cards and
other products through this platform. The Company believes that this diversified
technology platform provides it with a broader range of turnkey E-commerce
licensing opportunities, as well as database marketing opportunities.
Products
The Company's BID.COM 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. The Company
believes 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. The Company has offered and will continue to offer
lower margin computers, computer accessories and computer upgrades at its
auction sites. However, the Company has begun to shift its product mix and
increase the number and variety of 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, the Company intends to introduce other product
categories on a selected basis.
The Company will also seek to obtain electronic media distribution rights
to select groups of unique products. The Company believes that the successful
marketing of such products will accelerate the growth of its registered bidder
base as well as stimulate both its database marketing and auction activities. In
December 1998, the Company entered into an exclusive, worldwide Internet
distribution agreement with Micra SoundCards, the inventor and producer of a
patented collectible "talking" tradin cards which play the actual sound of the
sports or entertainment event featured on the card. The Company markets the
sound cards along with a card player. The debut series of the talking cards
distributed by the Company in Canada includes Paul Henderson's "Goal of the
Century," commemorating the winning goal in the 1972 Russia-Canada hockey
series, and in the United States, Michael Jordan's winning basket in the 1998
NBA championship. The agreement with Micra SoundCards expires December 31, 2001,
and i automatically renewable thereafter for consecutive two year terms, subject
to either party's notice not to renew.
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Approximately 70% of the Company's products are front-line goods and
typically 30% are clearance or other end-of-the-line items. The Company offers
products from many brand name manufacturers, including AST, Canon, Compaq,
Creative Labs, Dell, Epson, General Electric, Hewlett Packard, IBM, JVC, Koss,
Magnavox, Motorola, Nikon, Nintendo, Panasonic, Pentax, Samsung, Seagate, Sega,
Seiko, Sharp, Sony, Toshiba, U.S. Robotics, Western Digital and Zenith. The
Company also offers travel packages, gold and precious gem jewelry and authentic
sports collectibles, from multiples sources. Within its broad product
categories, the Company rotates the products it offers to consumers on a daily
basis.
The products supplied to the Company for sale through the Company's 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. The Company itself
provides no warranties on the products or services sold through its Web sites.
The Company believes that Internet consumers are price sensitive and seek
to purchase brand name goods at significant discounts from prices charged by
retail stores and catalog companies. The Company's products are generally priced
lower than the prices typically charged by retail stores or catalog companies
for the same or similar items. The Company is able to offer products at lower
prices because many of the costs typically associated with retail stores and
catalog companies, including the cost of sales staff and management, store rent
and maintenance, fixtures and merchandising, can be significantly reduced or
eliminated. Manufacturers are also able to offer more competitive prices to the
Company because many of their distribution costs, such as co-op advertising,
training and restocking of unsold merchandise, are substantially reduced or
eliminated. In addition, by operating online and purchasing products from
suppliers only after they have been ordered and paid for by the customer, the
Company is able to substantially reduce overhead costs typically associated with
retail stores and catalog companies.
In order to lower the costs of goods sold in its auctions, the Company
seeks to obtain volume discounts by purchasing large quantities of products from
selected suppliers. Accordingly, during 1998, DAAC Computers & Notebooks, Inc.
("DAAC"), a computer products supplier, provided over 30% of the Company's
products and four unrelated suppliers of computer and other products, including
DAAC, Bostek, Inc., Micro-Exchange Corporation and Advantage Company, accounted
for up to 90% of the Company's total supply base at various times. The Company
believes that, while it will likely continue to be reliant on one supplier, or a
small group of suppliers, for its computer products, the percentage of the
Company's supply base attributable to these suppliers will decrease as the
Company continues to change its product mix from computer related goods to
higher margin products. For 1999, the Company anticipates that, at any given
time, four unrelated suppliers may each be supplying up to 20-30% of the
Company's product offerings. The Company typically enters into non-exclusive
agreements with its primary suppliers, which are terminable at the Company's
option. The products purchased from the Company's primary suppliers generally
are readily available from other sources. See "Risk Factors--Reliance on
Merchandise Vendors."
The products sold at BID.COM auctions are typically shipped directly by the
Company's suppliers to the winning bidders. >From time to time, the Company may
offer its own fulfillment capability to new suppliers that are not initially
equipped to ship directly to customers. The Company currently uses Purolator
Courier, Federal Express and United Parcel Service to distribute purchased goods
and is in the process of adding other courier services. The Company does not
maintain its own warehouse, bu relies on third party contract warehouses. See
"Risk Factors--Reliance on Merchandise Vendors."
Customer Support and Service
The Company believes that its ability to establish and maintain long-term
relationships with its customers and encourage repeat visits and purchases is
dependent, in part, on the strength of its customer service support and staff.
The Company currently employs a staff of eight full-time customer support and
service personnel who are responsible for handling customer inquiries from 9:00
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 the Company's vendors. The Company is actively working to enhance
its customer service support operations through a variety of measures, including
improved customer reporting systems and automation. The Company accepts returns
from its customers but charges customers a re-stocking fee.
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Technology Platform
The Company's proprietary, state-of-the-art interactive auction technology
enables the Company to offer its customers an entertaining, easy to use and
secure E-commerce environment. BID.COM's technology allows the Company to
operate a large number of simultaneous rising and falling price auctions and
fixed price merchandising, each with many customers, across multiple technical
platforms.
The Company has devoted significant resources to developing its proprietary
software technology. The Company believes that its success depends, in part, on
its 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.
The Company licenses commercially available technology whenever possible,
rather than seek a custom-made or internally-developed solution. The Company
believes that this strategy lowers its operating costs and increases its ability
to respond to changing demands resulting from growth and technological shifts.
This approach also allows the Company to focus its development efforts on
creating and enhancing the specialized proprietary software that is unique to
the Company's business. BID.COM works with its strategic partners, such as
Rogers Media, to develop applications and content. The 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. The
Company uses Intel-based Hewlett Packard Netservers and DEC Alpha enterprise
servers, which employ symmetrical multiprocessing as the basis of the Company's
hardware systems.
BID.COM was the first company to process a secure Canadian online Visa
credit card transaction. BID.COM uses leading security and encryption systems to
maintain the security of online purchases and customer data. Each customer who
pre-registers or makes a purchase 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 the Company's
toll-free telephone lines to register with BID.COM. See "Risk Factors--Internet
Commerce Security."
The Company has embraced leading edge high performance switching
technologies, including Asynchronous Transfer Mode (ATM), to provide end users
with what BID.COM believes is the fastest access possible to its Web site.
BID.COM's access to telecommunications infrastructure is scaleable on demand and
has been proven to provide reliable transactional support.
In October 1998, the Company launched two technology tools, Bid Buddy and
Search Buddy. In November 1998, the Company also implemented an affinity engine
"BID.COM Recommends" using technology provided by Net Perceptions Inc. Based on
collaborative filtering technology, this affinity engine software allows BID.COM
to personalize its product offerings to customers' areas of interest. The first
feature was implemented as "BID.COM Recommends." See "--Auction Operations."
In November 1998, BID.COM won three Canadian Information Productivity
Awards ("CIPA"), for its online auction technology, including an Award of
Excellence, Best of Category Award for Small Business, and top honors with the
Best of Show Award. BID.COM's development work received distinction within a
group of award-winning IT solutions which included such organizations as GE
Capital, IBM Canada, Scotiabank, Air Canada, Revenue Canada, ING Canada,
Canadian Pacific Railways, National Bank of Canada, Rogers Media Cantel and
Royal Bank of Canada.
The Company's engineering, production and research and development staff
currently consists of 10 software development engineers and three system
consultants.
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Research and Development
The Company believes that its proprietary auction management software
provides a competitive advantage over other online auction companies and that
its future success depends, in part, on its ability to continue developing and
enhancing that software. Therefore, the Company has focused its research and
development efforts on the continued development of its proprietary auction
management software. The Company's ongoing research and development efforts are
aimed at enhancing the features and functionality of its existing software
components, the development of new software components, and the integration of
superior third party technology into its environment.
The Company's research and development expenditures were Cdn$889,000 for
the year ended December 31, 1998 and Cdn$661,000 for the year ended December 31,
1997, including salaries and related expenses of Company personnel engaged in
research and development. Research and development activity during 1998 included
the redevelopment and release of the BID.COM technology platform, with Year 2000
compliant architecture and an award winning solution design, the purchase of a
new accounting software package and the purchase and implementation of the
personalization software engine "BID.COM Recommends." See "--Auction
Operations."
Competition
The online commerce market is new, rapidly evolving and intensely
competitive, and the Company expects 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 at a relatively low cost. In addition, the broader retail
consumer product industry is intensely competitive. The Company's competitors,
determined on the basis of type of merchandis and sales format offered by such
entities to customers, include: (i) companies providing business-to-consumer
online auctions services such as Onsale, Inc. ("Onsale"), First Auction by
Internet Shopping Network Inc. ("First Auction"), uBid, Inc. ("uBid") and
Egghead.com Inc. ("Egghead"); (ii) consumer-to-consumer online auction services
such as eBay Inc. ("eBay"), Yahoo!, Auctions Powered by Onsale, Auction
Universe, a Times-Mirror Company ("Auction Universe"), Excite Inc. ("Excite")
and a number of small services, including those that serve specialty markets;
(iii) 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, AOL and Microsoft Corporation; (iv) companies that offer merchandise
similar to that of the Company but through physical auctions and with which the
Company competes for sources of supply; (v) catalog companies with substantial
customer data bases, which may devote greater resources to Internet commerce in
the future; and (vi) 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. ("QVC"). In
addition, because the barriers to the E-commerce industry are minimal, the
Company may i the future face additional competitors who the Company cannot
currently identify. The Company also anticipates that one or more of these
companies and other companies engaged in the business-to-business sector will
offer business-to-business online auctions as this sector continues to grow.
The Company believes that the principal competitive factors in its 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. The Company believes that it is competitive in each of these areas.
Many of the Company's competitors have longer operating histories, larger
customer bases, greater brand recognition and significantly greater financial,
marketing and other resources than the Company. Certain of the Company's
competitors may also offer auction services in Canada and/or Europe. In
addition, other online trading services may be acquired by, receive investments
from or enter into other commercial relationships with, larger, well-established
and well-financed companies as use of the Internet and other online services
increases. Therefore, certain of the Company's competitors with other revenue
sources may be able to devote greater resources to marketing and promotional
campaigns, adopt more aggressive pricing policies and devote substantially more
resources to Web site and systems development than the Company or may try to
attract traffic by offering services for free. See "Risk Factors -
Competition."
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Intellectual Property
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of patent, copyright, trademark and trade secret laws, as well as
confidentiality agreements and technical measures, to establish and protect its
proprietary rights. The Company has received a notice of allowance from the PTO
for a patent application it filed in the United States seeking patent protection
for the process whereby the Company conducts declining price, or Dutch, auctions
over electronic distribution channels. The PTO grants a notice of allowance if,
after examination, it finds a patent application allowable and then it issues
the patent soon after the applicant pays an issuance fee. The Company has a
patent application pending in Canada covering the same technology.
The Company's proprietary software is subject to common law copyright
protection, but the Company does not have, and does not intend to pursue, any
registered copyrights. Common law protection may be narrower than that which the
Company could obtain under registered copyrights. As a result, the Company may
experience difficulty in enforcing its copyrights against certain third party
infringements. The source code for the Company's proprietary software is
protected as a trade secret. See "Risk Factors--Protection of Intellectual
Property."
BID.COM, BID.COM THE ONLINE AUCTION, INTERNET LIQUIDATORS, ILUSA, $BUCK A
MONTH CLUB, CLUB.R.A.D.D., ONLINE OUTLET MALL, ONLINE AUCTION, BID BUDDY, SEARCH
BUDDY and EXPERIENCE ENGINE are trademarks or tradenames of the Company, all of
which are the subject of pending applications for registration in either or both
of the United States and Canada, except for INTERNET LIQUIDATORS, which is
registered in Canada.
The Company's competitive position is also dependent upon its unpatented
trade secrets. In an effort to protect its trade secrets, and as part of its
confidentiality procedures, the Company generally enters into confidentiality
and non-disclosure agreements with its employees and consultants and generally
limits access to and distribution of its software, documentation and other
proprietary information.
Employees
As of the date hereof, the Company employs 33 full-time employees,
including three in engineering support, four in operations, seven in merchandise
acquisition and marketing, five in customer support and service, and 14 in
finance, administrative and senior management functions. The Company also
employs three part-time employees, all of whom are in customer support and
service. The Company also hires independent contractors for software
development, technical documentation, artistic design merchandising and
administration, as needed. None of the Company's employees are represented by a
labor union, and the Company considers its employee relations to be good.
The Company's success is substantially dependent on the ability and
experience of its senior management and other key personnel. Moreover, to
accommodate its current size and manage its anticipated growth, the Company must
maintain and expand its employee base. Competition for personnel, particularly
persons having software development and other technical expertise, is intense,
and there can be no assurance that the Company will be able to retain existing
personnel or hire additional, qualified personnel. The inability of the Company
to retain and attract the necessary personnel or the loss of services of any of
its key personnel could have a material and adverse effect on the Company. All
key employees have been granted stock options. See "Risk Factors--Dependence on
Key Personnel; Need for Additional Personnel" and "Management."
History
The business of the Company 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, the Company was formed, as an Ontario
corporation, by amalgamation of Internet Liquidators Inc. and Internet
Liquidators International Inc. In June 1998, the Company changed its name from
Internet Liquidators International Inc. to BID.COM International Inc. The
Company converted its consumer brand URL from www.Internetliquidators.com to
www.BID.COM in March 1998.
The Company's offices are located at 6725 Airport Road, Suite 201,
Mississauga, Ontario L4V 1V2, Canada . The Company's subsidiary, Internet
Liquidators USA Inc., provides sales and marketing services and maintains an
office at 2701 North Rocky Point Drive, Suite 510, Tampa, Florida 33607-1013.
The Company's Web site is www.BID.COM. Information contained on the Company's
Web site shall not constitute a part of this Registration Statement.
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RISK FACTORS
An investment in the securities of BID.COM is speculative, involves
significant risk and is suitable for investment only by purchasers who can bear
the economic risk of a complete loss of their investment. Prior to making an
investment decision, prospective purchasers should consider carefully the
following risk factors, together with the information and financial statements
set forth elsewhere in this Registration Statement.
Limited Operating History
The Company was founded in September 1995 and began conducting auctions
on the Internet in April 1996. Accordingly, there is only a limited operating
history upon which to base an evaluation of the Company and its business and
prospects. The Company's business and prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in
their early stages of development, particularly companies in new and rapidly
evolving markets such as E-commerce. Such risks include the evolving and
unpredictable nature of the Company's business, the Company's ability to
anticipate and adapt to a developing market and technological changes,
acceptance by consumers of the Company's Internet auctions and the merchandise
sold at such auctions, the ability to identify, attract and retain qualified
personnel and the other risks described in this Registration Statement. There
can be no assurance that the Company will successfully overcome these risks. See
"Management' Discussion and Analysis of Financial Condition and Results of
Operations."
History Of Operating Losses; Accumulated Deficit and Negative Cash Flow
The Company has not earned profits to date and had accumulated losses of
[Cdn $27.7] million as at December 31, 1998. For the year ended December 31,
1998 and the year ended December 31, 1997, the Company's net loss was Cdn
$18.7 million and Cdn $6.7 million, respectively. The Company intends to
continue to invest heavily in marketing and promotion, development of its
technology, business-to-business auctions and other areas of its business. As a
result, the Company believes that it will incur substantial operating losses for
the foreseeable future. The Company's operating losses in 1997 and 1998 were
attributable, in part, to the Company's promotional pricing strategy under which
products were sold below cost or at significantly reduced profit margins. While
the Company began to limit this policy during the fourth quarter of 1998, the
Company continues to sell a limited number of products at significantly reduced
margins and, in the future, may from time to time continue to 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 such promotional pricing strategies may have a material adverse
effect on the Company's profitability. There can be no assurance that the
Company will earn profits or generate positive cash flows from operations in the
future, or that profitability, if achieved, will be sustained. The success of
the Company will ultimately depend on its ability to generate revenues from its
auction activities in amounts sufficient to permit the Company's operations and
development activities to be financed by revenues instead of external financing.
There can be no assurance that future revenues will be sufficient to generate
the required funds to operate the business profitably. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Additional Financing Requirements
The Company has been funded to date primarily through a series of private
placements of equity, sales of equity to and investments from strategic
partners, and cash flow from operations. The Company expects its capital
requirements to increase significantly due to the proposed expansion of its
marketing and business development activity, the introduction of
business-to-business auctions, and continued development of its technology. The
Company believes that its present capital, anticipated proceeds from the
expected exercise of outstanding in-the-money options and warrants expiring at
various times during 1999 and revenue from operations will be sufficient to
finance its cash requirements for the next 12 months. Thereafter, the Company
may need to raise additional funds. The exact amount of the Company's future
capital requirements will depend on numerous factors, including, but not limited
to, slower growth and adverse changes in the E-commerce environment, delays in
the growth of the Company's customer base, government regulations, failure or
delays in executing marketing programs, failure or delays in connection with
expansion to Europe, growth that is more rapid than anticipated or competitive
pressures. The Company may also need to raise additional funds sooner than
anticipated in order to acquire businesses, technologies or products or fund
investments and other relationships the Company believes are strategic. In
addition, while the exercise prices of the outstanding options and warrants may
currently be below the trading prices of th Company's Common Shares on the
Toronto Stock Exchange, there can be no assurance that the Common Shares will
continue to trade at prices that justify the exercise of the warrants, or that
the holders will, in fact, exercise them. Accordingly, the Company's actual
capital requirements may vary from currently anticipated needs and such
variations could be material.
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There can be no assurance that additional financing will be available on
commercially reasonable terms or at all. If adequate funds are not available or
are not available on acceptable terms, the Company may not be able to funds its
expansion, take advantage of strategic acquisitions, investment or licensing
opportunities or respond to competitive pressures. Such inability to obtain
additional financing when needed would have a material adverse effect on the
Company's business, results of operations, cash flow, financial condition and
prospects. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of the shareholders of the
Company will be reduced, shareholders may experience additional dilution and
such securities may have rights, preferences and privileges senior to those of
the Company's Common Shares. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Description of Securities."
Potential Fluctuations In Results Of Operations
The Company's 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 the Company's control. Factors that may affect the
Company's quarterly operating results include: (i) the Company's ability to
increase its customer base; (ii) the availability and pricing of merchandise
from vendors; (iii) the announcement or introduction of new sites, services and
products by the Company or its competitors; (iv) the success of the Company's
brand building and marketing campaigns; (v) introduction and success of the
Company's business-to-business auction; (vi) the success of any future
acquisition by the Company of businesses, technologies or products or any
strategic investments or relationships into which the Company may enter; (vii)
price competition; (viii) the level of use of the Internet and online services;
(ix) increasing consumer confidence in and acceptance of the Internet and other
online services for commerce and, in particular, products such as those offered
by the Company; (x) consumer confidence in the security of transactions over the
Internet and other online services; (xi) the Company's ability to upgrade and
develop its systems and infrastructure to accommodate growth; (xii) the
Company's ability to attract new personnel in a timely and effective manner;
(xiii) the timing, cost and availability of advertising in traditional media and
on other Web sites and online services; (xiv) technical difficulties or service
interruptions; (xv) the amount and timing of operating costs and capital
expenditures relating to expansion of the Company's business, operations and
infrastructure; (xvi) consumer trends and popularity of certain categories of
collectible items; (xvii) governmental regulation by Federal or local
governments; and (xviii) general economic conditions as well as economic
conditions specific to the Internet and online commerce industries.
As a result of the Company's limited operating history, the emerging nature
of the markets in which it competes and the inherent degree of variability in
auctions, it is difficult for the Company to accurately forecast its revenues or
earnings from auction activities. In addition, the Company has no backlog and a
significant portion of the Company's net revenues for a particular quarter are
derived from auctions that are conducted during that quarter. The Company's
current and future expense levels are based largely on its investment plans and
estimates of future revenues and are, to a large extent, fixed. The Company may
be unable to adjust spending in a timely manner to compensate for any unexpected
revenue shortfall. Accordingly, any significant shortfall in revenues relative
to the Company's planned expenditures would have an immediate adverse effect on
the Company's business, results of operations, cash flow and financial
condition. Further, as a strategic response to changes in the competitive
environment, the Company may from time to time make certain pricing, service or
marketing decisions that could have a material adverse effect on its business,
results of operations, financial condition and prospects.
Due to the foregoing factors, the Company's quarterly revenues and
operating results are difficult to forecast. The Company believes that
period-to-period comparisons of its 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 the Company's operating results
will fall below the expectations of securities analysts and investors. In such
event, the trading price of the Common Share would almost certainly be
materially adversely affected. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Developing Online Commerce Markets
The Company's long-term viability is substantially dependent upon the
widespread acceptance and use by consumers and businesses of the Internet as a
medium of commerce. Use of the Internet as a means of effecting
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retail and wholesale transactions is at an early stage of development, and
demand and market acceptance for recently introduced products and services over
the Internet is uncertain. The Company 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. See
"--Uncertain Acceptance of the BID.COM Brand; Evolving and Unpredictable
Business Model."
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 suppor the Internet also could
result in slower response times and adversely affect usage of the Internet
generally and the Company 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, the Company would be materially and
adversely affected. See "--Dependence on the Web Infrastructure," "--Reliance on
Other Third Parties," "--Rapid Technological Change," "--Internet Commerce
Security," "--Risk of System Failure; Single Site," and "--Government Regulation
and Legal Uncertainties."
In addition, even if consumers and businesses accept the use of the
Internet as a viable medium of commerce, there can be no assurance that Internet
auctions generally, or the Company's online auctions in particular, 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, or if the Company's Internet auctions do not
achieve market acceptance, the Company's business, financial condition, results
of operations, cash flow and prospects would be materially adversely affected.
See "Business--Industry Background" and "Business--Competition."
Reliance on Merchandise Vendors
The Company is dependent upon third party vendors to supply it with
merchandise for sale through the Company's Internet auctions and the
availability of merchandise from such suppliers is unpredictable. The Company
does not have long-term contracts or arrangements with most of its vendors
guaranteeing the availability of merchandise for its auctions. There can be no
assurance that the Company's current vendors will continue to sell merchandise
to the Company or otherwise provide merchandise for sale in the Company's
auctions or that the Company will be able to establish new vendor relationships
that ensure merchandise will be available for auction on the Company's Web site.
The Company also relies on many of its vendors to process and ship merchandise
to customers. The Company has limited control over the shipping procedures of
its vendors, and shipments by these vendors may be subject to delays. There can
be no assurance that the Company will be able to continue to develop and
maintain satisfactory relationships with vendors on acceptable commercial terms
and obtain sufficient quantities of merchandise and quality of service on a
consistent basis. During 1998,one computer products supplier provided over 30%
of the merchandise offered in the Company's auctions, and four unrelated
suppliers of computers and other products accounted for up to 90% of the
Company's supply base at various times. For 1999, the Company anticipates that,
at any given time, four unrelated suppliers may each be supplying up to 20-30%
of the Company's product offerings. See "Business--Products."
Reliance on Other Third Parties
In addition to its merchandise vendors, the Company's operations depend on
a number of other third parties. The Company has limited control over these
third parties and no long-term relationships with any of them. The Company does
not own a gateway onto the Internet. Instead, the Company relies on Internet
service providers to connect the Company's Web site to the Internet. From time
to time, the Company has experienced temporary interruptions in its Web site
connection and in its telecommunications access. Continuous or prolonged
interruptions in the Company's Web site connection or in its telecommunications
access would have a material adverse effect on the Company. There can be no
assurance that the Company will be able to maintain satisfactory, or develop
new, relationships with such third parties on acceptable commercial terms, or at
all.
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Continuance of Existing Strategic and Marketing Alliances
The Company's business strategy is based, to a substantial degree, on
seeking out and forming strategic and marketing alliances with Internet service
and content providers, Internet aggregators and search engines and other
marketing partners which can drive traffic to the Company's online auction
sites. Many of the Company's strategic and marketing alliances with its
marketing and distribution partners are of limited duration or may be terminated
at any time. The Rogers Media Agreement may be terminated by Rogers Media at any
time upon 90 days' advance written notice, subject to certain conditions. The
Company's agreement with AOL expires on March 31, 2000. Management estimates
that in 1997 and 1998 the Company earned a substantial portion of its auction
revenues from customers who accessed the Company's auction site through AOL.
While the Company has broadened its marketing channels, it expects that a
substantial number of bidders will continue to access the Company's Web site
through AOL. There can be no assurance that the Rogers Media, the AOL or other
marketing and advertising arrangements will not be terminated prior to their
expiration, or that upon expiration will be renewed on favorable terms or at
all. The discontinuance of these arrangements, and in particuler, the AOL
agreement, would have a material adverse effect on the Company's results of
operations and financial condition if the Company were unable to procure
suitable substitute marketing arrangements. To date, most of the strategic and
marketing alliances entered into by the Company in the United States have not
been exclusive or restricted as to location or technological environment. The
Company has therefore retained the necessary flexibility to broaden its
distribution by increasing the number of its strategic and marketing alliances
and advertising relationships. There can be no assurance that future alliances
with such partners or alliances with any other partners will provide the Company
with the same flexibility. See "--Developing Online Commerce Markets," "--
Reliance on Other Third Parties" and "Business--Business Strategy."
Competition
The online commerce market is new, rapidly evolving and intensely
competitive, and the Company expects 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 at a relatively low cost. In addition, the broader retail
consumer product industry is intensely competitive. The Company's competitors,
determined on the basis of type of merchandis and sales format offered by such
entities to customers, include: (i) companies providing business-to-consumer
online auctions services such as Onsale, First Auction, uBid, and Egghead; (ii)
consumer-to-consumer online auction services such as eBay, Yahoo!, Auctions
Powered by Onsale, Auction Universe, Excite and a number of small services,
including those that serve specialty markets; (iii) 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, AOL and Microsoft
Corporation; (iv) companies that offer merchandise similar to that of the
Company but through physical auctions and with which the Company competes for
sources of supply; (v) catalog companies with substantial customer data bases,
which may devote greater resources to Internet commerce in the future; and (vi)
large retailers and other companie 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. In addition, because the barriers to the E-commerce
industry are minimal, the Company may in the future face additional competitors
who the Company cannot currently identify. The Company also anticipates that one
or more of these companies and other companies engaged in the
business-to-business sector will offer business-to-business online auctions as
this sector continues to grow. Competitive pressures created by any one or more
of these competitors could have a material adverse effect on the Company's
business, results of operations, cash flow, financial condition and prospects.
See "Business--Competition."
The Company believes that the principal competitive factors in its 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. Many of the Company's competitors have longer operating histories,
larger customer bases, greater brand recognition and significantly greater
financial, marketing and other resources than the Company. Certain of the
Company's competitors may also offer auction services in Canada and/or Europe.
In addition, other online trading services may be acquired by, receive
investments from or enter into other commercial relationships with larger, well-
established and well-financed companies as use of the Internet and other online
services increases. Therefore, certain of the Company's competitors with other
revenue sources may be able to devote greater resources to marketing and
promotional campaigns, adopt more aggressive pricing policies and devote
substantially more resources to Web site and systems development than the
Company or may try to attract traffic by offering services for free.
Further, as a strategic response to changes in the competitive environment,
the Company may, from time to time, make certain pricing, service or marketing
decisions or acquisitions that could have a material adverse effect
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on its business, results of operations and financial condition. New technologies
and the expansion of existing technologies may increase the competitive
pressures on the Company by enabling the Company's competitors to offer a lower-
cost service. Certain Web-based application that direct Internet traffic to
certain Web sites may channel users to trading services that compete with the
Company. The Company is aware that certain of its competitors have and may
continue to adopt aggressive pricing or inventory availability policies,
establish cooperative relationships among themselves or directly with vendors to
obtain exclusive or semi-exclusive sources of merchandise, secure merchandise
from vendors on more favorable terms than the Company, and respond more quickly
to changes i customer preferences or devote greater resources to the
development, promotion and sale of their merchandise than can the Company.
Accordingly, the Company believes that new competitors or alliances among
competitors and vendors may emerge and rapidly acquire market share. Increased
competition may result in reduced operating margins, loss of market share and
diminished brand recognition, any one of which would have a material adverse
effect on the Company. See " Business--Competition."
Uncertain Acceptance of the BID.COM Brand
The Company believes that strong brand recognition is critical to achieving
widespread acceptance of BID.COM, especially in light of the intensely
competitive nature of the online business-to-consumer auction market. The
Company's ability to promote and position its brand will depend largely on the
success of the Company's marketing efforts and the Company's ability to offer a
broad range of products and provide high quality, easy-to-use, secure auction
service. If vendors do not perceive BID.COM as an effective marketing and sales
channel for their merchandise, or if customers do not perceive BID.COM as
offering an entertaining, secure and user-friendly platform to purchase
merchandise, the Company will be unsuccessful in promoting and maintaining its
brand. Furthermore, to attract and retain customers and to promote and maintain
the BID.COM brand in response to competitive pressures, the Company must
increase its marketing and advertising budgets and otherwise increase
substantially its financial commitment to creating and maintaining brand loyalty
among vendors and consumers. There can be no assurance that the Company's brand
promotion efforts will result in increased revenues, or that resulting increased
revenues would offset the expenses incurred by the Company in promoting its
brand. If the Company is unable to promote or maintain its brand, the Company's
business, financial condition, results of operations, cash flow and prospects
would be materially and adversely affected. See "Business--Business
Strategy--Expanding the Company's Customer Base Through Diverse Marketing
Strategy" and "Business--Marketing."
Risks Associated With Evolving Business Model
The Company's business model continues to evolve. The Company seeks to
develop and promote new or complimentary opportunities, services, products or
transaction formats and expand the breadth and depth of services. These include
the use of the Company's Web site as an advertising medium for the products and
services of other companies, licensing its technology, initiating under a
different brand name its business-to-business auctions, entering into strategic
relationships' to co-brand auctions in the business-to-business category and to
develop and operate interactive auctions in other electronic media, expanding
operations to Europe and elsewhere, and acquiring businesses, technologies,
services or products, or funding investments or other relationships that the
Company believes are strategic. There can be no assurance that the Company will
be able to expand its operations in a cost-effective or timely manner or that
any such efforts will maintain or increase overall market acceptance.
Furthermore, any new business or service launched b the Company that is not
favorably received by customers could damage the Company's reputation and
diminish the value of its brand name. Expansion of the Company's operations in
this manner would also require significant additional expenses and development,
operations and other resources and would strain the Company's management,
financial and operational resources. The lack of market acceptance of such
services or the Company's inability to generate satisfactory revenues from such
expanded services to offset their cost could have a material adverse effect on
the Company's business, results of operations, cash flow, financial condition
and prospects.
Risks Associated With Acquisitions
If appropriate opportunities present themselves, the Company intends to
acquire businesses, technologies, services or products that the Company believes
are strategic or enter into other strategic relationships. The Company currently
has no understandings, commitments or agreements with respect to any material
acquisition or strategic relationship and no material acquisition or strategic
relationship is currently being pursued. There can be
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no assurance that the Company will be able to identify negotiate or finance
future acquisitions or strategic relationships successfully, or to integrate
such acquisitions or strategic relationship with its current business. The
process of integrating an acquired business, technology, service or product into
the Company may result in unforeseen operating difficulties and expenditures and
may absorb significant management attention that would otherwise be available
for ongoing development of the Company's business. Moreover, there can be no
assurance that the anticipated benefits of any acquisition or strategic
relationship will be realized. Acquisitions or strategic relationships could
result in potentially dilutive issuances of equity securities, the incurrence of
debt, contingent liabilities and/or amortization expenses related to goodwill
and other intangible assets, which could materially adversely affect the
Company's business, results of operations, cash flow, financial condition and
prospects. Any such future acquisitions of other businesses, technologies,
services or products or strategic relationship might require the Company to
obtain additional equity or debt financing, which might not be available on
terms favorable to the Company, or at all, and such financing, if available,
might be dilutive. See "--Need For Additional Financing."
Dependence On The Web Infrastructure
The success of the BID.COM branded auction service and the private brand
auction service operated by the Company for certain of its customers 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, including outages and delays resulting from the inability of certain
computers or software to distinguish dates in the 21st century from dates in the
20th century. See "--Risks Associated with the Year 2000." 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, 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, or if the Web does not become a viable commercial
marketplace, the Company's business, results of operations, cash flow and
financial condition will be materially and adversely affected. Even if the
infrastructure, standards, protocols and complementary products, services or
facilities are developed and the Web becomes a viable commercial marketplace in
the long term, the Company might be required to incur substantial expenditures
in order to adapt its service to changing Web technologies, which could have a
material adverse effect on the Company's business, financial condition, results
of operations, cash flow and prospects.
Internet Commerce Security
A significant barrier to E-commerce and Internet communications is the
secure transmission of confidential information over public networks. Currently,
all bidders are required to authorize the Company to bill their credit card
accounts directly for the purchase price and shipping costs of goods purchased
at the Company's online auction. The Company relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to effect the secure transmission of confidential
information, including customer credit card numbers. There can be no assurance
that the advances in computer capabilities, new discoveries in the field of
cryptography or other events or developments will not result in a compromise or
breach of the technology used by the Company to protect customer transaction
data. Furthermore, a party who is able to circumvent the Company's security
measures could misappropriate proprietary information or cause interruptions in
the Company's operations. The Company may be required to expend significant
capital and other resources to protect against such security breaches or to
alleviate problems caused by such breaches. Concerns over the security of
Internet transactions and the privacy of users may also inhibit the growth of
the Internet generally, and the World Wide Web in particular, as a means of
conducting commercial transactions. To the extent that activities of the Company
involve the storage and transmission of proprietar information, such as credit
card numbers, security breaches could damage the Company's reputation and expose
the Company to a risk of loss or litigation and possible liability. The
Company's insurance policies do not reimburse the Company for losses caused by
security breaches. There can be no assurance that the Company's security
measures will prevent security breaches and protect the Company from any
resulting risk of loss. See " Business--Technology Platform."
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Risk of System Failure; Single Site
The Company's operations are largely dependent upon its communications
hardware and computer hardware, substantially all of which are located at a
leased facility in Mississauga, Ontario in Canada. The Company's systems are
vulnerable to damage from earthquake, fire, floods, power loss,
telecommunications failure, break-ins and similar events. While the Company has
developed preliminary plans for redundant systems and a formal disaster recovery
plan, no such system or plans are currently in effect. A substantial
interruption in these systems would have a material adverse effect on the
Company. The Company's coverage limits on its property and business interruption
insurance may not be adequate to compensate the Company for all losses that may
be incurred. Despite the implementation of network security measures by the
Company, its servers are also vulnerable to computer viruses, physical or
electronic break-ins, attempts by third parties to deliberately exceed the
capacity of the Company's systems and similar disruptive problems. The Company's
insurance policies carry low coverage limits which may not be adequate to
reimburse the Company for losses caused by erroneous transmission of computer
viruses or other defects. Computer viruses, break-ins or other problems caused
by third parties could lead to interruptions, delays, loss of data or cessation
in service to users of the Company's services. The occurrence of any of these
events could materially and adversely affect the Company's business, financial
condition, results of operations, cash flow and prospects.
Risk of Capacity Constraints
The Company seeks to generate a high volume of traffic and transactions on
the BID.COM auction. Accordingly, the satisfactory performance, reliability and
availability of the Company's Web site, processing systems and network
infrastructure are critical to the Company's reputation and its ability to
attract and retain large numbers of users who bid for items on its service while
maintaining adequate customer service levels. Any system interruptions that
result in the unavailability of the Company's service or reduced customer
activity would reduce the volume of transactions completed. Interruptions of
service may also diminish the attractiveness of the Company and its services.
Any substantial increase in the volume of traffic on the Company's Web site will
require the Company to expand its technology, transaction processing systems and
network infrastructure. There can be no assurance that the Company will be able
to accurately project the rate or timing of increases, if any, in the us of its
services or timely expand its systems and infrastructure in a timely manner to
accommodate such increases. Any failure to expand its systems could have a
material adverse effect on the Company's business, results of operations, cash
flow, financial condition and prospects.
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 or all of which could render the
Company's existing Web site and proprietary technology obsolete. The Company's
performance will depend, in part, on its ability to license leading
technologies, develop new proprietary technology that address the increasingly
sophisticated and varied needs of its existing and prospective customers,
respond to technological advances and emerging industry standards and practices
on a timely and cost-effective basis and continually improve the performance,
features and reliability of its services in response to evolving market demands.
In addition, the widespread adoption of new Internet, networking or
telecommunications technologies or other technological changes could require
substantial expenditures b the Company to modify or adapt its services or
infrastructure. There can be no assurance that the Company will be successful in
using new technologies effectively or adapting its Web site and proprietary
technology and services to customer requirements or emerging industry standards.
See "Business--Technology Platform" and "Business--Research and Development."
Risks Associated With the Year 2000
The Year 2000 issue is the result of computer programs being written using
two digits rather than four to define the applicable year. As a result,
date-sensitive software may recognize a date using "00" as the year 1900 rather
than the Year 2000. This could result in system failures or financial
miscalculations causing disruptions of operations, including, among others, a
temporary inability to process transactions, send invoices or engage in similar
normal business activities.
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The Company does not believe that it has material exposure to Year 2000
complications with respect to its own information systems since its existing
systems correctly define the Year 2000. The Company is conducting an analysis to
determine the extent to which its major suppliers', service providers' and
marketing and advertising partners' systems (insofar as they relate to the
Company's business) are subject to the Year 2000 issue. However, the Company is
currently unable to predict the extent to which the Year 2000 issue will affect
its suppliers, service providers and marketing or advertising partners, or the
extent to which it would be vulnerable to such parties' failure to remedy any
Year 2000 issues on a timely basis. The failure of a major supplier, service
provider or marketing or advertising partner subject to the Year 2000 issue to
convert its systems on a timely basis, or the conversion of these systems that
is incompatible with the Company's systems, could have a material adverse effect
on the Company's business, results of operations, cash flow, financial condition
and prospects. The Company has not yet devised a contingency plan covering the
possible failure of any of its primary suppliers, service providers or marketing
or advertising partners to resolve its Year 2000 problems in a timely manner. If
necessary, such contingency plans could require the Company to incur significant
expenses. In addition, most of the purchases fro the Company's auctions are paid
for using credit cards. If the bank systems used to process credit card
transactions for a significant portion of transactions on BID.COM's auction site
are not Year 2000 compliant, the Company's operations may be materially and
adversely affected to the extent customers are unable to use their credit cards
to make purchases. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
Dependence on Key Personnel; Need for Additional Personnel
The Company's success is substantially dependent on the ability and
experience of its senior management and other key personnel. The Company does
not have long term employment agreements with any of its key personnel and
maintains no "key person" life insurance policies. Moreover, to accommodate its
current size and manage its anticipated growth, the Company must maintain and
expand its employee base. Competition for personnel, particularly persons having
software development and other technica expertise, is intense, and there can be
no assurance that the Company will retain existing personnel or hire additional,
qualified personnel. The inability of the Company to retain and attract the
necessary personnel or the loss of services of any of its key personnel could
have a material adverse effect on the Company. See "Business--Employees" and
"Management."
Management of Growth
The Company has recently experienced, and may continue to experience,
growth in its operations, financial systems and the number of its employees.
Such growth has and will continue to place significant demands on the Company's
management, administrative, operating and financial resources. In order to
manage its current operations and any future growth effectively, the Company
will need to continue to implement and improve its operational, financial and
management information systems and to hire train, motivate, manage and retain
its employees. There can be no assurance that the Company will be able to manage
such growth effectively, that its management, personnel or systems will be
adequate to support the Company's operations, or that the Company will be able
to achieve levels of revenue commensurate with the increased levels of operating
expenses associated with such growth.
Protection of Intellectual Property
The Company's performance and ability to compete are dependent to a
significant degree on its proprietary technology. The Company relies on a
combination of patent, copyright, trademark and trade secret laws as well as
confidentiality agreements and technical measures, to establish and protect its
proprietary rights. The Company has received a notice of allowance from the PTO
for a patent application it filed in the United States seeking patent protection
for the process whereby the Company conducts declining price, or Dutch, auctions
over electronic distribution channels. The PTO grants a notice of allowance if,
after examination, it finds a patent application allowable and then it issues
the patent soon after the applicant pays an issuance fee. The Company has a
patent application pending in Canada covering the same technology. There can be
no assurance that the patent under application in Canada will be allowed or
issued in whole or in part. In addition, the Company cannot guarantee that any
patents issued to it will afford meaningful protection for its technology.
Competitors may develop similar technologies which do not conflict with the
Company's patents, or they could challenge the Company's patents. The Company is
not aware of any challenges to its patent rights or any infringement by its
technology on the proprietary rights of third parties, but there can be no
assurance that current or future technologies developed by the Company do not
or, in the future, will not, infringe on the rights of others or that the
Company's patents will not be challenged. The cost of any litigation against the
Company regarding its patent rights could be significant and any successful
litigation could materially and adversely affect the Company's business.
The Company's 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 the Company could obtain under registered
copyrights. As a result, the Company may experience difficulty in enforcing its
copyrights against certain third party infringements. The source code for the
Company's proprietary software is protected as a trade secret. As part of its
confidentiality-protection procedures, the Company generally enters into
agreements with its employees and consultants and limits access to, and
distribution of, its software, documentation and other proprietary information.
There can be no assurance that the steps taken by the Company will prevent
misappropriation of its technology or that agreements entered into for that
purpose will be
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enforceable. The laws of other countries may afford the Company little or no
protection of its intellectual property. The Company also relies on a variety of
technology that it licenses from third parties, including its database and
Internet server software, which is used in the Company's Web site to perform key
functions. There can be no assurance that these third party technology licenses
will continue to be available to the Company on commercially reasonable terms,
if at all. The loss of or inability of the Company to maintain or obtain
upgrades to any of these technology licenses could result in delays in
completing its proprietary software enhancements and new development until
equivalent technology could be identified, licensed or developed and integrated.
Any such delays would materially and adversely affect the Company's business,
financial condition, results of operations, cash flow and prospects. See
"Business--Intellectual Property."
Government Regulation and Legal Uncertainties
The Company is subject, both directly and indirectly, to various laws and
regulations relating to its business, although there are presently few laws or
regulations directly applicable to Internet access. However, due to the
increasing popularity and use of the Internet, it is possible that laws and
regulations will be adopted in the near future. Such laws and regulations may
cover issues such as user privacy, pricing, content, copyrights, distribution
and characteristics and quality of product and services. Furthermore, the growth
and development of the market for online commerce may prompt calls for more
stringent consumer protection laws that may impose additional burdens on those
companies conducting business online. The enactment of any additional laws or
regulations may impede the growth of commerce on the Internet which could, in
turn, decrease the demand for the Company's products and services and increase
the Company's cost of doing business or otherwise have a material adverse effect
on the Company.
The applicability of existing laws to the Internet in various jurisdictions
governing issues such as property ownership, sales and other taxes, contests and
sweepstakes, libel, personal privacy, rights of publicity, language requirements
and content restrictions is uncertain and could expose the Company to
substantial liability. The application of existing and new laws and regulations
to the Internet could have a material adverse effect on the Company. An
allegation that the Company was violating U.S, Canadian, or international civil
or criminal law could have a material adverse effect on the Company even if the
Company successfully defended such claims.
In addition, several telecommunications carriers are seeking to have
telecommunications over the Internet regulated by the Federal Communications
Commission (the "FCC") in the same manner as other telecommunications services.
Also, because the growing popularity and use of the Internet has burdened the
existing telecommunications infrastructure and many areas with high Internet use
have begun to experience interruptions in telephone service, certain local
telephone carriers have petitioned the FCC to regulate Internet service
providers and online service providers in a manner similar to long distance
telephone carriers and to impose access fees on such providers. If any of these
petitions are granted, or the relief sought therein is otherwise granted, the
costs of communicating on the Internet could increase substantially, potentially
slowing the growth in use of the Internet. Any such new legislation or
regulation or application or interpretation of existing laws could have a
material adverse effect on the Company's business, financial condition and
results of operations.
U.S. and foreign laws regulate certain uses of customer information and
development and sale of mailing lists. The Company believes that it is in
material compliance with such laws, but new restrictions may arise in this area
that could materially adversely affect the Company.
Potential Liability for Sales and Other Taxes.
With the exception of sales to bidders in Florida, California and Georgia,
the states in which the Company has, or in the past had, a physical presence,
the Company does not collect sales or other similar taxes in respect of goods
sold through BID.COM hosted auctions. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies such as the
Company which engage in or facilitate online commerce, and 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 the Company's opportunity to derive financial benefit from such
activities. Moreover, a successful assertion by one or more states, Canada or
any other foreign country that the Company
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should collect sales or other taxes on the exchange of merchandise on its system
could have a material adverse effect on the Company's business, results of
operations, cash flow and financial condition.
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. Additionally, the legislation provides for the establishment of
an Advisory Committee on Electronic Commerce whose responsibility is to conduct
a thorough study of federal, state and local, and international taxation and
tariff treatment of transactions using the Internet and Internet access and
other comparable intrastate, interstate or international sales activities and
present legislative recommendations to the U.S. Congress. It is possible that
the moratorium could 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
the Company's business, financial condition, results of operation, cash flow and
prospects.
Risks Associated with Global Expansion
The Company currently operates in the United States and Canada. However, it
intends to open an office in Ireland in June 1999, and may expand to other
countries thereafter. Expansion will require management attention and resources.
The Company has limited experience in localizing its service, and the Company
believes that many of its competitors are also undertaking expansion into
foreign markets. There can be no assurance that the Company will be successful
in expanding into global markets. In addition to the uncertainty regarding the
Company's ability to generate revenues from foreign operations and establish a
global presence, there are certain risks inherent in doing business on a global
level, including, among others, regulatory requirements, legal uncertainty
regarding liability, tariffs, and other trade barriers, difficulties in staffing
and managing foreign operations, difficulties in protecting intellectual
property rights, longer payment cycles, different accounting practices,
political instability, the impact of recession and other economic conditions in
local markets, seasonal reductions in business activity during the summer months
in Europe and elsewhere, inability to predict foreign consumer demand and
potentially adverse tax consequences, any of which could adversely affect the
success of the Company's global operations. If the Company expands its foreign
operations and has additional portions of its revenues denominated in foreign
currencies, the Company could become subject to increased risks relating to
foreign currency exchange rate fluctuations. In addition, the export of certain
software from the United States and Canada is subject to export restrictions as
a result of the encryption technology in such software and may give rise to
liability to the extent the Company violates such restrictions. There can be no
assurance that one for more of the factors discussed above will not have a
material adverse effect on the Company's future global operations and,
consequently, on the Company's business, results of operations, cash flow,
financial condition and prospects. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Exchange Rate Fluctuations
The Company transacts substantially all of its purchases and sales in U.S.
dollars while the majority of the Company's operating expenses are in Canadian
dollars. The Company does 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 could have a material
adverse effect on the Company's earnings and cash flows. See "Exchange Rates"
at the forepart of this Registration Statement and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Foreign Currency
Fluctuations."
Forward-Looking Statements
In addition to historic information, this Registration Statement includes
forward-looking statements within the meaning of the United States Private
Securities Litigation Reform Act of 1995 that involve risks and uncertainties.
Such statements are indicated by words or phrases such as "anticipate,"
"estimate," "project," "plans," "intends," "management believes," "the Company
believes" and similar words or phrases. Such statements are based on current
expectations and are subject to risks, uncertainties and assumptions. Certain of
these risks are described in the section of this Registration Statement entitled
"Risk Factors." Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated or projected. Although the Company
believes that its expectations are based on reasonable assumptions within the
bounds of its business and operations, actual results may differ materially from
expectations that may be expressed or implied from any forward-looking
statements contained in this Registration Statement. Factors that could cause
actual results to differ from expectations include, and are not limited to, the
failure of the Internet and/or online auctions to become widely accepted as a
viable medium of commerce, inability of the Company directly and/or through its
marketing and advertising alliances to attract a sufficient number of customers
to the Company's site, the failure or delay of market acceptance of the
Company's auction services, the Company's future need for additional capital and
the uncertainty of the availability of funding, the ability of the Company to
compete with other E-tailing and online auction businesses, failure to timely
license or develop 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 the Company relies, risk of system failure
or interruption, implementation and enforcement of government regulations, the
failure of the Company's suppliers and strategic partners to resolve any Year
2000 issues and other risks or uncertainties described in this Registration
Statement.
Possible Issuance of Preference Shares
The Company's Preference Shares may be issued by the Board of Directors
without shareholder approval on such terms and conditions, and having such
rights, privileges and preferences, as the Board of Directors may determine. 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. The issuance of a series of Preference Shares could
have the effect of delaying, deterring or preventing a change in control of the
Company. See "Description of Securities To Be Registered."
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Possible Volatility of Stock Price
The Company has applied for its Common Shares to be quoted for trading on
The Nasdaq SmallCap Market under the symbol BIDS. The trading price of the
Common Shares on The Nasdaq SmallCap Market is likely to be highly volatile and
could be subject to wide fluctuations in response to factors such as actual or
anticipated variations in the Company's quarterly operating results,
announcements of technological innovations or new services by the Company or its
competitors, changes in financial estimates by securities analysts, conditions
or trends in the Internet and online commerce industries, changes in the market
valuations of other Internet or online service companies, announcements by the
Company or its competitors of significant acquisitions, strategic partnerships,
joint ventures or capital commitments, additions or departures of key personnel,
sales of Common Shares or othe securities of the Company in the open market and
other events or factors, many of which are beyond the Company's control.
Further, the stock markets in general, and The Nasdaq Markets 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 such companies. The trading
prices of many technology companies' stocks are at or near historical highs and
reflect valuations substantially above historical levels. There can be no
assurance that these trading prices and valuations will be sustained. These
broad market and industry factors may materially and adversely affect the market
price of the Common Shares, regardless of the Company's operating performance.
Market fluctuations, as well as general political and economic conditions such
as recession or interest rate or currency rate fluctuations or economic turmoil
in Southeast Asia, South America or elsewhere in the world, may have a negative
effect on market prices of stocks generally, which could adversely affect the
market price of the Common Shares even though the Company may have no customers
or operations in those regions. 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 the subject company. Such litigation, if
instituted against the Company, could result in substantial costs and a
diversion of management's attention and resources, which would have a material
adverse effect on the Company's business, results of operations, cash flow,
financial condition and prospects.
No Prior Market for Common Shares in United States; Risk of Low Priced
Stock
Prior to the effective date of this Registration Statement, there has been
no public market for the Company's Common Shares in the United States, and there
can be no assurance that an active public market will develop in the United
States or be sustained after the effective date of this Registration Statement
or that investors will be able to sell the Common Shares should they desire to
do so. In addition, historically the Company's Common Shares have frequently
traded on the TSE at prices below $5.00. Should a similar trading range continue
on Nasdaq after the effective date of this Registration Statement, the 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 $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 (i) net tangible assets of at least $2,000,000, if such issuer has been
in continuous operation for three years, (ii) net tangible assets of at least
$5,000,000, if such issuer has been in continuous operation for less than three
years, or (iii) average annual revenue of at least $6,000,000, if such issuer
has been in continuous operation for less than three years. Unless an exception
is available, the regulations require the delivery, prior to any transaction
involving a penny stock, 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 the Common Shares by limiting the
ability of broker/dealers to trade the stock and the ability of purchasers of
the Common Stock to sell in the secondary market.
Shares Eligible For Future Sale
This Registration Statement registers the Company's class of Common Shares
pursuant to the Exchange Act. It does not register the sale of any Common Shares
by the Company or any shareholder pursuant to the Securities Act of 1933, as
amended (the "Securities Act"). The Common Shares may be sold in the United
States as set forth below. As of the effective date of this Registration
Statement, there are ______________ Common Shares outstanding. Of these shares,
______________ Common shares will be freely tradable immediately upon the
effective date of this Registration Statement, except for those shares held by
"affiliates," as defined in rule 144 ("Rule 144") under the Securities Act. The
remaining outstanding Common Shares may be sold from time to time in accordance
with Rule 144 (such shares being referred to herein as "Restricted Shares") or,
if applicable, may be sold in accordance with Rule 701 (as defined below). In
addition, as of April 1, 1999, there were outstanding options and warrants to
purchase an aggregate of 2,026,796 Common Shares. Sales of substantial amounts
of the Company's Common Shares (including shares issued upon the exercise of
outstanding options and warrants) in the public market could have a materially
dilutive effect on the prevailing market price of the Common Shares and the
ability of the Company to raise equity capital in the future.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Registration Statement, 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 Common Shares
then outstanding (which will equal approximately 481,250 shares immediately upon
the effective date) or (ii) the average weekly trading volume of the 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 the Company. Under Rule 144(k), a person who is not
deemed to have been an affiliate of the Company 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 ("Rule 701") permits resales of shares in
reliance upon Rule 144 but without compliance with certain restrictions of Rule
144, including the holding period requirement. Any employee, officer or director
of or consultant to the Company who, prior to the effective date of this
Registration Statement, purchased his or her shares or received options to
purchase Common Shares, pursuant to a written compensatory plan or contract may
be entitled to rely on the resale provisions of Rule 701 with respect to options
or shares issued in reliance on Rule 701. Rule 701 permits affiliates to sell
their Rule 701 shares under Rule 144 without complying with the holding period
requirements of Rule 144. 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.
All holders of Rule 701 shares are required to wait until 90 days after the date
of this Registration Statement before selling such shares.
In addition, Rule 701 shares and shares issued upon exercise of options
granted after the effective date of this Registration Statement pursuant to
written compensatory plans or contracts may be sold pursuant to a short form
registration statement on Form S-8 filed by the Company. This type of
registration statement is automatically effective upon filing with the
Securities and Exchange Commission. Certain restrictions under Rule 144 may
apply to sales of shares registered on an S-8 registration statement. The
Company has not entered into any commitments to file any registration statements
on Form S-8, but may from time to time register shares under such registration
statements as long as it is eligible to use this form under applicable
rules.
Enforceability of Civil Liabilities
The Company is incorporated under the laws of the Province of Ontario,
Canada, certain of the Company's directors and officers are residents of Canada
and a substantial part of the assets of the Company and all or a substantial
portion of the assets of such persons are located outside the United States.
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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. The Company believes, based on
advice of its 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, the Company believes,
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.
No Dividends
The Company has paid no cash dividends on any of its shares of capital
stock and has no plans to pay dividends in the foreseeable future. The Company
currently intends to retain all other earnings, if any, for working capital and
general corporate purposes.
ITEM 2 - DESCRIPTION OF PROPERTY
The Company's principal administrative, engineering, merchandising and
marketing facilities total approximately 10,165 square feet and are located on
one floor of an office building in Mississauga, Ontario, Canada, under a lease
that commenced on November 1, 1998 for a three year term. The Company also
leases premises in Tampa, Florida where four employees are located. The Company
believes that it has adequate space for its current needs. As the Company
expands, it expects that suitable additional space will be available on
commercially reasonable terms. The Company does not own any real estate nor does
it currently own or lease warehouse space. The Company relies, instead, on
direct shipments from vendors or contract warehouses for its fulfillment and
logistics requirements.
In June 1999, the Company plans to open an office in Dublin, Ireland. The
Company is in the process of locating suitable premises.
ITEM 3 - LEGAL PROCEEDINGS
Neither the Company nor any of its subsidiaries, is a party to or the
subject of any material legal proceedings nor are any such proceedings known by
the Company to be contemplated against the Company or any of its subsidiaries.
ITEM 4 - CONTROL OF REGISTRANT
To the knowledge of the Company, no person beneficially owns, directly or
indirectly, or exercises control or direction over more than 10% of the issued
and outstanding Common Shares of the Company.
The following table shows certain information as of April 6, 1999 with
respect to the beneficial ownership of Common Shares by the Company's
executive officers and directors as a group (12 persons).
Amount of Shares
Beneficially Owned Percent of Class
------------------------------------------------
All Directors and Executive
Officers as a Group (12 persons) 3,585,350 (1)(2) 7.0%
- -----------------
(1) Includes an aggregate of 1,120,000 Common Shares subject to options and
warrants exercisable within 60 days from the effective date of this Registration
Agreement held by certain directors and executive officers.
(2) Does not include: (i) any Common Shares held by HDL Capital Corporation
("HDL"); Mr. Bulger is an officer and principal of HDL; (ii) 1.0 million Common
Shares purchased by AOL; Mr. Singer is senior vice president of AOL Studios, a
division of AOL; (iii) 1.5 million Common Shares and a warrant to purchase
100,000 Common Shares purchased by Rogers Media; Mr. Abramsky is an officer of
Rogers Media; (iv) 25,000 Common Shares held by Terri Pamenter, David Pamenter's
wife; (v) options granted to Paul Hart to purchase 50,000 Common Shares which
options have not yet vested (vi) options granted to James I. Moskos to
purchase 25,000 Common Shares which options have not yet vested; and (vii)
options granted to Robert Joynt to purchase 5,000 Common Shares which options
have not yet vested. See "Directors and Officers of Registrant" and "Interest of
Management in Certain Transactions."
BID.COM knows of no arrangements, the operation of which may at a
subsequent date result in a change in control of the Company.
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ITEM 5 - NATURE OF TRADING MARKET
The Common Shares of the Company commenced trading on The Toronto Stock
Exchange (the "TSE") on February 9, 1998. The Common Shares have been traded
under the symbol "BII" since July 18, 1998, and prior to that traded on the TSE
under the symbol "ILI." From June 6, 1996 to February 9, 1998, the Common Shares
were quoted for trading on the Canadian Dealing Network ("CDN") under the symbol
"ILII." Prior to the effective date of this Registration Statement, the Common
Shares were not listed or quoted for trading on any securities markets within
the United States. The Company has applied for its Common Shares to be quoted
for trading on The Nasdaq SmallCap Market under the symbol BIDS. The following
table sets forth the range of high and low sales prices (rounded to the nearest
hundredth) as reported by CDN and the TSE during the calendar quarters set forth
therein:
1997 High Low
---- ---- ---
(Cdn $) (Cdn $)
1st Quarter 1.45 0.80
2nd Quarter 1.25 0.73
3rd Quarter 4.05 0.85
4th Quarter 5.00 2.25
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 (through 13.90 3.80
March 26, 1999)
As of March 23, 1999, the Company had 1,095 shareholders of record holding
48,125,396 Common Shares, of which 64 shareholders holding 4,946,002 Common
Shares had an address of record in the United States. Common Shares held by the
principal depositary in the United States amounted to 4,740,316 or 10.0% of the
issued Common Shares of BID.COM, which shares are held for participants'
accounts.
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After the effective date of this Registration Statement, BID.COM will be
subject to periodic reporting obligations under Sections 13 and 15(d) of the
Exchange Act and the rules and regulations promulgated thereunder. Pursuant to
such statues and regulations, the Company intends to file with the Securities
and Exchange Commission annual reports on Form 20-F and periodic reports on Form
6-K. BID.COM is a foreign private issuer as defined under Rule 3b-4 of the
Exchange Act, and, as such, will not be subject to the proxy rules promulgated
under Section 14 of the Exchange Act or the insider short-swing profit reporting
rules promulgated under Section 16 of the Exchange Act for as long as it
maintains its foreign private issuer status.
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. See "Taxation-Canadian Federal Income Tax
Considerations."
There is no limitation imposed by Canadian law or by the articles or other
charter documents of the Company on the right of a non-resident to hold or vote
Common Shares or Preference Shares with voting rights (collectively, "Voting
Shares"), other than as provided in the Investment Canada Act (the "Investment
Act"), as amended by the World Trade Organization Agreement Implementation Act
(the "WTOA Act"). The Investment 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 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 Voting Shares of the
Company by a non-Canadian (other than a "WTO Investor," as defined below) would
be reviewable under the Investment Act if it were an investment to acquire
direct control of the Company, and the value of the assets of the Company were
Cdn$5.0 million or more. An investment in Voting Shares of the Company by a WTO
Investor would be reviewable under the Investment Act if it were an investment
to acquire direct control of the Company, and the value of the assets of the
Company equaled or exceeded Cdn$184.0 million. A non-Canadian, whether a WTO
Investor or otherwise, would acquire control of the Company for purposes of the
Investment Act if he or she acquired a majority of the Voting Shares of the
Company. The acquisition of less than a majority, but at least one-third of the
Voting Shares of the Company, would be presumed to be an acquisition of control
of the Company, unless it could be established that the Company was not
controlled in fact by the acquirer through the ownership of Voting Shares. In
general, an individual is a WTO Investor if he or she is a "national" of a
country (other than Canada) thaT is a member of the World Trade Organization
("WTO Member") or has a right of permanent residence in a WTO Member. A
corporation or other entity will be a WTO investor if it is a "WTO
investor-controlled entity" pursuant to detailed rules set out in the Investment
Act. The United States is a WTO Member.
Certain transactions involving Voting Shares of the Company would be exempt
from the Investment Act, including: (a) an acquisition of Voting Shares of the
Company 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 the 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 Act; and (c) an acquisition of control of the Company by reason
of an amalgamation, merger, consolidation or corporate reorganization, following
which the ultimate direct or indirect control in fact of the Company, through
the ownership of voting interests, remains unchanged.
ITEM 7 - TAXATION
Canadian Federal Income Tax Considerations
The following summary describes material Canadian federal income tax
consequences generally applicable to a holder of Common Shares who is not a
resident of Canada, and who, for purposes of the Income Tax Act (Canada) (the
"ITA"), (i) holds such shares as capital property and (ii) deals at arm's length
with the Company. 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 ITA and the
regulations thereunder and on an understanding of the published administrative
practices of Revenue Canada. 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
Common Shares of the Company.
Taxation of Dividends.
A holder of a Common Share who is not resident in Canada for purposes of
the ITA (a "Non-Resident") will be subject to Canadian withholding tax on
dividends paid or credited, or deemed under the ITA to be paid or credited, to
the holder of the Common Share. The rate of withholding tax under the ITA 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. Pursuant to the tax treaty that Canada has entered into with the United
States (the "Canada-U.S. Treaty"), 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 stock. 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. (See "U.S. Federal Income
Tax Considerations - Treatment of Dividend Distributions"). 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 organisations 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 ITA 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 ITA). Shares of a corporation
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that are listed on a prescribed stock exchange (which includes shares traded on
a U.S. stock exchange and the National Association of Securities Dealers
Automated Quotation System) are generally not considered to be taxable Canadian
property. However, shares that are traded on a prescribed Canadian or prescribed
foreign exchange (including those noted above in the United States) can be
taxable Canadian property since the definition of taxable Canadian property also
includes any Common Share held by a Non-Resident if, at any time during the
five-year period immediately preceding its disposition, not less than 25% of the
issued shares of any class or series of shares of the Company belong to the
NonResident, to persons with whom the Non-Resident did not deal at arm's length
or to any combination thereof.
For the purposes of determining whether a property is a taxable Canadian
property, a person holding an option to acquire Common Shares or other
securities convertible into or exchangeable for Common Shares, or otherwise
having an interest in Common Shares, will be considered to own the Common Shares
that could be acquired upon the exercise of the option, the conversion or
exchange rights or in which there is such interest. Taxable Canadian property
also includes any Common Share held by a NonResident 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 Common Share will also
constitute taxable Canadian property of a former Canadian resident who made an
election under section 128.1 of the ITA in respect of such shares on ceasing to
be resident in Canada. The aforementioned rules can apply to any class of
shares.
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.
Three-quarters of any capital gain realized by a holder (a taxable capital
gain) will be included in computing the holder's income. Three-quarters 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 ITA.
A purchase of Common Shares by the Company (other than a purchase of Common
Shares by the Company 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 ITA equal to the difference between the
amount paid by the Company on the purchase and the paid-up capital of such
shares determined in accordance with the ITA. 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 ITA 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
ITA.
Even if the Common Shares constitute or are deemed to 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 ITA 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.
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U.S. Federal Income Tax Considerations
The following summary describes material United States federal income tax
consequences arising from the purchase, ownership and sale of Common Shares.
This summary is based on the provisions of the Internal Revenue Code of 1986, as
amended (the "Code"), 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 Registration
Statement. 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 particular
classes of taxpayers, including financial institutions, broker-dealers,
tax-exempt organizations, investors who own (directly, indirectly or through
attribution) 10% or more of the Company's outstanding voting stock, 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. 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 the 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, or (iii) an estate or
trust, the income of which is includable in gross income for United States
federal income tax purposes regardless of source (a "U.S. Holder").
Each shareholder should consult with his own tax advisor as to the
particular tax consequences to him of the purchase, ownership and sale of 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 Company," a distribution by the 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 the 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 the 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 the Company will pay dividends in the
foreseeable future (see "Risk Factors -- No Dividends"), the gross amount of any
distribution from the 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 the 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 the
dividend is considered to be received by the U.S. Holder, 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
receipt. 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 receipt.
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 the
Company with respect to the Common Shares will generally constitute "passive
income."
Sale or Exchange of a Common Share
Subject to the discussion below under "Tax Status of the Company -- Passive
Foreign Investment Company," the sale or exchange by a U.S. Holder of a Common
Share 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 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%. 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.
See discussion under "Taxation -- Canadian Federal Income Tax
Considerations -- Disposition of Common Shares" for a discussion of taxation by
Canada of capital gains realized on sales of capital assets.
Tax Status of the Company
Personal Holding Companies. A non-U.S. corporation may be classified as a
personal holding company (a "PHC") 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 (the "PHC Ownership Test") and (ii) such non-U.S. corporation receives 60%
or more of its U.S. related gross income, as specifically adjusted, from certain
passive sources such as dividends and royalty payments (the "PHC Income Test").
Such a corporation is taxed (currently at a rate of which are effectively
connected with the conduct of a U.S. trade or business) to the extent amounts at
least equal to such income are not distributed to shareholders. The Company
believes that it is not currently a PHC. 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 (an "FPHC") 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% in later years) of its gross income
(regardless of source), as specifically adjusted, from certain passive sources.
If such a corporation is classified as a FPHC, 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 FPHC. Such income would
be taxable as a dividend, even if no cash dividend is actually paid. U.S.
Holders who dispose of their shares prior to such date would not be subject to
tax under these rules. The Company believes that it is not currently a FPHC.
However, no assurance can be given that it will not qualify as a FPHC in the
future.
Passive Foreign Investment Company. The Company will be a passive foreign
investment company ("PFIC") 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 PFIC 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. Passive income includes interest,
dividends, royalties, rents and annuities.
The Company does not believe it was a PFIC during 1998. However, there can
be no assurance that the Company will not be classified as a PFIC in 1999 or
thereafter.
If the Company is a PFIC for any taxable year, U.S. Holders would, upon
certain distributions by the Company and upon disposition of the Common Shares
at a gain, be liable to pay tax at the then prevailing income tax rates on
ordinary income plus interest on the tax, as if the distribution or gain had
been recognized ratably over the taxpayer's holding period for the Common
Shares. If the Company is treated as a PFIC for any taxable year, holders should
consider whether to elect to treat the Company as a "qualified electing fund"
("QEF Election") for United States federal income tax purposes. If a holder has
a QEF Election in effect for all taxable years that such holder has held the
Common Shares and the Company was a PFIC, distribution and gain will not be
recognized ratably over the holder's holding period or subject to an interest
charge, and gain on the sale of Common Shares will be characterized as capital
gain. Instead, each such holder is required for each taxable year that the
Company is a PFIC to include in income a pro rata share of the undistributed
ordinary earnings of the Company as ordinary income and a pro rata share of the
undistributed net capital gain of the Company as long-term capital gain. As an
alternative to making a QEF Election, a U.S. Holder may elect to make a mark-to-
market election (the "Mark-to-Market Election") with respect to the Common
Shares owned by him. 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 him as
of the close of the taxable year over the shareholder's adjusted basis in such
shares. The U.S. Holder would be entitled to a deduction for the excess, if any,
of such 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 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 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 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 Internal
Revenue Service ("IRS") consents to the revocation of the 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 PFIC
rules.
Back-Up Withholding and Information Reporting
Under the Code, a U.S. Holder of Common Shares may be subject, under
certain circumstances, to "backup withholding" at a 31% rate on cash payments in
the United States of dividends on, and the proceeds of disposition of, a Common
Share. Backup withholding will apply if a U.S. Holder (i) fails to furnish its
social security or other taxpayer identification number ("TIN") within a
reasonable time after the request therefor, (ii) furnishes an incorrect TIN,
(iii) is notified by the IRS tha it has failed to properly report receipts of
interest and dividends or (iv) under certain circumstances, fails to certify,
under penalty of perjury, that it has furnished a correct TIN and has not been
notified by the IRS that it is subject to backup withholding for failure to
report interest and dividend payments. U.S. Holders should consult their tax
advisors regarding their qualification for exemption from backup withholding and
the procedure for obtaining such an exemption, if applicable. The amount of any
backup withholding from a payment to a U.S. Holder will be allowed as a credit
against such holder's federal income tax liability and may entitle such holder
to a refund, provided that the 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, the consolidated financial statements
of the Company, and notes thereto, and Management's Discussion and Analysis of
Financial Condition and Results of Operations included elsewhere in this
Registration Statement. The selected financial data as at, and for the years
ended, December 31, 1996, 1997 and 1998, and as at, and for the four months
ended, December 31, 1995 are derived from the consolidated audited financial
statements of the Company, including the notes thereto, included elsewhere in
this Registration Statement. The Company has prepared its audited financial
statements in accordance with accounting principles generally accepted in Canada
("Canadian GAAP"), which differ in certain respects from generally accepted
accounting principles in the United States ("U.S. GAAP"). However, as applied to
the Company, for all fiscal periods for which financial data are presented in
this Registration Statement, Canadian GAAP and U.S. GAAP were substantially
identical in all material respects, except as disclosed in Note 12 to the
Company's consolidated financial statements and as described below.
The Company's 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, 1998 has been translated
from Canadian dollars into U.S. dollars for convenience purposes at the
representative exchange rates of Cdn$1.5375 to US$1.00, the noon buying rate in
New York City on December 31, 1998 for cable transfers in Canadian dollars as
certified for customs purposes by the Federal Reserve Bank of New York. Such
translation should not be construed as a representation that the Canadian dollar
amount represents, or has been converted into, U.S. dollars at this or any other
rate.
33
<PAGE>
Selected Financial Data
Statement of Operations Data:
<TABLE>
<CAPTION>
Year Ended Four Months
December 31 Ended Dec 31
-------------------------------------------------------------------------
1998 1998 1997 1996 1995(1)
---- ---- ---- ---- ------
(Cdn$) (U.S.$) (Cdn$) (Cdn$) (Cdn$)
(in thousands except for per share data)
<S> <C> <C> <C> <C> <C>
Revenues.................. 20,089 13,066 2,671 51 -
Expenses
Direct expenses......... 19,361 12,593 2,916 12 -
Advertising
and promotion.......... 12,594 8,191 2,521 403 12
General & administrative 5,751 3,740 3,176 1,453 112
Software development
and technology......... 889 578 541 194 10
Depreciation and
amortization........... 201 131 122 100 1
Total expenses........ 38,796 25,233 9,396 2,162 135
Loss from operations...... (18,707) (12,167) (6,725) (2,111) (135)
Canadian GAAP
Net (loss)................ (18,707) (12,167) (6,725) (2,111) (135)
Loss per common share..... (0.79) (0.51) (0.55) (0.21) (0.01)
Weighted average number
of common shares....... 23,819 23,819 12,297 9,598 3,375
U.S. GAAP
Pro forma (loss).......... (19,941) (12,970) (8,134) (2,281) (135)
Pro forma loss per
common share............. (0.84) (0.55) (0.66) (0.23) (0.01)
Weighted average number
of common shares......... 23,819 23,819 12,297 9,598 3,375
</TABLE>
Balance Sheet Data:(2)
<TABLE>
<CAPTION>
As at December 31
-----------------------------------------------------------------------------------
1998 1998 1997 1996 1995
------- ------- ------ ------ ------
(Cdn$) (U.S.$) (Cdn$) (Cdn$) (Cdn$)
(in thousands)
<S> <C> <C> <C> <C> <C>
Working capital....... 17,929 11,661 5,088 (559) 62
Total assets.......... 21,047 13,690 6,886 471 145
Total long-term debt.. - - - - -
Shareholders equity... 18,622 12,112 5,563 (209) 116
</TABLE>
- ------------------------
(1) The Company commenced its present business in September 1995.
(2) The Company has not paid dividends since its formation.
34
<PAGE>
ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
BID.COM is a sales and marketing company striving to become the pre-eminent
online auction house and a leading E-tailer. The Company operates
business-to-consumer online auctions at its BID.COM Web site and at other URLs.
The Company recently completed the development of a business-to-business auction
service and intends to operate business-to-business auctions in selected
vertical industry sectors and to conduct liquidation auctions for bankruptcy
trustees and other liquidators. The Company also seeks to license its
proprietary online auction technology to support private brand online auctions
and interactive auctions in a variety of other communication media.
The business of the Company was commenced by Internet Liquidators Inc., an
Ontario corporation, in September 1995. In May 1996, Internet Liquidators USA
Inc., a wholly owned subsidiary of Internet Liquidator 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, the Company was formed, as an Ontario corporation, by amalgamation
of Internet Liquidators Inc. and Internet Liquidators International Inc. In June
1998, the Company changed its name from Internet Liquidators International Inc.
to BID.COM International Inc.
From incorporation through April 1996, the Company had no revenues. During
this period, the Company focused on development of its proprietary technology
and computer infrastructure and the initial planning and development of its Web
site and operations. The Company launched its auction Web site in April 1996
under the URL www.internetliquidators.com, but did not begin to actively promote
or advertise its Web site until May 1997. From April 1996 until May 1997, the
Company focused on securing its initial relationships with AOL and the Toronto
Star, which were concluded in February 1997, and developing an advertising and
promotion plan for its business, while continuing to develop its technology and
Web site and build its business infrastructure. The Company generated only
minimal revenues during this period.
In May 1997, the Company initiated its marketing and advertising campaign
and, as a result, began generating more significant commercial revenues for
auctions conducted at its Web site. In March 1998, the Company changed its Web
site address to www.BID.COM. Since launching its BID.COM brand name, the
Company's customer base has increased significantly. As of March 14, 1999, the
Company had approximately 103,000 registered bidders, representing a 412.0%
increase in registered bidders from January 1, 1998.
The Company has not earned profits to date and at December 31, 1998 had an
accumulated deficit of Cdn$27.7 million. The Company intends to continue to
invest heavily in marketing and promotion, development of its technology,
business-to-business auctions, multi-media auction platforms, the distribution
of specialty products and other areas of its business, including the acquisition
of, or strategic investments in, complimentary products, businesses or
technologies. As a result, the Company expects to continue to incur losses for
the foreseeable future and there can be no assurance that the Company will ever
achieve profitability. Operating results have varied on a quarterly basis in the
past and may fluctuate significantly in the future as a result of a variety of
factors, many of which are outside of the Company's control.
The Company's policy is, generally, not to purchase inventory from
merchandise vendors for resale in BID.COM auctions. Rather, the Company usually
acquires the right to sell the merchandise under arrangements with its vendors.
These arrangements typically provide that the supplier will reserve for sale by
the Company specified quantities of products for a fixed period of time without
obligating the Company to purchase these products until sales are made to the
Company's customers. Prior to sale, the Company negotiates to receive either an
agreed upon commission based upon the final selling price of the goods, or the
difference between the actual selling price and a reserve price negotiated by
the Company with a particular vendor. When an auction is completed, the Company
charges the successful bidder's credit card. The Company typically purchases
merchandise from suppliers only after a customer has purchased and paid for the
product. The Company typically does not take actual possession of goods sold
because goods are shipped directly from the supplier to the customer. The
Company records the gross amount as revenue upon verification of the credit card
authorization and shipment of the merchandise to the customer. Inventory on the
Company's balance sheets reflects sales returns in transit which 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.
Historically, the Company has offered lower margin categories of products,
such as computers, computer accessories and computer upgrades. While the Company
plans to continue offering these product categories, it has begun to shift its
product mix and increase the number and variety of goods in higher margin
product categories,
35
<PAGE>
such as consumer electronics, toys, games, sporting goods, memorabilia, jewelry,
collectible sports and entertainment cards and travel and entertainment products
and services. In addition, as part of its strategy to diversify revenue sources,
the Company is seeking to increase revenue opportunities that yield higher gross
margins than sales of products in online auctions, such as licensing its auction
platform, marketing the Micra SoundCard collectible trading cards and other
unique products and selling advertising space on its Web site.
In connection with the introduction of the Company's marketing program in
the third and fourth quarters of 1997, the Company initiated a promotional
pricing strategy under which products were sold below cost or at significantly
reduced profit margins. The Company continued that approach through most of
1998. As a result, the Company's earnings were significantly impacted. The
Company recorded advertising and promotional expenses of Cdn$698,000 for the
year ended December 31, 1997 and Cdn$3.52 million for the year ended December
31, 1998 to reflect the cost to the Company of its promotional pricing program
during those periods. During the fourth quarter of 1998, the Company began to
limit its promotional pricing practices and has continued this trend during the
first quarter of 1999. However, the Company continues 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. In such cases, the Company anticipates that earnings will be
reduced and such reductions may be significant.
The following analysis of the financial condition and results of operations
of the Company should be read in conjunction with the "Selected Financial Data"
and the Company's financial statements (including the notes thereto) appearing
elsewhere in this Registration Statement. The financial statements appearing in
the Registration Statement have been prepared in Canadian dollars and in
accordance with Canadian GAAP and the results of operations discussed below are
in Canadian dollars. At December 31, 1998 the exchange rate was US$1.00 to
Cdn$1.5375. See "Exchange Rates." For a discussion of the differences between
Canadian GAAP and U.S. GAAP as they apply to the financial statements of the
Company, see Note 12 to the financial statements of the Company included
elsewhere in this Registration Statement.
Results of Operations
Comparison of Year Ended December 31, 1998 and December 31, 1997
Revenues. Revenues are comprised of transactional revenues from the sale of
merchandise plus commissions, shipping and handling costs. Revenues increased to
Cdn$20.089 million for the year ended December 31, 1998 from Cdn$2.671 million
for the year ended December 31, 1997, an increase of 652.1%. The increase
reflects commercial sales for the full year ending December 31, 1998 as compared
to only eight months (May to December) during the period ended December 31,
1997. In addition, the increase is attributable to the introduction of the
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, the Company's 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 the Company. Direct expenses were
Cdn$19.361 million (96.4% of revenues) for the year ended December 31, 1998
resulting in a gross margin of Cdn$728,000 or 3.6%, as compared to Cdn$2.916
million (109.2% of revenues) for the year ended December 31, 1997, resulting in
a negative gross margin of Cdn$(245,000) or (9.2)%. The increase in cost of
revenues reflects 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 reflects the
commencement of the Company's efforts to change its 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 6.9% in the
fourth quarter. The Company anticipates that its direct expenses will vary, and
may increase, as a percentage of revenues in future quarters.
Advertising and Promotion Expenses. Advertising and promotion expenses
consist primarily of advertising and marketing fees, loss leader promotions and
expenses paid to strategic and marketing partners and other third parties from
which the Company purchases advertising space, but does not include salaries and
related expenses of the Company's sales and marketing personnel which are
included in general and administrative expenses. Advertising and promotion
36
<PAGE>
expenses were Cdn$12.594 million for the year ended December 31, 1998, as
compared to Cdn$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 62.7% of revenues for the year ended December 31, 1998 from 94.4% during the
year ended December 31, 1997. Advertising and promotion expenses for the year
ended December 31, 1998 include Cdn$3.52 million (18% of revenue) attributable
to loss leader promotions and Cdn$7.0 million (34.8% of revenue) paid to AOL
pursuant to the AOL Marketing Agreement. Advertising and promotion expenses for
the year ended December 31, 1997 included Cdn$698,000 (26.0% of revenue for the
year ended December 31, 1997) for loss leader promotions and Cdn$442,000 (17.0%
of revenue) for payments to AOL pursuant to the AOL Marketing Agreement. The
increase in advertising and promotion expenses reflects the substantial increase
in advertising and marketing which the Company undertook in order to promote the
BID.COM brand name, attract track traffic to its Web site and enlarge its
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. Under the new agreement and
related arrangements with AOL, payments to AOL during the period March 1, 1999
to March 31, 2000 will decrease to $3.0 million from an anticipated $5.0 million
under the old agreement.
General and Administrative Expenses. General and administrative expenses
include, primarily: all salaries and related expenses (including benefits and
payroll taxes) of the Company other than fees to independent contractors on the
research and development and technology staff 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 Cdn$5.734 million during the year ended
December 31, 1998 from Cdn$3.176 million in year ended December 31, 1997, an
increase of 81.6%. As a percentage of revenues, general and administrative
expenses decreased to 28.5% of revenues in 1998 from 118.2% of revenues in 1997.
The increase in general and administrative expenses is attributable t 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 the
Company's growth during 1998 and losses due to foreign currency exchange
expenses. The reduction in general and administrative expenses as a percentage
of sales reflects economies of scales achieved as a result of a significant
growth of revenues during the year ended December 31, 1998. See "-Foreign
Currency Fluctuations."
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
Company personnel engaged in these activities. Software development and
technology expenses increased to Cdn$889,000 for the year ended December 31,
1998 from Cdn$541,000 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 24.7% during
the year ended December 31, 1997. The increase in software development and
technology expenses is attributable primarily to the increased expenses incurred
in connection with the redevelopment of the Company's 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 is attributable
to the significant growth in revenues during the period, and resulting economies
of scale.
Depreciation and Amortization. Depreciation and amortization expense was
Cdn$201,000 for the year ended December 31, 1998 as compared to Cdn$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 the Company during 1997 as the result of the growth of the
Company.
Comparison of Years Ended December 31, 1996 and 1997 and Four Month Period
Ended December 31, 1995
Revenues. The Company did not commence actively marketing and promoting its
Web site auctions until May 1997, and therefore generated only minimal revenues
until May 1997. During the four month period ended December 31, 1995, the
Company had no revenues as it was in the early stage of development of its
technology platform and retail concept. Revenues for the year ended December 31,
1996 were Cdn$51,000. Revenues for the year ended December 31, 1997 were
Cdn$2.671 million as a result of the commencement of more significant
transactional business on the Web site in May 1997 and the growth of the
Company's customer base due to alliances with the Company's strategic and
marketing partners and the significant increase in Company's advertising.
37
<PAGE>
Direct Expenses. Direct Expenses for the four months ended December 31,
1995 and for the year ended December 31, 1996 were nil and Cdn$12,000,
respectively, because the Company did not generate any significant revenues
during these periods. Direct expenses were Cdn$2.916 million for the year ended
December 31, 1997, resulting in a negative gross margin of Cdn$(245,000). The
significant increase in direct expenses during 1997 and the resulting negative
gross margin is attributable to a substantial increase in revenues. In addition,
1997 gross margins were affected by higher shipping and handling costs incurred
by the Company to minimize shipping delays during a UPS strike. The Company
elected not to pass these costs on to its customers.
Advertising and Promotion Expenses. Advertising and promotion expenses were
Cdn$2.521 million in the year ended December 31, 1997, including Cdn$698,000 for
loss leader promotions. Advertising and promotion expenses were Cdn$403,000
in the year ended December 31, 1996 and Cdn$12,000 in the four months ended
December 31, 1995. The Company conducted preliminary marketing during 1996, but
substantially increased its efforts in 1997 with the execution of alliances with
AOL and the Toronto Star.
General and Administrative Expenses. General and administrative expenses
for the years ended December 31, 1997 and 1996 were Cdn$3.157 million and
Cdn$1.453 million, respectively. General and administrative expenses were
Cdn$112,000 for the four month period ended December 31, 1995. The increase from
period to period reflects the growth of the Company's infrastructure and staff
as the Company progressed from the development to revenue generation stage.
Software Development and Technology Expenses. Software development and
technology expense was Cdn$10,000 for the four months ended December 31, 1995,
Cdn$194,000 for the year ended December 31, 1996 and Cdn$661,000 for the year
ended December 31, 1997. Software development and technology expenses for the
four months ended December 31, 1995 and the year ended December 31, 1996 were
attributable primarily to the engagement of a software consultant. Software
development and technology expenses increased in 1997 due to the addition of a
second software consultant and increased expenses incurred in connection with
the redevelopment of the Company's auction platform launched in early 1998.
Depreciation and Amortization. Depreciation and amortization expense for
the four months ended December 31, 1995 and the years ended December 31, 1996
and 1997, were, respectively, Cdn$1,000, Cdn$100,000 and Cdn$122,000.
Liquidity and Capital Resources
The Company has been funded to date primarily through a series of private
placements of equity and, in one instance a convertible debenture, sales of
equity to and investments from strategic partners and cash flow from operations.
The Company has received aggregate proceeds of Cdn$52.043 million through its
private offerings, including, as of March 19, 1999, an aggregate of Cdn$15.984
million from the subsequent exercise of options and Common Share purchase
warrants sold in such offerings, and an aggregate of Cdn$4.30 million (including
Cdn$1.0 million in the form of advertising credits) from sales to and
investments from Rogers Media, Toronto Star and AOL.
As of March 19, 1999, the Company had cash on hand and marketable
securities of approximately Cdn$20.17 million. In addition, as of March 19,
1999, the Company had outstanding 3,795,659 exercisable options and warrants
which expire at various times from 1999 and to 2002 ("Exercisable Warrants").
The exercise price of the Exercisable Warrants range from Cdn$1.00 to Cdn$1.75,
and on March 19, 1999, the closing sales price of the Company's Common Shares on
the TSE was Cdn$13.90. See "Trading History." If all of the Exercisable Warrants
are exercised prior to their expiration, the Company will receive aggregate
proceeds of Cdn$7.16 million, of which Cdn$3,867,500 represents proceeds from
the exercise of Exercisable Warrants expiring in 1999. At December 31, 1998, the
Company had cash on hand and marketable securities of approximately Cdn$16.6
million. See "Risk Factors-Need For Additional Financing."
The Company believes that its present capital, anticipated proceeds from
the expected exercise of the Exercisable Warrants and revenue from operations
will be sufficient to finance its cash requirements for the next 12 months.
Thereafter, the Company may need to raise additional funds. The exact amount of
the Company's future
38
<PAGE>
capital requirements will depend on numerous factors, including, but not limited
to, slower growth and adverse changes in the E-commerce environment, delays in
the growth of the Company's customer base, government regulations, failure or
delays in executing marketing programs, failure or delays in connection with
expansion to Europe, growth that is more rapid than anticipated or competitive
pressures. The Company may also need to raise additional funds sooner than
anticipated in order to acquire businesses, technologies or products or fund
investments and other relationships the Company believes are strategic. In
addition, while the exercise prices of the Exercisable Warrants may currently be
below the trading prices of the Company's Common Shares on the TSE, there can be
no assurance that the Common Shares will continue to trade at prices that
justify the exercise of the Exercisable Warrants, or that the holders of such
warrants will, in fact, exercise them. Accordingly, the Company's actual capital
requirements may vary from currently anticipated needs and such variations could
be material.
There can be no assurance that additional financing will be available when
needed on commercially reasonable terms or at all. If adequate funds are not
available or are not available on acceptable terms, the Company may not be able
to funds its expansion, take advantage of strategic acquisitions, investment or
licensing opportunities or respond to competitive pressures. Such inability to
obtain additional financing when needed would have a material adverse effect on
the Company's business, results of operations, financial condition and
prospects. If additional funds are raised through the issuance of equity or
convertible debt securities, the percentage ownership of the shareholders of the
Company will be reduced, shareholders may experience additional dilution and
such securities may have rights, preferences and privileges senior to those of
the Company's Common Shares.
In the four month period ended December 31, 1995, the Company invested
Cdn$55,000 in fixed assets for computer hardware, equipment, furniture and
fixtures. Additions to fixed assets during 1996 and 1997 were Cdn$396,000 and
Cdn$247,000, respectively, primarily for computer hardware. During 1998, the
Company invested Cdn$351,000 in fixed assets, primarily for computer hardware,
leasehold improvements and furniture and fixtures, and Cdn$68,000 for
trademarks.
The Company has an agreement with a financial institution that settles
credit card transactions for online auction sales. Under this agreement, the
Company is 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,
1998, the Company was required to maintain Cdn$1.50 million in this account.
The Company has available an aggregate of approximately Cdn$27.635 million
of net operating losses for tax purposes that may be used to reduce taxable
income in future years, of which Cdn$135,000 expires in 2001, Cdn$2.1 million
expires in 2002, Cdn$6.7 million expires in 2003 and Cdn$18.7 million expires in
2004. The Company's net operating losses are subject to assessment of the
Company's tax returns by taxation authorities.
Since its inception, the Company raised a significant portion of its
funding from the following strategic investments and financings:
Strategic Investments. In February 1997, Toronto Star purchased from the
Company 1.0 million Common Shares and a warrant to purchase an additional
500,000 Common Shares which it subsequently exercised, resulting in aggregate
proceeds to the Company of Cdn$1.425 million. In addition, in February 1997, AOL
purchased 1.0 million Common Shares for an aggregate purchase price of Cdn$1.0
million, which AOL paid by extending to the Company advertising credits in the
same amount in lieu of cash.
In July 1998, the Company issued to Rogers Media a Series B special warrant
and a Common Share warrant for an aggregate purchase price of Cdn$1.875 million.
The Series B special warrant was deemed exercised on October 7, 1998, and the
Company issued to Rogers Media 1,500,000 Common Shares for no additional
consideration. The Common Share purchase warrant entitles Rogers Media to
acquire up to 100,000 Common Shares of the Company at a price of Cdn$1.40 per
Common Share. This Common Share purchase warrant is exercisable on the date
which is the earlier of: (i) the 10th business day following the date on which
the Company delivers a notice to the holder of such common share warrant
confirming it has filed a registration statement or preliminary prospectus for
an initial public offering of shares of the Company in the United States for
proceeds of at least Cdn$7.0 million; and (ii) July 31, 1999.
39
<PAGE>
October 1997 Special Warrants. On October 3, 1997, the Company sold in a
private placement a total of 6,335,000 special warrants at a price of Cdn$1.50
per special warrant for aggregate gross proceeds of Cdn$9.503 million. Each
special warrant entitled the holder to acquire, for no additional consideration,
one unit consisting of one Common Share and one-half of one share purchase
warrant. The special warrants were exercised on February 2, 1998, for 6,335,000
Common Shares and 3,167,500 Common Share purchase warrants, each exercisable to
purchase one Common Share at Cdn$1.65 per share. The 3,167,500 Common Share
purchase warrants were exercised on January 3, 1999 resulting in additional
proceeds to the Company of Cdn$5.226 million.
The Company also granted to Yorkton Securities Inc. ("Yorkton") and First
Marathon Securities Limited ("First Marathon"), placement agents for the
offering, compensation warrants entitling them to receive, without the payment
of any further consideration, up to 633,500 units (each unit consisting of one
Common Share and one-half of one share purchase warrant) at a price of Cdn$1.50
per unit at any time until January 3, 1999. Both the compensation warrants and
the underlying warrants were exercised at $1.65 per share resulting in aggregate
proceeds to the Company of Cdn$1.473 million.
August 1998 Special Warrants. On August 4, 1998, the Company sold in a
private placement a total of 8,100,000 special warrants at a price of Cdn$1.40
per special warrant for aggregate gross proceeds of Cdn$11.340 million. Each
special warrant entitled the holder to acquire, for no additional consideration,
one unit consisting of one Common Share and one-half of one share purchase
warrant. 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 Cdn$1.65 per share. The 4,050,000 share purchase
warrants were exercised, resulting in proceeds to the Company of Cdn$6.68
million.
The Company also granted to Yorkton, 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 Cdn$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 the Company of Cdn$1.204 million. The 430,000 share
purchase warrants were exercised, resulting in proceeds to the Company of
Cdn$709,500.
November 1998 Special Warrants. On November 30, 1998, the Company sold in a
private placement 5,714,984 special warrants at a price of Cdn$1.75 per special
warrant. The Company received proceeds of Cdn$10.001 million. Each special
warrant entitles the holder thereof to acquire, for no additional consideration,
one unit consisting of one Common Share and one-quarter of one share purchase
warrant. The special warrants issued by the Company 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 Cdn$1.75 per share. Of these share
purchase warrants, as of April 1, 1999, 1,195,270 were exercised, resulting in
proceeds to the Company of Cdn$2.092 million. The remaining 233,476 warrants are
exercisable until 5:00 p.m. (Toronto time) on the date which is the earlier of
(i) 10 business days following the date upon which the Company delivers a notice
to all holders of share purchase warrants confirming that it has filed a
preliminary prospectus or registration statement in connection with a public
offering in the United States of America of at least Cdn$7.0 million, and (ii)
December 31, 1999.
The Company also granted to Yorkton, placement agent for the offering,
compensation warrants which entitle Yorkton to receive, without payment of
additional consideration, options to purchase up to 611,498 units (each unit
consisting of one Common Share and one-quarter of one share purchase warrant) at
a price of Cdn$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 purchas warrants, each exercisable to purchase
one Common Share at Cdn$1.75 per share, resulting in proceeds to the Company of
Cdn$1,070,122. Yorkton exercised the 152,875 Common Share purchase warrants
resulting in proceeds to the Company of Cdn$267,531.
40
<PAGE>
Year 2000
As the Year 2000 approaches, an issue exists for companies that rely 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 properly recognize calendar
dates beginning in the Year 2000. If not corrected, these applications and
programs could fail or create erroneous results. To correctly identify the Year
2000, a four-digit year code field will be required to be what is commonly
termed "Year 2000 compliant."
The Company has conducted a comprehensive examination of its information
technology systems and software applications to determine Year 2000 compliance.
Based on its examination, the Company believes that these systems and software
applications are Year 2000 compliant. The Company has hired a Year 2000
consultant to review the Company's examination and anticipates the consultant's
review to be completed within the second quarter of 1999. The Company's auction
site at www.bid.com has been developed to be fully Year 2000 compliant.
The Company is reviewing its communications systems and other
non-information technology systems to ascertain whether they are Year 2000
compliant. The Company expects to complete this review by the end of April 1999.
The Year 2000 consultant will also review the Company's examination of
these systems.
The Company contacted significant suppliers and third-party service
providers to identify Year 2000 problems and provide solutions to prevent the
disruption of BID.COM business activities. The Company and its consultant are in
the process of reviewing reponses from suppliers and third party providers.
Material areas of potential exposure include electronic data exchange systems
operated by third parties with whom the Company transacts business, credit card
processing companies and banks on whom the Company relies for purchase
transactions and other Internet providers and services such as AOL and Rogers
Media, on whom the Company relies for advertising and promotion. The Company
expects to complete its review of the compliance efforts by these parties in
April 1999.
Until the Company gains a better understanding of the readiness and plans
of its third-party suppliers and service providers, it does not have a basis for
determining, or developing a response to, or contingency plans for, a worst case
scenario which might result from their failure to be Year 2000 compliant. At
present, management anticipates that a likely worst case scenario would involve
disruption of credit card transactions for purchases of products on the Web site
auctions. This would likely lead to material interruption in product sales. When
the Company completes its review of significant third party suppliers, it will
assess worst case scenarios and, if necessary, develop one or more contingency
plans.
Management estimates that total costs attributable to Year 2000 compliance
efforts, both for past efforts and present and anticipated future efforts, will
be approximately Cdn$270,000, of which the Company has incurred approximately
Cdn$200,000 to date. Management's estimate includes the expense the Company will
incur in reviewing whether its significant suppliers and third-party service
providers have resolved their own Year 2000 problems, including the costs of the
Year 2000 consultant. The Company may incur additional expenses in connection
with the development and implementation of a contingency plan, should the
Company learn that any of its significant suppliers or third-party service
providers may fail to achieve Year 2000 compliance on a timely basis. These
expenses cannot be quantified at this time.
Readers are cautioned that forward-looking statements contained in this
subsection "Year 2000" should be read in conjunction with the Company's
disclosure under the heading "Forward Looking Statements" in the forepart of
this Registration Statement.
Euro Conversion
In June 1999, the Company plans to open an office in Dublin, Ireland, to
license the Company's auction technologies and provide related support 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.
The Company currently conducts business operations in U.S. and Canadian
dollars. Since the Company's information systems and processes generally
accommodate multiple currencies, the Company anticipates that any necessary
modifications to its information systems, equipment and processes to accommodate
euro transactions will be made on a timely basis and does not expect any
failures that would have a material adverse effect on the Company's financial
position or results of operations, or that the costs of such modifications will
have a material adverse effect on the Company's financial position or results of
operations. The Company expects to spend approximately Cdn$1.0 million during
1999 to open and operate the Dublin office, including salaries, office rent and
other expenses, including computers and telephones. These expenses include
purchasing or modifying appropriate business software and arranging for banking
relationships to allow the Company to invoice and accept payments, and pay its
own suppliers, in legacy currencies and in euro.
The auction software that the Company intends to license 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, the Company anticipates that partners to whom it will
license its auction technology will initially designate the currency zones in
which they operate, and the Company 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 licensing 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, licensees 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.
The Company does 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, the Company may need to evaluate its currency
exchange costs and rate exposure with respect to the euro during and after the
transition period.
Foreign Currency Fluctuations
The Company purchases substantially all of its products from suppliers, and
sells substantially all of its products to customers, in U.S. dollars. The
Company also incurs a significant amount of advertising and marketing expenses
in U.S. dollars. However, the majority of the Company's other operating
expenses are in Canadian dollars. Fluctuations in the U.S./Canadian dollar
exchange rate with respect to the Company's operations are a function,
primarily, of: (i) the relative value of the Canadian dollar to the U.S. dollar
at any given time; and (ii) the relationship between the amount of revenues and
financing received by the Company in U.S. dollars and the amount of Company
expenditures being paid in Canadian dollars, on the one hand, and the amount of
revenues and financing received by the Company in Canadian dollars and the
amount of Company expenditures being paid in U.S. dollars, on the other hand.
The Company does not have any hedging programs in place to manage the potential
exposure to fluctuations in the U.S./Canadian dollar exchange rate.
The Company incurred net losses from foreign currency exchange fluctuations
of Cdn$724,000 in 1998 and Cdn$34,949 in 1997. The increase in the losses
resulted from the devaluation of the Canadian dollar in 1998 as compared to
1997, the significant overall increase in Company revenue and expenditures in
1998 as compared to 1997 and, in particular, the significant increase in Company
advertising and marketing expenses in 1998 as compared to 1997 See "Exchange
Rates" at the forepart of this Registration and "-Results of Operation" above.
41
<PAGE>
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.
42
<PAGE>
ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT
The following table sets forth the name, age and position of each of
the directors and executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
- ---- --- --------
<S> <C> <C>
Paul Godin(2),(4) 45 Chairman of the Board of Directors and Chief Executive Officer
Jeffrey Lymburner(2),(4) 42 Director, President, Secretary and Treasurer
T. Christopher Bulger(1),(2),(3),(4) 41 Director, Executive Vice President and Assistant Secretary
Michael Abramsky 40 Director
Dr. Duncan Copeland(1),(3) 42 Director
David Pamenter 51 Director and Assistant Secretary
Fred Singer 35 Director
Charles S. Walker 62 Director
Paul Hart 43 Chief Financial Officer
Brent Bowes 40 Vice President, Corporate Controller and Assistant Secretary
Robert W.A. Joynt 51 Vice President--General Merchandising Manager
James I. Moskos 36 Vice President--Technology
</TABLE>
- ------------------------
(1) Member of Audit Committee
(2) Member of Executive Committee
(3) Member of the Compensation Committee
(4) Member of the Stock Option Committee
The business experience of each of the directors and executive officers of
the Company for at least the last five years is as follows:
Paul Godin is a founding shareholder of the Company and has served as Chairman
of the Board of Directors and Chief Executive Officer since September 1995. Mr.
Godin served as President of the Company from September 1995 until June 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 Canadian Airlines, H.J. Heinz, and
Clarion Canada.
Jeffrey Lymburner is a founding shareholder of the Company and has served as
President of the Company since August 1998, Executive Vice President from
September 1995 until August 1998 and as a Director, Secretary and Treasurer
since September 1995. Mr. Lymburner is also President of the Company's
subsidiary, Internet Liquidators USA Inc. 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, Canadian consumer
electronics retail chain.
T. Christopher Bulger has served as Executive Vice President of the Company
since September 1998, and as a Director since June 1996 and as Assistant
Secretary since September 1996. Mr. Bulger served as Chief Financial Officer of
the Company from April 1996 to September 1998. Since 1994, Mr. Bulger has been
an officer and a partner with HDL Capital Corporation, a Toronto-based merchant
bank. Mr. Bulger devotes substantially all of his business time to Company
affairs.
Michael Abramsky has served as a Director of the Company since August 1998.
Mr. Abramsky joined Rogers New Media, in March 1997 and since January 1998 has
been its President. From March 1996 to March 1997, Mr.
43
<PAGE>
Abramsky was Vice President-Marketing for InSystems, a software development
company. From February 1993 to March 1996, Mr. Abramsky was Vice President-
Marketing for Delrina Corp. (now part of the Symantec Group), a software
company. Prior to joining Delrina, Mr. Abramsky was the Marketing Director for
Interleaf Canada.
Dr. Duncan Copeland has served as a Director of the Company since September
1995. Dr. Copeland is the President of Copeland & Company, a Washington D.C.-
based international consultancy firm, and is a Visiting Professor of business at
Georgetown University. 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.
David Pamenter has served as a Director of the Company 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.
Fred Singer has served as a Director of the Company since June 1997. Mr.
Singer has been the Senior Vice President of AOL Studios, a division of AOL,
since November 1997. Mr. Singer also serves as an advisor and board member on
several AOL Studios companies. From April 1996 to November 1996, Mr. Singer was
Vice President--Corporate Development of AOL, and from November 1996 to November
1997 he was Vice President of AOL Studios. From 1992 to March 1996, Mr. Singer
was founder and Vice President of Digital Inc., the Washington Post electronic
subsidiary, and from August 1992 to July 1993, he served as a director of
corporate development for the Washington Post Company. Mr. Singer also
previously worked as an international consultant at Bain and Company and in
various brand management positions with Proctor and Gamble.
Charles S. Walker has served as a Director of the Company 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.
Paul Hart has served as Chief Financial Officer of the Company 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.
Brent Bowes has served as Vice President of the Company since October 1998,
as its Corporate Controller since May 1996 and as an Assistant Secretary since
January 1997. From February 1991 to April 1996, Mr. Bowes was a Senior
Accountant in the Corporate Finance Group of Deloitte & Touche, Chartered
Accountants. Prior to that, Mr. Bowes served in various management positions
within the manufacturing, financial and retail sectors.
Robert W.A. Joynt has served as the Vice President--General Merchandising
Manager of the Company 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.
James I. Moskos has served as the Vice President--Technology of the Company
since September 1997. 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.
Under Canadian law, a majority of the Board of Directors must be residents
of Canada. Each director of the Company holds office until the next annual
meeting of shareholders or until his successor has been elected and qualified.
The executive officers of the Company are appointed by the Board of Directors of
the Company and serve at the discretion of the Board of Directors.
44
<PAGE>
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, 1998 by the Executive Officers of the Company.(1)
<TABLE>
<CAPTION>
Other
Annual Compensation Annual All Other
------------------- Compen- Options Compen-
Name And Principal Position Salary Bonus sation Granted Sation
--------------------------- ------ ----- ------ ------- ------
(Cdn.$) (Cdn $) (Cdn $) (#) (Cdn $)
<S> <C> <C> <C> <C> <C>
Paul Godin.................... 178,300 Nil 12,000/(2)/ 50,000 Nil
Chairman & CEO
Jeffrey Lymburner............. 170,500 Nil Nil 100,000 Nil
President
T. Christopher Bulger......... 132,000 100,000 12,000/(2)/ 125,000 Nil
Executive Vice-President
Paul Hart..................... 46,875 Nil 4,500/(2)/ 100,000 Nil
Chief Financial Officer
Brent Bowes................... 80,800 Nil 6,000/(2)/ 50,000 Nil
Vice-President, Corporate
Controller
Robert W.A. Joynt............ 154,300 8,500 6,000/(2)/ 35,000 21,000/(3)/
Vice-President
James I. Moskos................ 102,200 Nil 4,500/(2)/ 100,000 Nil
Vice-President, Technology
</TABLE>
- ----------
(1) For the purposes of disclosure of Compensation of Directors and
Executive Officers in Item 11, "Executive Officer" means the Chairman,
President, Chief Executive Officer, Chief Financial Officer,
Vice-President, and any other officer of the Corporation or person who
performed a policy making function and whose total compensation earned
during the fiscal year was greater than Cdn $100,000.
(2) Received on account of car reimbursement expenses and other expenses.
(3) Net proceeds on the exercise of stock options.
During 1998, the Company did not provide any pension, retirement or similar
benefits to its directors and officers.
Each of Paul Godin and Jeffrey Lymburner has entered into a non-competition
and salary protection agreement with the Company dated February 21, 1997, which
provides, among other things, that he (i) will not compete with the Company for
a period of 12 months, which may be extended by the Company to 24 months,
following the termination of his employment with the Company, in consideration
of which the Company will pay his full annual salary during such period; and
(ii) if his employment with the Company is terminated other than by reason of
death, disability or cause (as such terms are defined in such agreements), the
Company will continue to pay his full annual salary for 12 months (or 24 months
if the Company exercises its option to extend the non-competition restrictions
for 24 months) following the date of termination.
Stock Option Plan
The Company has adopted a Stock Option Plan pursuant to which it grants
options to purchase Common Shares. The purpose of the Stock Option Plan is to
afford directors, executive officers and key employees of the
45
<PAGE>
Company and its subsidiaries (such persons, collectively, "Insiders") who are
responsible for the continued growth of the Company an opportunity to acquire an
ownership interest in the Company, and thus create in such persons an increased
interest in, and a greater concern for, the welfare of the Company and its
subsidiaries.
The Stock Option Plan is administered by the Board of Directors. 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 date of the grant.
There are 2,100,000 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 (the "Outstanding Issue") 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 unde 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 upon the termination of
an option holder's employment with the Company. Subject to certain limits, the
Board of Directors may amend the Stock Option Plan.
Options Granted to Executive Officers During Fiscal Year Ended December 31, 1998
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, 1998.
<TABLE>
<CAPTION>
Market Value
Per Share of
% of Total Securities
Options Underlying
Securities Granted to Exercise Price Options on the
Underlying Executives Per Share Date of Grant Expiration
Name Options Granted in Fiscal Year (Cdn $) (Cdn $) Date
- ---------------------- --------------- -------------- --------------- ---------------- ----------
<S> <C> <C> <C> <C> <C>
Paul Godin........... 50,000 5.5% 1.40 1.40 6/30/00
Jeffrey Lymburner.... 50,000 5.5% 2.35 2.35 2/2/00
50,000 5.5% 1.40 1.40 6/30/00
T. Christopher Bulger 75,000 8.2% 2.35 2.35 2/2/00
50,000 5.5% 1.40 1.40 6/30/00
Brent Bowes.......... 25,000 2.7% 2.35 2.35 2/2/00
25,000 2.7% 1.40 1.40 6/30/00
Robert W. A. Joynt... 10,000 1.1% 1.40 1.40 6/30/00
25,000 2.7% 2.35 2.35 2/2/00
James I. Moskos...... 50,000 5.5% 2.35 2.35 2/2/00
50,000 5.5% 1.40 1.40 6/30/00
</TABLE>
46
<PAGE>
Options Exercised By Executive Officers During Fiscal Year Ended December 31,
1998
The following table sets forth certain information regarding stock options
exercised by the Executive Officers during the fiscal year ended December 31,
1998.
<TABLE>
<CAPTION>
Number of Value of
Number of Unexercised Unexercised
Securities Options at 12/31/98 in-the-Money
Acquired Value Exercisable/ Options at
Name on Exercise Realized Unexercisable 12/31/98
- --------------------- ------------------ ------------------ ------------------- --------
(Cdn$) (Cdn$)
<S> <C> <C> <C> <C>
Paul Godin............... NIL NIL 150,000/NIL 348,000
Jeffrey Lymburner........ NIL NIL 175,000/NIL 352,250
T. Christopher Bulger.... NIL NIL 300,000/NIL 621,000
Brent Bowes.............. NIL NIL 35,000/15,000 87,250
Robert W. A. Joynt....... 15,000 21,000 42,500/5,000 86,067
James I. Moskos.......... NIL NIL 125,000/25,000 305,500
</TABLE>
ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES
As of April 1, 1999, options and warrants to purchase 2,026,796 Common
Shares were outstanding as follows:
Issued Under Stock Option Plan
<TABLE>
<CAPTION>
Optionee Number of Shares Date of Grant Exercise Price Expiry Date
- -------- ----------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Executive Officers 10,000 September 2, 1997 1.00 August 31, 1999
(7 persons) 200,000 September 2, 1997 1.25 August 31, 1999
210,000 February 3, 1998 2.35 February 2, 2000
225,000 June 23, 1998 1.40 June 30, 2000
100,000 October 22, 1998 1.00 November 17, 2002
265,000 January 25, 1999 5.05 January 24, 2002
Directors who are not 50,000 September 2, 1997 1.25 August 31, 1999
Executive Officers 65,000 June 23, 1998 1.40 June 30, 2000
(3 persons) 25,000 January 25, 1999 5.05 January 24, 2002
Other 50,000 September 2, 1997 1.00 August 31, 1999
(27 persons) 92,800 February 3, 1998 2.35 February 2, 2000
60,000 June 23, 1998 1.40 June 30, 2000
30,500 January 25, 1999 5.05 January 24, 2002
---------
Total 1,383,300
=========
</TABLE>
47
<PAGE>
Issued Under Other Securities Exemptions
<TABLE>
<CAPTION>
Optionee Number of Shares Date of Grant Exercise Price Expiry Date
- -------- ----------------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Other 60,000 September 2, 1997 1.00 August 31, 1999
250,000 November 11, 1998 1.16 November 10, 2001
100,000 July 29, 1998 1.40 (1)
233,476 January 28, 1999 1.75 (2)
---------
Total 643,496
=========
</TABLE>
- ------------------
(1) This Common Share purchase warrant held by Rogers Media is exercisable
until 5:00p.m. (Toronto time) on the date which is the earlier of: (i) the
10th business day following the date on which the Company delivers a notice
to the holder of such common share warrant confirming it has filed a
registration statement or preliminary prospectus for an initial public
offering of shares of the Company in the United States for proceeds of at
least Cdn$7,000,000; and (ii) July 31, 1999.
(2) These Common Share purchase warrants, which are the unexercised portion of
the 1,428,746 Common Share purchase warrants issued upon exercise of
Special Warrants sold in the Company's November 1998 private placement, are
exercisable until 5:00 p.m. (Toronto time) on the date which is the earlier
of (i) ten (10) business days following the date upon which the Company
delivers a notice to all holders of share purchase warrants confirming that
it has filed a preliminary prospectus or registration statement in
connection with a public offering in the United States of America of at
least Cdn$7,000,000, and (ii) December 31, 1999.
ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
Paul Godin and Jeffrey Lymburner, the founders and promoters of the
Company, sold all of their shares of Internet Liquidators Inc. to Avonlee
Capital Corporation (a predecessor of the Company) for consideration equal to
Cdn$0.80 per share payable in previously unissued shares of Avonlee Capital
Corporation. This transaction was completed on May 28, 1996 pursuant to a share
exchange agreement dated May 15, 1996. The value of the consideration received
by Messrs. Godin and Lymburner was based upon an independent valuation of
Internet Liquidators Inc. as of March 31, 1996, prepared by SLF Valuation
Services Inc.
48
<PAGE>
The Company and AOL have entered into marketing and related agreements. AOL
purchased 1.0 million Common Shares. The Company has granted to AOL certain
registration rights with respect to such Common Shares. Fred Singer, senior vice
president of AOL Studios, a division of AOL, is a director of the Company. Mr.
Singer was appointed as a director of the Company pursuant to a shareholders
agreement between AOL and the Company that had, among other things, granted AOL
the right to nominate representatives to the Company's Board of Directors. The
shareholders agreement was terminated in February 1998, but Mr. Singer remains a
director of the Company. See "Business--Marketing."
The Company and Toronto Star have entered into the Torstar Agreement and
related agreements. Toronto Star purchased 1.5 million Common Shares. Rocco
Rossi, an officer of Toronto Star, was a director of the Company from February
1997 through November 1998. Mr. Rossi was appointed as a director of the Company
pursuant to a shareholders agreement between Toronto Star and the Company that
had, among other things, granted the Toronto Star the right to nominate
representatives to the Company's Board of Directors. The shareholders agreement
was terminated in February 1998.
The Company and Rogers Media entered into the E-Commerce and Promotion
Services Agreement on July 29, 1998. Rogers Media purchased 1.5 million Common
Shares and warrants to purchase 100,000 Common Shares at Cdn$1.40 per Common
Share. Michael Abramsky, an officer of Rogers Media, is a director of the
Company. Mr. Abramsky was appointed as a director of the Company pursuant to the
E-Commerce and Promotion Services Agreement. See "Options to Purchase Securities
from Registrant and Subsidiaries."
During 1996, 1997 and 1998, the Company paid to HDL aggregate fiscal agent
fees of Cdn$178,000, Cdn$161,280 and Cdn$96,000, respectively, in connection
with investment banking services provided by HDL to the Company. T. Christopher
Bulger, a Director, Executive Vice President and Assistant Secretary of the
Company, is a principal and officer of HDL. HDL owns options to purchase 200,000
Common Shares. The Company believes that the fees paid to HDL where comparable
to fees that the Company would have been charged for similar services by an
unaffiliated fiscal agent in an arms length transaction.
David Pamenter, a director of the Company, is a partner in the Toronto law
firm of Gowling, Strathy & Henderson, which provided legal services to the
Company during 1996, 1997 and 1998 and continues to provide legal services to
the Company. The Company believes that the legal fees paid to Gowling, Strathy &
Henderson were comparable to fees that the Company would have been charged for
similar services by an unaffiliated law firm.
49
<PAGE>
PART II
ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED
The authorized capital of the Company consists of an unlimited number of
Common Shares and an unlimited number of preference shares ("Preference
Shares"), issuable in series. As of March 23, 1999, 48,125,396 Common Shares and
no Preference Shares were issued and outstanding. The issued and outstanding
Common Shares are fully paid and non-assessable.
Holders of Common Shares are entitled to one vote per share in the election
of directors and on all other matters on which shareholders are entitled or
permitted to vote. Cumulative voting in the election of directors is not
permitted. Holders of Common Shares have no redemption, conversion, preemptive
or other subscription rights. The holders of the Common Shares are entitled to
receive, on a pro-rata basis, such dividends as may be declared by the Board of
Directors of the Company out of funds legally available for such payments. In
the event of the liquidation, dissolution or winding-up of the Company, the
holders of Common Shares will be entitled, subject to the rights of any holder
of Preferred Shares, to share, on a pro rata basis, in all of the assets of the
Company remaining after payment of all the Company's liabilities.
Under the Company's Articles of Amalgamation, the Board of Directors is
authorized, subject to certain limitations prescribed by law, to issue an
unlimited number of Preference Shares without shareholder approval in one or
more series and to fix the designations, rights, privileges and restrictions
thereof, including the dividend rate, conversion or exchange rights and
redemption price of any such series. The Company's Articles of Amalgamation
currently provide that all series of such Preference Shares are entitled to
share ratably in the assets of the Company in the event of liquidation,
dissolution, or the winding up of the affairs of the Company.
The Company has not issued any Preference Shares to date. Any Preference
Shares issued in the future could have conversion rights which may result in the
issuance of additional Common Shares which could dilute the interests of the
holders of Common Shares. Such shares could also have voting rights and
liquidation preferences which are senior to the rights and preferences of the
Common Shares. Additionally, such shares could have dividend rates and
redemption or other provisions which could adversely affect the Company's
ability to pay dividends on the Common Shares or prohibit payment of such
dividends. Such shares could also be issued, under certain circumstances, in an
attempt to prevent a takeover of the Company, and such issuance could adversely
impact holders of Common Shares who might vote in favor of a proposed merger,
tender offer or similar transaction. The Company has no current plans to issue
any Preference Shares.
The Company's transfer agent and registrar for the Common Shares and
warrant agent for the Company's warrants is CIBC Mellon Trust Company, 320 Bay
Street, Toronto, Ontario, M5H 4A6, Canada.
50
<PAGE>
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 REGISTRATION
STATEMENT.
<TABLE>
<S> <C>
Auditors' Report for the periods ended December 31, 1998 and 1997..................................... F-1
Consolidated Balance Sheets as at December 31, 1998 and 1997 (audited)................................ F-2
Consolidated Statements of Operations for the periods ended December 31, 1998, 1997 and 1996 (audited) F-3
Consolidated Statements of Deficit for the periods ended December 31, 1998, 1997 and 1996 (audited)... F-4
Consolidated Statements of Cash Flows for the periods ended December 31, 1998, 1997 and 1996 (audited) F-5
Notes to Financial Statements for the periods ended December 31, 1998, 1997 and 1996 (audited)........ F-6
(b) EXHIBITS FILED AS PART OF THIS REGISTRATION STATEMENT.
**1.1 Articles of Incorporation of the Company.
**1.2 By-laws of the Company.
</TABLE>
51
<PAGE>
<TABLE>
<C> <S>
**3.1 Subscription Agreement dated February 12, 1997, between the
Company and Toronto Star. (This Agreement is filed in
redacted form as it is subject to a request for
confidentiality submitted to the SEC.)
**3.2 E-Commerce Services Agreement dated as of February 12, 1997
between The Company and Toronto Star and Clarification letter
dated July 22, 1998. (This Agreement is filed in redacted
form as it is subject to a request for confidentiality
submitted to the SEC.)
**3.3 Intellectual Property Rights and Non-Competition Agreement
dated February 12, 1997 between the Company and the Toronto
Star.
**3.4 Subscription Agreement dated February 18, 1997, between the
Company and AOL. (This Agreement is filed in redacted form as
it is subject to a request for confidentiality submitted to
the SEC.)
**3.5 Intellectual Property Rights and Non-Competition Agreement
dated February 21, 1997 between the Company and AOL.
**3.6 Interactive Marketing Agreement dated as of November 1, 1997
between the Company and AOL (replacing the Auction Services
Agreement dated February 21, 1997, between the Company and
AOL). (This Agreement is filed in redacted form as it is
subject to a request for confidentiality submitted to the
SEC.)
**3.7 Form of Subscription Agreement dated October 3, 1997 between
the Company and each of the Investors in the October 3, 1997
private placement.
**3.8 Special Warrant Indenture dated October 3, 1997 between the
Company and CIBC Mellon Trust Company.
**3.9 Share Purchase Warrant Indenture dated October 3, 1997
between the Company and CIBC Mellon Trust Company.
**3.10 Underwriting Agreement dated October 3, 1997 between the
Company, Yorkton Securities Inc. and First Marathon
Securities Limited.
**3.11 Form of Subscription Agreement dated August 4, 1998 between
the Company and each of the Investors in the August 4, 1998
private placement
**3.12 Special Warrant Indenture dated August 4, 1998 among the
Company, certain Selling Shareholders and CIBC Mellon Trust
Company.
**3.13 Share Purchase Warrant Indenture dated August 4, 1998 among
the Company, certain Selling Shareholders and CIBC Mellon
Trust Company.
**3.14 Underwriting Agreement dated August 4, 1998 between the
Company and Yorkton Securities Inc.
**3.15 Subscription Agreement dated July 29, 1998 between the
Company and Rogers Media.
**3.16 E-Commerce and Promotional Services Agreement between the
Company and Rogers Media dated as of July 29, 1998. (This
Agreement is filed in redacted form as it is subject to a
request for confidentiality submitted to the SEC.)
**3.17 Form of Subscription Agreement dated November 30, 1998 among
the Company and the Investors in the November 30, 1998
private placement.
**3.18 Underwriting Agreement dated November 30, 1998 between the
Company and Yorkton Securities Inc.
</TABLE>
52
<PAGE>
<TABLE>
<C> <S>
**3.19 Special Warrant Indenture dated November 30, 1998 among the
Company, certain Selling Shareholders and CIBC Mellon Trust
Company.
**3.20 Share Purchase Warrant Indenture dated November 30, 1998
among the Company, certain Selling Shareholders and CIBC
Mellon Trust Company.
**3.21 License Agreement between the Company and American
Interactive Media Inc. (This Agreement is filed in redacted
form as it is subject to a request for confidentiality
submitted to the SEC.)
**3.22 Distribution Agreement between the Company and Micra
SoundCards. (This Agreement is filed in redacted form as it
is subject to a request for confidentiality submitted to the
SEC.)
**3.23 Stock Purchase Agreement between the Company and American
Interactive Media Inc. (This Agreement is filed in redacted
form as it is subject to a request for confidentiality
submitted to the SEC.)
**3.24 Termination Agreement dated as of March 16, 1999 between
the Company and AOL (terminating the Interactive Marketing
Agreement dated as of November 1, 1997 between the Company
and AOL).
**3.25 Advertising Insertion Order dated as of March 16, 1999
between the Company and AOL (replacing the Interactive
Marketing Agreement dated as of November 1, 1997 between the
Company and AOL). (This Agreement is filed in redacted form
as it is subject to a request for confidentiality submitted
to the SEC.)
**3.26 Salary Protection Letter, dated February 21, 1997, between
the Company and Paul Godin.
**3.27 Salary Protection Letter, dated February 12, 1997, between
the Company and Jeffrey Lymburner.
**3.28 Salary Protection Letter, dated February 12, 1997, between
the Company and Paul Godin.
</TABLE>
- -----------------
** Previously filed.
53
<PAGE>
Auditors' Report
To the Directors of
Bid.Com International Inc.
(formerly known as Internet Liquidators International Inc.)
We have audited the consolidated balance sheets of Bid.Com International Inc. as
at December 31, 1998 and 1997 and the consolidated statements of operations,
deficit and cash flows for each of the three years in the period ended December
31, 1998. 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 generally accepted auditing
standards. 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, 1998
and 1997 and the results of its operations and its cash flows for each of the
three years in the period ended December 31, 1998 in accordance with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
Chartered Accountants
Toronto, Ontario
March 3, 1999
F-1
<PAGE>
BID.COM INTERNATIONAL INC.
(formerly Internet Liquidators International Inc.)
Consolidated Balance Sheets
(expressed in thousands of Canadian Dollars)
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------
1998 1998 1997
-------------- -------------------- ------------
<S> <C> <C> <C>
Convenience
translation into
U.S. $ (Note 14)
ASSETS
CURRENT
Cash $ 9,792 $ 6,369 $ 1,019
Marketable securities 6,806 4,427 1,158
Accounts receivable 1,102 717 166
Special warrants receivable (Note 5) 2,311 1,503 2,189
Inventory 169 110 201
Deposits and prepaid expenses 174 113 1,678
- ----------------------------------------------------------------------------------------------------------------
20,354 13,239 6,411
- ----------------------------------------------------------------------------------------------------------------
CAPITAL ASSETS - AT COST 1,049 682 698
Less accumulated depreciation 404 262 223
- ----------------------------------------------------------------------------------------------------------------
645 420 475
- ----------------------------------------------------------------------------------------------------------------
TRADEMARKS AND INTELLECTUAL PROPERTY 48 31 -
- ----------------------------------------------------------------------------------------------------------------
$ 21,047 $ 13,690 $ 6,886
================================================================================================================
LIABILITIES
CURRENT
Accounts payable $ 2,155 $ 1,402 $ 1,216
Accrued liabilities 133 87 107
Deferred revenue 137 89 -
- ----------------------------------------------------------------------------------------------------------------
2,425 1,578 1,323
- ----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Share capital (Note 4) 37,217 24,206 6,140
Special warrants (Note 5) 9,083 5,908 8,394
Deficit (27,678) (18,002) (8,971)
- ----------------------------------------------------------------------------------------------------------------
18,622 12,112 5,563
- ----------------------------------------------------------------------------------------------------------------
$ 21,047 $ 13,690 $ 6,886
================================================================================================================
</TABLE>
F-2
<PAGE>
BID.COM INTERNATIONAL INC.
Consolidated Statements of Operations
(expressed in thousands of Canadian Dollars)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1998 1998 1997 1996
-------------- --------------------- ------------- -------------
<S> <C> <C> <C> <C>
Convenience
translation into
U.S. $ (Note 14)
Revenue $ 20,089 $ 13,066 $ 2,671 $ 51
- --------------------------------------------------------------------------------------------------------------------------
Direct expenses 19,361 12,593 2,916 12
Advertising and promotion (Note 10) 12,594 8,191 2,521 403
General and administrative 5,734 3,729 3,157 1,453
Software development and expense 889 578 661 194
Depreciation and amortization 201 131 122 100
Interest expense 17 11 19 -
- --------------------------------------------------------------------------------------------------------------------------
38,796 25,233 9,396 2,162
- --------------------------------------------------------------------------------------------------------------------------
NET LOSS FOR THE YEAR $(18,707) $(12,167) $(6,725) $(2,111)
==========================================================================================================================
LOSS PER SHARE $(0.79) $(0.51) $(0.55) $(0.21)
==========================================================================================================================
</TABLE>
F-3
<PAGE>
BID.COM INTERNATIONAL INC.
Consolidated Statements of Deficit
(expressed in thousands of Canadian Dollars)
- -------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------------------------------------------------
1998 1998 1997 1996
-------------- --------------------- ------------- -------------
<S> <C> <C> <C> <C>
Convenience
translation into
U.S. $ (Note 14)
DEFICIT, BEGINNING OF YEAR $ (8,971) $ (5,835) $(2,246) $ (135)
NET LOSS FOR THE YEAR (18,707) (12,167) (6,725) (2,111)
- --------------------------------------------------------------------------------------------------------------------------
DEFICIT, END OF YEAR $(27,678) $(18,002) $(8,971) $(2,246)
==========================================================================================================================
</TABLE>
F-4
<PAGE>
BID.COM INTERNATIONAL INC.
Consolidated Statements of Cash Flows
(expressed in thousands of Canadian Dollars)
- ------------------------------------------------------------------------
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------
1998 1998 1997 1996
-------------- -------------------- ------------- -------------
Convenience
translation into
U.S. $ (Note 14)
NET INFLOW (OUTFLOW)
OF CASH RELATED TO THE
FOLLOWING ACTIVITIES
OPERATING
<S> <C> <C> <C> <C>
Net loss for the year $(18,707) $(12,167) $(6,725) $(2,111)
Item not affecting cash
Depreciation and amortization 201 131 122 100
- -----------------------------------------------------------------------------------------------------------------------
(18,506) (12,036) (6,603) (2,011)
Changes in non-cash operating working
capital items (Note 9) 1,702 1,107 (1,085) 381
- -----------------------------------------------------------------------------------------------------------------------
(16,804) (10,929) (7,688) (1,630)
- -----------------------------------------------------------------------------------------------------------------------
INVESTING
Purchase of capital assets (351) (228) (247) (396)
Acquisition of net assets of subsidiary - - - (27)
Purchase of trademarks and
intellectual property (68) (44) - -
Marketable securities (5,648) (3,674) (1,158) -
- -----------------------------------------------------------------------------------------------------------------------
(6,067) (3,946) (1,405) (423)
- -----------------------------------------------------------------------------------------------------------------------
FINANCING
Issuance of common shares (Note 4) 22,683 14,753 4,103 1,786
Issuance of special warrants
(net of expenses) (Note 5) 9,083 5,908 8,394 -
Special warrants receivable (122) (80) (2,189) -
Loan payable - - (258) 258
- -----------------------------------------------------------------------------------------------------------------------
31,644 20,581 10,050 2,044
- -----------------------------------------------------------------------------------------------------------------------
NET CASH INFLOW (OUTFLOW)
DURING THE YEAR 8,773 5,706 957 (9)
CASH, BEGINNING OF YEAR 1,019 663 62 71
- -----------------------------------------------------------------------------------------------------------------------
CASH, END OF YEAR $ 9,792 $ 6,369 $ 1,019 $ 62
=======================================================================================================================
</TABLE>
F-5
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Bid.Com International Inc. ("Bid.Com") is a sales and marketing company
striving to become the pre-eminent online auction house and a leading E-
tailer. The Company operates business-to-consumer online auctions at its
BID.COM Web site and at other URLs. The Company recently completed the
development of a business-to-business auction service and intends to operate
business-to-business auctions in selected vertical industry sectors and to
conduct liquidation auctions for bankruptcy trustees and other liquidators.
The Company also seeks to license its proprietary online auction technology
to support private brand online auctions and interactive auctions in a
variety of other communications media.
The business of the Company was commenced by Internet Liquidators Inc., an
Ontario corporation, in September 1995. In May 1996, Internet Liquidators
USA Inc., a wholly owned subsidiary of Internet Liquidators Inc. was
incorporated under the laws of Florida. In January 1997, the Company was
formed, as an Ontario corporation, by amalgamation of Internet Liquidators
Inc. and Internet Liquidators International Inc. In May 1998, Bid.Com USA Inc
and Lapis Group USA Inc., were incorporated as wholly owned subsidiaries. In
June 1998, the Company changed its name from Internet Liquidators
International Inc. to Bid.Com International Inc. The accompanying
consolidated financial statements are issued under the name of "BID.COM
International Inc." (formerly "Internet Liquidators International Inc.") but
are considered a continuation of the financial statements of Internet
Liquidators Inc.
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 (see Note 12).
Principals of consolidation
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All material inter-company
transactions have been eliminated.
Inventory
The Company's operating policy is not to purchase inventory for resale but to
ship direct from suppliers. Inventory on the balance sheets reflects sales
returns in transit which 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.
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.
F-6
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
2. SIGNIFICANT ACCOUNTING POLICIES (continued)
Capital assets and depreciation
Capital assets are carried at cost less accumulated depreciation.
Depreciation is calculated on the 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
Trademarks and intellectual property
Trademarks and intellectual property are recorded at cost and amortized on a
straight-line basis over two years.
Software development costs
The costs of acquired software and internally developed software are expensed
as incurred.
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 loss.
Loss per share
The basic loss per share calculation is based on the weighted average number
of shares outstanding during the period. No fully diluted calculation is
included as it would reduce the loss per share.
Revenue recognition
Revenue from product sales, commissions, shipping and handling are recognized
when the goods are shipped to customers.
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.
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.
F-7
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
3. INCOME TAXES
The Company's non-capital loss carryforwards as at December 31, 1998, the
benefit of which has not been recognized in the financial statements, expire
as follows:
2001 $ 135,000
2002 $ 2,100,000
2003 $ 6,700,000
2004 $18,700,000
4. SHARE CAPITAL
a) Authorized
Unlimited number of common shares
Unlimited number of preference share -
issuable in series
b) Common shares
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1998 1997
------------------------------ ------------------------------
Common Common
Shares Amount Shares Amount
-------------- -------------- -------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Opening balance 14,188 $ 6,140 9,598 $2,037
Issued for:
Cash 16,375 21,068 1,577 1,531
Exercise of options 615 681 263 318
Exercise of warrants 5,989 9,328 1,750 1,254
Other - - 1,000 1,000
-------------------------------------------------------------------------------------------------------------
Closing balance 37,167 $37,217 14,188 $6,140
=============================================================================================================
</TABLE>
c) Stock options
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 31,1998 was approximately $2.2
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 1998 have vesting periods attached which range
from six months to thirty-two months. The options expire between 1999
and 2002.
F-8
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
4. SHARE CAPITAL (continued)
c) Stock options (continued)
A summary of changes in the stock option plan for the two years ended
December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Number of Options Average Price
-------------------------------- ------------------------------
1998 1997 1998 1997
--------------- --------------- -------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year 651 424 $1.15 $1.19
Options granted 916 450 1.76 1.15
Options exercised (115) (218) 0.98 1.06
Options cancelled (11) (5) 2.35 1.25
--------------------------------------------------------------------------------------------------------------
Options outstanding,
end of year 1,441 651 $1.55 $1.15
==============================================================================================================
Options exercisable,
end of year 1,251 501 $1.60 $1.20
==============================================================================================================
Shares reserved for
issuance under
stock option plan 326 632
==============================================================================================================
</TABLE>
The Company also has stock options outstanding to third parties. The
aggregate purchase price for third party stock options outstanding at
December 31, 1998 was approximately $530,000. The options expire between
1999 and 2001.
A summary of changes in the stock options to third parties for the two
years ended December 31, 1998 is as follows:
<TABLE>
<CAPTION>
Number of Options Average Price
-------------------------------- ------------------------------
1998 1997 1998 1997
--------------- --------------- -------------- --------------
(in thousands)
<S> <C> <C> <C> <C>
Options outstanding,
beginning of year 640 475 $1.14 $1.25
Options granted 350 210 1.06 0.90
Options exercised (500) (45) 1.14 1.25
--------------------------------------------------------------------------------------------------------------
Options outstanding,
end of year 490 640 $1.08 $1.14
==============================================================================================================
Options exercisable,
end of year 490 640 $1.08 $1.14
==============================================================================================================
</TABLE>
F-9
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
4. SHARE CAPITAL (continued)
d) Compensation and share purchase warrants
The Company has issued warrants to investors under private placement
equity issues during 1996,1997 and 1998. A summary of changes in the
warrants to investors for the two years ended December 31,1998 is as
follows
<TABLE>
<CAPTION>
1998 1997
-------------------------------- --------------------------------
Warrants Amounts Warrants Amounts
--------------- --------------- --------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Opening balance 4,301 $ 6,802 1,750 $ 1,400
Granted 7,797 12,829 4,301 6,802
Exercised (5,989) (9,393) (1,750) (1,400)
---------------------------------------------------------------------------------------------------------------
Closing balance 6,109 $10,238 4,301 $ 6,802
===============================================================================================================
</TABLE>
A further 43,000 share purchase warrants exercisable at $1.65 and 152,875
share purchase warrants exercisable at $1.75 are subject to issuance upon
the exercise of outstanding compensation warrants and are not included in
the above table.
5. SPECIAL WARRANTS
On November 30, 1998 the Company closed a private placement of $10,001,222 in
equity for net proceeds of $6,863,460 with the remaining $2,311,098 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.
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.
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.
F-10
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
6. 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.
7. 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, 1998, the Company
was required to maintain $1,500,000 in this reserve account (December
31, 1997 - $300,000). This arrangement was renegotiated by the Company
at a reduced percentage of sales for 1999 and a corresponding reduced
reserve account balance.
(b) Minimum lease payments during the next five years are as follows:
1999 $211,200
2000 192,300
2001 155,000
(c) The Company is committed under an Interactive Marketing Agreement with
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.
F-11
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
8. 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 that use certain dates in 1999 to represent something other
than a date. The effects of the Year 2000 Issue may be experienced before,
on, or after January 1, 2000, and, if not addressed, the impact on operations
and financial reporting may range from minor errors to significant system
failure, which could affect a company's ability to conduct normal business
operations. It is not possible to be certain that all aspects of the Year
2000 Issue affecting the Company, including those related to the efforts of
customers, suppliers, or third parties, will be fully resolved.
9. CHANGE IN NON-CASH OPERATING WORKING CAPITAL
<TABLE>
<CAPTION>
Years ended December 31,
----------------------------------------------------------------
1998 1998 1997 1996
------------- -------------------- -------------- -----------
Convenience
translation into
U.S. $ (Note 14)
<S> <C> <C> <C> <C>
(in thousands)
Accounts receivable $ (936) $ (609) $ (117) $ 19
Inventory 32 21 (200) -
Deposits and prepaid expenses 1,504 978 (1,668) 1
Accounts payable 939 611 819 361
Accrued liabilities 26 17 81 -
Deferred revenue 137 89 - -
--------------------------------------------------------------------------------------------------------------------
$1,702 $1,107 $(1,085) $ 381
====================================================================================================================
</TABLE>
10. OPERATIONS
In June 1997, the Company, as part of its marketing program in conjunction
with America Online Inc. ("AOL"), introduced special promotional pricing in
order to stimulate new bidder registrations and first time sales. This
initiative contributed to annual sales growth in 1997 of over 5,100% and 1998
of 652%. This special promotional pricing cost the Company approximately
$3,520,000 in 1998 ($698,000 in 1997) and has been included in advertising
and promotion.
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
renegotiation also extended the term of the original agreement.
In March 1998 the Company launched its new consumer brand "BID.COM".
F-12
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
11. SUBSEQUENT EVENTS
(a) Issue of Shares and Share Purchase Warrants
The Company filed a final prospectus on January 21, 1999 in connection
with the special warrants issued on November 30, 1998 and received the
remaining $2,311,098 of the special warrants receivable. Upon the
exercise of the special warrants on January 21, 1999, the Company issued
5,714,984 common shares and 1,428,746 common share purchase warrants.
The Company also issued compensation warrants to the underwriter
entitling the underwriter to acquire up to 611,498 units at a price of
$1.75 per unit up to December 31, 1999. Each unit consists of one common
share and one-quarter of one share purchase warrant. In exercising the
compensation options, the underwriter may, at its option, elect to
receive a number of common shares based on a formula dependent upon the
market value of the common shares as of the day preceding the election
(see Note 5).
(b) Stock Option Plan
The Stock Option Committee of the Board of Directors approved the issue
of 328,000 options to directors and employees on January 22, 1999
exercisable at $5.05 per share until January 21, 2002.
(c) Nasdaq listing application and filing of Form 20 F with Securities
and Exchange Commission
On February 16, 1999 the Company filed a listing application with the
Nasdaq SmallCap Market ("Nasdaq") as part of the process to qualify for
trading on Nasdaq. Concurrently, the Company filed a Registration
Statement on Form 20-F with the Securities and Exchange Commission
("SEC") in order to register its shares for trading on Nasdaq. The
Nasdaq and SEC review process is expected to last approximately 45 to 60
days
(d) Exercise of options
During the period from January 1, 1999 to March 3, 1999, the Company
issued 390,000 common shares upon the exercise of options at prices
ranging from $0.80 to $2.35 per share for aggregate consideration of
$514,250 and canceled 2,500 stock options at $2.35 per common share
subsequent to termination of employment of an employee.
(e) Exercise of compensation warrants
During the period from January 1, 1999 to March 3, 1999, the Company
issued 86,000 common shares upon the exercise of 86,000 compensation
warrants at $1.40 per share and issued 43,000 share purchase warrants
exercisable at $1.75 per share. The Company also issued 300,000 common
shares upon the exercise of 300,000 compensation warrants at $1.75 per
share and issued 75,000 share purchase warrants exercisable at $1.75 per
share.
(f) Exercise of share purchase warrants
During the period from January 1, 1999 to March 3, 1999, the Company
issued 1,846,312 common shares upon the exercise of 1,846,312 share
purchase warrants at $1.65 per share and issued 521,250 common shares
upon the exercise of 521,250 share purchase warrants at $1.75 per share.
F-13
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
12. 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:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Dividend yield - - -
Risk free interest rate 4.80% 4.90% 3.68%
Expected term, in years 1.18 1.40 2.02
</TABLE>
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:
<TABLE>
<CAPTION>
Years ended December 31
-------------------------------------------------
1998 1997 1996
--------------- --------------- ---------------
<S> <C> <C> <C>
Loss attributable to common shareholders (in thousands)
As reported $(18,707) $(6,725) $(2,111)
Pro forma $(19,941) $(8,134) $(2,281)
Basic and diluted net loss per share:
As reported $ (.79) $ (.55) $ (.21)
Pro forma $ (.84) $ (.66) $ (.23)
</TABLE>
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 Company does not
expect the adoption of this pronouncement to have a material impact upon
its financial statements.
F-14
<PAGE>
BID.COM INTERNATIONAL INC.
Notes to the Consolidated Financial Statements
(expressed in Canadian Dollars)
- -------------------------------------------------------------------------------
13. RECLASSIFICATION OF PRIOR YEARS
Certain prior year amounts have been reclassified to conform to the current
year's basis of presentation.
14. CONVENIENCE TRANSLATION
The financial statements as at December 31, 1998 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, 1998 as published by the Federal Reserve Bank of New
York (U.S. $1.000 = Cdn. $1.5375). 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-15
<PAGE>
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 Amendment No. 2 to the Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized.
BID.COM INTERNATIONAL INC.
By: /s/ Paul Godin
---------------------------
Name: Paul Godin
Title: Chief Executive Officer
Dated: April 7, 1999
