<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration No: 333-90143
THIS PROSPECTUS CONSTITUTES A PUBLIC OFFERING OF THESE SECURITIES ONLY IN THOSE
JURISDICTIONS WHERE THEY MAY BE LAWFULLY OFFERED FOR SALE AND THEREIN ONLY BY
PERSONS PERMITTED TO SELL SUCH SECURITIES. NO SECURITIES COMMISSION OR SIMILAR
AUTHORITY IN CANADA OR THE UNITED STATES HAS IN ANY WAY PASSED UPON THE MERITS
OF THE SECURITIES OFFERED HEREUNDER AND ANY REPRESENTATION TO THE CONTRARY IS AN
OFFENCE.
INITIAL PUBLIC OFFERING January 27, 2000
[LOGO]
CDN.$223,860,000
6,000,000 COMMON SHARES
This offering is an initial public offering (the "Offering") of 6,000,000 common
shares of 724 Solutions Inc. (the "Company"). The Company is offering
4,500,000 common shares in the United States through a syndicate of
U.S. underwriters and 1,500,000 common shares in Canada through a syndicate of
Canadian underwriters. The common shares are being offered in Canada by Nesbitt
Burns Inc., RBC Dominion Securities Inc. and Credit Suisse First Boston
Securities Canada Inc. (the "Canadian Underwriters") and in the United States by
Credit Suisse First Boston Corporation, FleetBoston Robertson Stephens Inc. and
Thomas Weisel Partners LLC (the "U.S. Underwriters" and, collectively with the
Canadian Underwriters, the "Underwriters"). This prospectus incorporates the
prospectus included in a Registration Statement on Form F-1 filed with the U.S.
Securities and Exchange Commission. The offering price of the common shares has
been determined by negotiation between the Company and the Underwriters.
THERE IS CURRENTLY NO MARKET THROUGH WHICH THE COMMON SHARES MAY BE SOLD. The
Toronto Stock Exchange has conditionally approved the listing of the common
shares under the symbol "SVN". Listing is subject to the Company fulfilling all
of the requirements of The Toronto Stock Exchange on or before April 12, 2000,
including the distribution of the common shares to a minimum number of public
shareholders. An application has been made for the quotation of the common
shares on The Nasdaq National Market under the symbol "SVNX", subject to the
Company meeting Nasdaq's quotation requirements.
After giving effect to the Offering, the offering price of each common share
would exceed the net tangible book value per common share as of September 30,
1999 by Cdn.$28.74, representing a dilution factor of 77.0% (74.7% if the
Underwriters' over-allotment option is exercised in full). See "Dilution" and
"Risk Factors".
AN INVESTMENT IN THE COMMON SHARES IS SUBJECT TO A NUMBER OF RISK FACTORS WHICH
SHOULD BE CAREFULLY REVIEWED BY PROSPECTIVE PURCHASERS. SEE "RISK FACTORS".
UNLESS OTHERWISE STATED, ALL DOLLAR AMOUNTS HEREIN ARE STATED IN U.S. DOLLARS.
PRICE: CDN.$37.31 PER COMMON SHARE
-----------------------------------
-----------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING NET PROCEEDS
PUBLIC COMMISSION TO THE COMPANY(1)
---------------- ---------------- -----------------
<S> <C> <C> <C>
Per common share(2)........................................ Cdn.$37.31 Cdn.$2.61 Cdn.$34.70
Total(3)................................................... Cdn.$223,860,000 Cdn.$15,670,200 Cdn.$208,189,800
</TABLE>
(1) Before deducting expenses of the Offering payable by the Company estimated
at Cdn.$3,228,750.
(2) The common shares are being offered in Canada in Canadian dollars at the
approximate equivalent of the U.S. dollar offering price converted at an
exchange rate of Cdn.$0.6969 equals U.S.$1.00 as of January 27, 2000. See
"Exchange Rates".
(3) The Company has granted an over-allotment option to the Underwriters
exercisable within 30 days from the completion of the Offering to purchase a
maximum of 900,000 additional common shares on the same terms as set forth
above to cover over-allotments, if any. If the over-allotment option is
exercised in full, the Price to Public, Underwriting Commission and Net
Proceeds to the Company will be Cdn.$257.4 million, Cdn.$18.0 million and
Cdn.$239.4 million, respectively.
The Canadian Underwriters, as principals, conditionally offer the common
shares, subject to prior sale, if, as and when issued and sold by the Company
and delivered to the Canadian Underwriters and accepted by them in accordance
with the conditions of the Canadian Underwriting Agreement described under
"Underwriting" and subject to the approval of certain legal matters on behalf of
the Company by Goodman Phillips & Vineberg, Toronto and Morrison & Foerster LLP,
and on behalf of the Underwriters by Osler, Hoskin & Harcourt LLP and
Shearman & Sterling.
Subscriptions shall be received subject to rejection or allotment in whole
or in part, and the right is reserved to close the subscription books at any
time without notice. It is expected that the closing of the Offering will take
place on February 2, 2000 or such other date which may be agreed upon, but not
later than March 9, 2000. Certificates evidencing the common shares will be
available for delivery at closing.
<PAGE>
[GATEFOLD ARTWORK]
[The gatefold artwork bears a caption stating, "724 Solutions provides an
Internet infrastructure solution to financial institutions that enables them to
offer personalized and secure on-line banking and brokerage services across a
wide range of Internet-enabled wireless and consumer electronic devices." The
gatefold artwork contains a diagram captioned "724 Solutions Financial Services
Platform." The diagram illustrates that different types of Internet-enabled
consumer devices (a PalmPilot connected organizer, a cellular phone, a
television, a pager and a PC) connect to wireless, cable and wireline networks.
These networks connect through the Internet to 724's network and device gateway.
724's network and device gateway connects to 724's services infrastructure,
which provides consumer applications enabling e-Banking, e-Brokerage and
e-Commerce services. The services infrastructure connects to 724's transaction
and content gateway. The transaction and content gateway connects to providers
of informational content, financial institutions and merchants. Security is
provided between each of the points in the system. Beneath the diagram are four
graphic displays of financial services enabled by 724's solution, including (i)
bill payment and account information, (ii) detailed quotes, (iii) integrated
content and (iv) trading and personalized alerts.
An additional page of artwork includes 724's logo, together with the caption
"Financial Services in Motion." This page contains two photos, one of a woman
holding a cellular phone, and one of a man holding with a cellular phone. Set
forth next to each of these photos are additional graphic displays of services
enabled by 724's solution.]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PROSPECTUS SUMMARY.................... 4
RISK FACTORS.......................... 7
FORWARD-LOOKING STATEMENTS............ 19
GENERAL INFORMATION IN PROSPECTUS..... 19
USE OF PROCEEDS....................... 20
DIVIDEND POLICY....................... 20
EXCHANGE RATES........................ 20
CAPITALIZATION........................ 21
DILUTION.............................. 22
SELECTED CONSOLIDATED FINANCIAL
DATA................................ 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS....................... 24
BUSINESS.............................. 32
MANAGEMENT............................ 45
CERTAIN TRANSACTIONS.................. 53
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PRINCIPAL SHAREHOLDERS................ 56
DESCRIPTION OF SHARE CAPITAL.......... 57
SHARES ELIGIBLE FOR FUTURE SALE....... 58
INCOME TAX CONSEQUENCES............... 60
UNDERWRITING.......................... 64
LEGAL MATTERS......................... 67
EXPERTS............................... 67
WHERE YOU CAN FIND MORE INFORMATION... 67
ELIGIBILITY FOR INVESTMENT............ 68
MATERIAL CONTRACTS.................... 69
PROMOTERS............................. 69
PURCHASERS' STATUTORY RIGHTS.......... 69
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
CERTIFICATE OF THE COMPANY............ C-1
CERTIFICATE OF THE UNDERWRITERS....... C-2
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS DOCUMENT OR TO
WHICH WE HAVE REFERRED YOU. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
INFORMATION THAT IS DIFFERENT. THIS DOCUMENT MAY ONLY BE USED WHERE IT IS LEGAL
TO SELL THESE SECURITIES. THE INFORMATION IN THIS DOCUMENT MAY ONLY BE ACCURATE
ON THE DATE OF THIS DOCUMENT.
--------------
DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL FEBRUARY 21, 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES IN THE U.S., WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE DEALER'S OBLIGATION TO DELIVER A PROSPECTUS WHEN
ACTING AS AN UNDERWRITER AND WITH RESPECT TO UNSOLD ALLOTMENTS OR SUBSCRIPTIONS,
AND IS IN ADDITION TO THE DELIVERY OBLIGATIONS OF DEALERS SUBJECT TO CANADIAN
SECURITIES LAWS.
--------------
3
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS INFORMATION CONTAINED ELSEWHERE IN THIS PROSPECTUS.
THIS SUMMARY DOES NOT CONTAIN ALL OF THE INFORMATION THAT YOU SHOULD CONSIDER
BEFORE INVESTING IN THE COMMON SHARES. YOU SHOULD READ THE ENTIRE PROSPECTUS
CAREFULLY, INCLUDING THE CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES.
724 SOLUTIONS INC.
We provide an Internet infrastructure solution to financial institutions
that enables them to offer personalized and secure on-line banking, brokerage
and e-commerce services across a wide range of Internet-enabled wireless and
consumer electronic devices. Our solution currently enables consumers to access
on-line banking and brokerage services through network service providers using
digital mobile phones, personal digital assistants, two-way pagers and personal
computers. With critical security features built in, our solution can be quickly
implemented and integrated with existing systems, and scaled or expanded to
accommodate future growth. Using our platform, financial institutions may build
on their consumers' trust and provide new levels of service in an easy to use,
personalized way.
The emergence of the Internet is having a significant effect on the delivery
of financial services to consumers. As a group, on-line consumers represent an
affluent and important market segment. These consumers are increasingly using
new methods, including wireless technologies, to access the Internet. The
convergence of the Internet and digital wireless technologies presents new
opportunities for financial institutions. Using our platform, financial
institutions can differentiate their services to retain and strengthen their
existing customer relationships and attract new customers.
Our objective is to become the leading provider of Internet infrastructure
solutions for the secure delivery of transaction and information services to
consumers. To differentiate us from our competitors, our strategy is to:
- FOCUS INITIALLY ON LEADING FINANCIAL INSTITUTIONS: Our target market
includes the largest financial institutions worldwide. Currently, Bank of
America, Citigroup, Bank of Montreal and Wells Fargo, four of our
shareholders, are in various stages of implementing our solution on a
non-exclusive basis. These institutions have a worldwide customer base
with approximately 152 million customer relationships.
- ACCELERATE ADOPTION OF OUR SOLUTION BY CONSUMERS WORLDWIDE: Dataquest
projects that there will be 828 million digital wireless subscribers
worldwide by the end of 2003. To enable our customers to offer their
services to these subscribers, we are currently working with network
service providers including Bell Mobility and Sprint to provide broad
geographic coverage. We are also working with device manufacturers
including Ericsson, Motorola, Neopoint, Nokia, Palm Computing, Qualcomm
and Research In Motion to support a wide range of Internet-enabled
devices. We intend to deliver a consistent and compelling consumer
experience worldwide across a broad range of networks and devices.
- ACCELERATE ADOPTION OF OUR SOLUTION BY FINANCIAL INSTITUTIONS: In order to
enable rapid implementation of our platform, we are working with system
integrators, including Deloitte & Touche. In the future, we intend to
provide an application hosting service that will enable financial
institutions to operate the software and other components of our solution
on equipment maintained by us or by one or more third parties. We are
currently building the capacity to provide this service.
- EXPAND THE FUNCTIONALITY OF OUR PLATFORM: We work with technology
providers such as Certicom to provide robust security, and with Sun
Microsystems to provide highly scalable and manageable features for our
platform. Our customers do not currently offer e-commerce services based
upon our solution, but have advised us that they expect to begin to do so
this year. We intend to continue to introduce new services, applications
and support for additional Internet-enabled devices, including set-top
boxes that permit television sets to display electronic data, and game
consoles.
4
<PAGE>
- PURSUE ACQUISITIONS OF COMPANIES AND TECHNOLOGIES: We intend to pursue
acquisitions of technologies and service capabilities that will enable us
to accelerate the introduction of new and innovative products and
services.
- ADAPT OUR PLATFORM FOR OTHER INDUSTRY SECTORS: Key elements of our
platform and strategy are transferable to other industries, such as
insurance, sales force management and logistics. We intend to address
these opportunities after establishing our position as the leading
provider of an Internet infrastructure solution for the on-line financial
services sector.
We believe that our solution benefits our customers and the companies with
which we have strategic relationships by enabling the delivery of differentiated
on-line financial services. These services increase consumer loyalty and drive
wireless airtime usage, consumer electronic device sales and the purchase of
other products and services.
In May 1999, Bank of Montreal conducted a market trial in which banking and
brokerage applications using our solution were offered to approximately 350
users. Bank of Montreal has announced the success of its market trial and is
currently in the process of rolling out these services throughout Canada. The
initial term of our license agreement with Bank of Montreal will expire in
February 2000. Bank of Montreal has informed us that it intends to extend this
agreement for an additional one year term.
Our net revenue was approximately $0.8 million during the nine months ended
September 30, 1999 and we incurred net losses during this period of
approximately $7.6 million.
We are incorporated under the laws of Ontario, Canada. Our principal
executive offices are located at 4101 Yonge Street, Suite 702, Toronto, Ontario,
M2P 1N6, and our telephone number is (416) 226-2900.
THE OFFERING
<TABLE>
<S> <C> <C>
Common shares offered
U.S. offering...................................... 4,500,000 shares
Canadian offering.................................. 1,500,000 shares
-----------------
Total:............................................... 6,000,000 shares
=================
</TABLE>
<TABLE>
<S> <C>
Common shares to be outstanding after
this offering...................................... 35,402,426 shares
Use of proceeds...................................... For general corporate purposes, including the
development of our application hosting
service, and potential acquisitions
Proposed Nasdaq National Market symbol............... SVNX
Proposed Toronto Stock Exchange symbol............... SVN
</TABLE>
The table above is based on common shares outstanding as of December 31,
1999 and excludes the following:
- outstanding options as of the date of this prospectus to purchase
2,809,098 common shares under our stock option plans at a weighted average
exercise price of $3.25 per share; and
- common shares issued upon the exercise of stock options after
September 30, 1999.
--------------
All references to "$" or dollars in this prospectus refer to U.S. dollars
and all references to "Cdn.$" refer to Canadian dollars.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Our consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. These principles conform in
all material respects with U.S. generally accepted accounting principles except
as disclosed in note 11 of our consolidated financial statements. You should
read the following selected consolidated financial data with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes appearing elsewhere in this
prospectus. The consolidated statements of operations data for the period from
July 28, 1997 (inception) to December 31, 1997, for the year ended December 31,
1998 and for the nine months ended September 30, 1998 and 1999, and the
consolidated balance sheet data as of September 30, 1999, are derived from our
consolidated financial statements that have been audited by KPMG LLP,
Independent Auditors, which are included elsewhere in this prospectus.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
JULY 28, 1997 SEPTEMBER 30,
(INCEPTION) TO YEAR ENDED -------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
------------------- ------------------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Software development from related
party.................................. $ -- $ 1,678 $ 1,049 $ 1,314
Services................................. -- 208 208 788
Less: Stock-based compensation related to
software development................... -- (1,395) (785) (1,273)
------ ------- ------- -------
Net revenue............................ -- 491 472 829
Total operating expenses................... 165 3,297 1,659 8,720
------ ------- ------- -------
Income (loss) from operations.............. (165) (2,806) (1,187) (7,891)
Interest income............................ 10 107 69 341
------ ------- ------- -------
Net income (loss).......................... $ (155) $(2,699) $(1,118) $(7,550)
====== ======= ======= =======
Basic and diluted net income (loss) per
share.................................... $(0.06) $ (0.47) $ (0.24) $ (0.57)
====== ======= ======= =======
Shares used in computing basic and diluted
net income (loss) per share (in
thousands)............................... 2,752 5,784 4,564 13,301
====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents................................... $28,044 $69,134 $211,964
Working capital............................................. 25,716 66,806 209,636
Total assets................................................ 32,444 73,534 216,364
Total shareholders' equity.................................. 27,353 68,443 211,273
</TABLE>
The pro forma numbers in the table above are adjusted to give effect to the
issuance of 10,082,066 common shares for aggregate proceeds of $41.1 million in
October 1999.
The pro forma as adjusted numbers in the table above are adjusted to give
effect to receipt of the net proceeds from the sale of 6,000,000 common shares
offered by us at the initial public offering price of $26.00 per share after
deducting the underwriting discounts and commissions and estimated offering
expenses payable by us. See also "Use of Proceeds," "Capitalization" and
"Underwriting."
6
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY CONSIDER
THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS
BEFORE PURCHASING OUR COMMON SHARES. OUR MOST SIGNIFICANT RISKS AND
UNCERTAINTIES ARE DESCRIBED BELOW.
IF ANY OF THE FOLLOWING RISKS OCCUR, OUR BUSINESS, OPERATING RESULTS AND
FINANCIAL CONDITION COULD BE MATERIALLY ADVERSELY AFFECTED, THE TRADING PRICE OF
OUR COMMON SHARES COULD DECLINE AND YOU MAY LOSE ALL OR PART OF YOUR INVESTMENT.
RISK FACTORS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND WE EXPECT TO INCUR LOSSES IN THE FUTURE.
We have not been profitable since our inception. We incurred losses of
$155,000 for the period between July 28, 1997 and December 31, 1997,
$2.7 million for the year ended December 31, 1998 and $7.6 million for the nine
months ended September 30, 1999. As of September 30, 1999, we had an accumulated
deficit of $10.4 million. We expect to incur a loss of between $5.0 million and
$6.0 million for the three months ended December 31, 1999. We expect to continue
to incur losses in the near future and possibly longer. We anticipate that our
expenses will increase substantially in the foreseeable future as we establish
our application hosting service and continue to increase our research and
development, sales and marketing and general and administrative expenses. These
efforts may prove more expensive than we currently anticipate. We cannot predict
if we will ever achieve profitability and if we do, we may not be able to
sustain or increase our profitability.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT MAY BE DIFFICULT FOR YOU TO
EVALUATE OUR BUSINESS AND ITS FUTURE PROSPECTS.
Your evaluation of our business will be more difficult because of our
limited operating history. We were founded in July 1997 and services based on
our platform were first launched on a trial basis in May 1999 with our initial
licensee, Bank of Montreal. Because we are in an early stage of development, our
prospects are difficult to predict and may change rapidly. When making your
investment decision, you should consider the risks, expenses and difficulties
that we may encounter or incur as a young company in a new and rapidly evolving
market, including our substantial dependence on a single product with only
limited market acceptance to date and our need to manage expanding operations.
Our business strategy may not be successful, and we may not successfully address
these risks.
OUR RAPID GROWTH MAY STRAIN OUR RESOURCES AND HINDER OUR ABILITY TO IMPLEMENT
OUR BUSINESS STRATEGY.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. Our ability to achieve
and maintain profitability will depend on our ability to manage our growth
effectively, to implement and expand operational and customer support systems
and to hire personnel worldwide. We may not be able to augment or improve
existing systems and controls or implement new systems and controls to respond
to any future growth. In addition, future growth may result in increased
responsibilities for our management personnel, which may limit their ability to
effectively manage our business.
WE ARE BUILDING THE CAPABILITY TO PROVIDE AN APPLICATION HOSTING SERVICE, AND IF
WE DO NOT SUCCESSFULLY IMPLEMENT THIS SERVICE WE MAY NOT ATTRACT OR RETAIN
CUSTOMERS.
Some of our existing customers require us, and some of our potential
customers will require us, to host and manage the server infrastructure and
software platform as part of the implementation of our solution. We may acquire
or partner with third parties to provide this service. We may also provide this
service by establishing application hosting facilities of our own, or through a
combination of these
7
<PAGE>
strategies. Regardless of the implementation strategy we pursue, providing the
service will require significant capital expenditures and other resources, and
we cannot assure you that we will be able to implement these services on an
effective, cost-efficient or timely basis. Because our experience is primarily
in the areas of developing and implementing our software solution, we do not
know what other difficulties we may encounter or risks we may be exposed to in
the establishment and operation of these facilities. If we cannot effectively
implement these services, we may lose our existing customers and may not attract
new customers.
TO DATE, ALL OF OUR CUSTOMERS HAVE ACQUIRED AN EQUITY INTEREST IN OUR COMPANY
AND IF WE DISCONTINUE THIS PRACTICE WE MAY NOT ATTRACT NEW CUSTOMERS.
To date, all of our revenue has been attributable to the sale of our
solution to customers who have also purchased an equity interest in our company.
The opportunity to invest in our company provided these customers with an
additional incentive to purchase our solution. We do not expect to offer this
opportunity to prospective customers, which may hurt our ability to sell our
product.
BECAUSE ALL OF OUR CURRENT CUSTOMERS ARE SHAREHOLDERS IN OUR COMPANY, IF A
CUSTOMER CEASES TO LICENSE OUR TECHNOLOGY AND ALSO SELLS ITS SHARES IN OUR
COMPANY, THE MARKET PRICE OF OUR SHARES MAY DECLINE.
All of our current customers, or their affiliates, are shareholders in our
company. If any customer ceases to license our technology, our credibility in
the market may suffer, which may impede our ability to attract new customers. In
addition, if a customer that switches to a competing technology also sells its
shares in our company, our credibility may further suffer and the market price
of our shares will likely decline.
WE HAVE A LENGTHY AND COMPLEX SALES CYCLE, WHICH COULD CAUSE THE DELAY OR LOSS
OF REVENUE AND INCREASE OUR EXPENSES.
Our sales efforts target large financial institutions worldwide, which
requires us to expend significant resources educating prospective customers
about the uses and benefits of our product. Because the purchase of our solution
is a significant decision for these institutions, our prospective customers
generally take a long time to evaluate our product. Our sales cycle typically
ranges from four to six months, although these cycles can be longer due to
significant delays over which we have little or no control. Our lengthy sales
cycle is due to many factors, including customer concerns about the introduction
or announcement of new products and technologies, requests for product
enhancements and an extensive evaluation process that may involve many
individuals or departments. As a result of our long sales cycle, it may take us
a substantial amount of time to generate revenue from our sales efforts. In
addition, any delay in selling our platform could lead our prospective customers
to find alternatives to our solution from a competitor or to develop an in-house
solution.
IF FINANCIAL INSTITUTIONS DO NOT CONSIDER THE INTERNET TO BE A VIABLE COMMERCIAL
MEDIUM, OUR CUSTOMER BASE MAY NOT GROW.
Our success depends on financial institutions' acceptance of the Internet as
a viable means to deliver their services. The adoption of the Internet for
commerce and communication, particularly by those financial institutions that
have historically relied upon traditional means, generally requires these
institutions to understand and accept a new way of conducting business and
exchanging information. Financial institutions may be reluctant or slow to adopt
a new, Internet-based strategy because of increased pressure on costs and the
complexity and risk involved in developing a solution based on emerging
technologies. Reluctance by financial institutions to use the Internet to
deliver financial services may prevent us from growing.
8
<PAGE>
OUR PRODUCT HAS ACHIEVED LIMITED MARKET ACCEPTANCE TO DATE, AND IF IT FAILS TO
ACHIEVE MARKET ACCEPTANCE OUR BUSINESS WILL NOT GROW.
Our solution is one of a number of competing solutions that is available in
a new and rapidly evolving market. Financial institutions may not prefer our
solution to competing technologies. If financial institutions do not accept our
product as the preferred solution, we may not attract new customers and our
business will not grow.
OUR FUTURE REVENUE DEPENDS ON CONSUMERS USING THE SERVICES THAT ARE BASED ON OUR
SOLUTION, AND IF OUR CUSTOMERS DO NOT SUCCESSFULLY MARKET THESE SERVICES, OUR
REVENUE WILL NOT GROW.
We expect that revenue under most of our license agreements will depend on
the number of monthly subscribers to these services. To stimulate consumer
adoption of these services, our customers must implement our solution quickly.
However, our customers may delay implementation because of factors that are not
within our control, including budgetary constraints, limited resources committed
to the implementation process and limited internal technical support.
Consumer adoption of these services also requires our customers to market
these services. However, our customers currently have no obligation to launch a
marketing campaign of any kind, may choose not to do so, or may not do so
effectively. To date, these services have only been provided on a test basis to
a limited number of consumers. As a result, we cannot assure you that a large
number of consumers will use these services in the future.
WE CURRENTLY DEPEND ON THE SALE OF A SINGLE PRODUCT TO GENERATE MOST OF OUR
REVENUE AND IF WE ARE UNABLE TO SELL THIS PRODUCT WE MAY NEVER BECOME
PROFITABLE.
We expect sales of our product to constitute most of our revenue for the
foreseeable future. If customers do not purchase this product, we do not
currently offer any other products or services that would enable us to become
profitable.
WE CURRENTLY RELY ON SALES TO A LIMITED NUMBER OF FINANCIAL INSTITUTIONS, AND IF
WE FAIL TO RETAIN THESE CUSTOMERS OR TO ADD NEW CUSTOMERS OUR REVENUE MAY BE
SUBSTANTIALLY REDUCED AND OUR SOLUTION MAY NOT ACHIEVE MARKET ACCEPTANCE.
We derive a significant portion of our revenue from the sale of our solution
to a limited number of financial institutions. Since our inception, sales to one
financial institution have accounted for more than 81% of our total revenue. We
expect that a small number of customers will continue to account for a
significant portion of our revenue for the foreseeable future. If any of our
customers discontinue their relationship with us for any reason, do not renew
their agreements with us, or seek to reduce or renegotiate their purchase and
payment obligations to us, our revenue may be substantially reduced. In
addition, there are a limited number of large financial institutions in our
target market, and we believe this number may decline in the future as a result
of consolidation in the financial services industry worldwide. If our sales
efforts to these potential customers are not successful, our solution may not
achieve market acceptance and our revenue will not grow.
9
<PAGE>
OUR LICENSE AGREEMENTS WITH OUR CURRENT CUSTOMERS DO NOT HAVE LONG TERMS, AND
THE FAILURE OF ANY CUSTOMER TO RENEW ITS AGREEMENT COULD SIGNIFICANTLY DECREASE
OUR REVENUE.
A significant portion of our revenue is derived from the licensing of our
technology to our customers. Unless renewed, the license agreement with each of
our current customers will expire as follows:
<TABLE>
<CAPTION>
CUSTOMER DATE OF EXPIRATION
- -------- ------------------
<S> <C>
Bank of Montreal(1)........................................ February 2000
Bank of America............................................ February 2001
Wells Fargo(2)............................................. September 2003
Citigroup.................................................. December 2004
</TABLE>
- ------------------------
(1) Bank of Montreal has informed us that it intends to extend its agreement for
an additional one year term.
(2) May be terminated earlier by Wells Fargo upon payment of a termination fee.
Each of our customers may, but is not obligated, to renew its license
agreement for additional terms. There is no guarantee that any of our customers
will renew their license agreement. If our customers do not renew these
agreements or otherwise license our technology, our revenue will decrease
substantially. See "Customers" and "Certain Transactions."
IF THE DIGITAL WIRELESS AND OTHER NETWORK SERVICE PROVIDERS THAT ENABLE OUR
CUSTOMERS TO DELIVER SERVICES BASED ON OUR PRODUCT TO CONSUMERS FAIL TO SUPPORT
OUR SERVICE, OUR REVENUE FROM EXISTING CUSTOMERS WILL DECLINE AND WE MAY NOT
ATTRACT NEW CUSTOMERS.
We rely on wireless and other network service providers to introduce and
support services using our product in a timely and effective manner. We have no
control over the pace at which they will do so. If these providers are slow to
support the services that use our solution, our existing customers may not be
able to effectively offer these services, and potential customers may be
reluctant to purchase our platform. In addition, wireless and other network
service providers face implementation and support challenges in introducing
services delivered to Internet-enabled devices, which may slow their rate of
adoption or implementation of our solution. Moreover, the continued expansion of
digital wireless services, especially in North America, is critical to our
success.
IF WE DO NOT RESPOND ADEQUATELY TO EVOLVING TECHNOLOGY STANDARDS, SALES OF OUR
SOLUTION MAY DECLINE.
Our future success will depend on our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
technologies, including technologies related to communications and the Internet
generally and the financial services industry in particular. Wireless Internet
access is a rapidly evolving market and is characterized by an increasing number
of market entrants that have introduced or developed, or are in the process of
introducing or developing, products that facilitate the delivery of
Internet-based services through wireless devices. In addition, our competitors
may develop alternative technologies that gain broader market acceptance than
our solution. As a result, the life cycle of our solution is difficult to
estimate. We may need to develop and introduce new products and enhancements to
our existing solution on a timely basis to keep pace with technological
developments, evolving industry standards, changing customer requirements and
competitive technologies that may render our solution obsolete. These research
and development efforts may require us to expend significant capital and other
resources. In addition, as a result of the complexities inherent in our
solution, major enhancements or improvements will require long development and
testing periods. If we fail to develop products and services in a timely
fashion, or if
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we do not enhance our product to meet evolving customer needs and industry
standards, including security technology, we may not remain competitive or sell
our solution.
ANY DISRUPTION OF THE SERVICES SUPPORTED BY OUR PRODUCT DUE TO ACCIDENTAL OR
INTENTIONAL SECURITY BREACHES MAY DAMAGE OUR REPUTATION, EXPOSE US TO COSTLY
LITIGATION AND REQUIRE CAPITAL INVESTMENTS IN ALTERNATIVE SECURITY TECHNOLOGY.
Despite our efforts to maintain Internet security, we may not be able to
stop unauthorized attempts to gain access to or disrupt transactions between our
customers and the consumers of their services. Specifically, computer viruses,
break-ins and other disruptions could lead to interruptions, delays, loss of
data or the inability to accept and confirm the receipt of information. Any of
these events could substantially damage our reputation. We rely on encryption
and authentication technology licensed from third parties to provide the
security and authentication necessary to achieve secure transmission of
confidential information. We cannot assure you that this technology or future
advances in this technology or other developments will be able to prevent
security breaches. We may need to expend further capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches.
Because our activities involve the storage and transmission of proprietary
information such as credit card numbers and bank account numbers, if a
third-party were able to steal a user's proprietary information, we could be
subject to claims, litigation or other potential liabilities that could cause
our expenses to increase substantially. In addition to purposeful security
breaches, the inadvertent transmission of computer viruses could expose us to
litigation or a significant loss of revenue. Although our customer agreements
contain provisions which limit our liability relating to security, our customers
or their consumers may seek to hold us liable for any losses suffered as a
result of unauthorized access to their communications. We may not have adequate
insurance or resources to cover these losses.
WE MAY ACQUIRE TECHNOLOGIES OR COMPANIES IN THE FUTURE AND THESE ACQUISITIONS
COULD DISRUPT OUR BUSINESS AND DILUTE YOUR HOLDINGS IN OUR COMPANY.
We may acquire technologies or companies in the future, especially to
establish our application hosting service. Entering into an acquisition entails
many risks, any of which could materially harm our business, including:
- diversion of management's attention from other business concerns;
- failure to effectively assimilate the acquired technology or company into
our business;
- the loss of key employees from either our current business or the acquired
business; and
- assumption of significant liabilities of the acquired company.
To date, we have not completed any acquisitions, and we may not be able to
do so in an effective manner. In addition, your holdings in our company will be
diluted if we issue equity securities in connection with any acquisition.
WE FACE COMPETITION FROM EXISTING AND NEW COMPETITORS AND FROM NEW PRODUCTS
WHICH COULD CAUSE US TO LOSE MARKET SHARE AND CAUSE OUR REVENUE TO DECLINE.
The widespread adoption of open industry standards, such as Wireless
Application Protocol (WAP) specifications, may make it easier for new market
entrants and existing competitors to introduce products that compete with our
product. In addition, our competitors may market their products and services
more effectively than we do, which could decrease demand for our product and
cause our revenue to decline. Currently, our competitors include:
- financial institutions that develop their own in-house solutions;
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- software vendors focused on financial institutions;
- wireless and other network service providers that provide their customers
with wireless financial services; and
- software and services vendors and portals that provide the infrastructure
to link devices to carriers and the Internet and to enable other wireless
applications.
We may also face competition in the future from established companies who
have not previously entered the market for wireless data services and
Internet-related services. Barriers to entry in the software market are
relatively low, and it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In
addition, many of our competitors have greater resources, which may enable them
to penetrate the market more quickly.
ANY FAILURE TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS COULD LIMIT OUR
POTENTIAL REVENUE GROWTH.
We are expanding our activities outside the U.S. and Canada. Our plans to
expand internationally may be adversely affected by a number of risks,
including:
- difficulties in localizing our product and services for foreign markets;
- challenges in staffing and managing foreign operations;
- difficulties in establishing relationships with local partners;
- restrictions on the export of encryption and other technologies;
- recessionary environments in foreign economies, particularly in the
financial services sector; and
- longer payment cycles.
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
EXCHANGE LOSSES.
Our expanding operations outside the U.S. and Canada are in some instances
conducted in currencies other than the U.S. dollar and fluctuations in the value
of foreign currencies relative to the U.S. dollar could cause us to incur
currency exchange losses. We cannot predict the effect of exchange rate
fluctuations upon future operating results.
WE WILL NEED TO RECRUIT, TRAIN AND RETAIN KEY MANAGEMENT AND OTHER QUALIFIED
PERSONNEL TO SUCCESSFULLY GROW OUR BUSINESS.
Our future success will depend in large part on our ability to recruit and
retain experienced research and development, sales and marketing, customer
service and management personnel. In particular, our future success depends in
part on the continued services of our current executive officers. If we do not
attract and retain such personnel, we may not be able to grow our business.
Competition for qualified personnel is intense in our industry. In the past we
have experienced difficulty in recruiting qualified personnel, especially
technical and sales personnel. We are in a new market and there are a limited
number of people with the appropriate combination of skills needed to provide
the services that our customers demand. We expect competition for qualified
personnel to remain intense, and we may not succeed in attracting or retaining
sufficient personnel. In addition, new employees generally require substantial
training, which requires significant resources and management attention. Even if
we invest significant resources to recruit, train and retain qualified
personnel, we may not be successful in our efforts.
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OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS THAT COULD DAMAGE OUR REPUTATION.
The software we develop is complex and must meet the stringent technical
requirements of our customers. We must develop our product quickly to keep pace
with the rapidly changing industry in which we operate. Software products that
are as complex as ours are likely to contain undetected errors or defects,
especially when first introduced or when new versions are released. In addition,
our software may not properly operate when integrated with the systems of our
customers, or when used to deliver services to a large number of a customer's
subscribers.
While we continually test our product for errors and work with customers
through our customer support services to identify and correct bugs, errors in
our product may be found in the future. Testing for errors is complicated in
part because it is difficult to simulate or anticipate the computing
environments in which our customers use our product. Our software may not be
free from errors or defects even after it has been tested, which could result in
the rejection of our product and damage to our reputation, as well as lost
revenue, diverted development resources, and increased support costs.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN SIGNIFICANT
COSTS TO US.
We may be subject to claims for damages related to any errors in our
product. A major product liability claim could materially adversely affect our
business because of the costs of defending against these types of lawsuits,
diversion of key employees' time and attention from the business and potential
damage to our reputation. Our license agreements with our customers contain
provisions designed to limit exposure to potential product liability claims.
Limitation of liability provisions contained in our license agreements may not
be effective under the laws of some jurisdictions if local laws treat them as
unenforceable. As a result, we could be required to pay substantial amounts of
damages in settlement or upon the determination of any of these types of claims.
WE HAVE NOT YET INTEGRATED PUBLIC KEY INFRASTRUCTURE INTO OUR SOLUTION, AND IF
WE FAIL TO DO SO, WE MAY BE COMPETITIVELY DISADVANTAGED AND OUR BUSINESS MAY NOT
GROW.
We expect that the use of public key infrastructure (PKI), an emerging
technology which facilitates user identity authentication and non-repudiation of
transactions, will be used by financial institutions' customers and by our
competitors. If we do not succeed in integrating public key infrastructure into
our solution, our product may not be attractive to potential customers because
of their security concerns. If PKI becomes a widely used standard and our
product does not use that standard, we may be at a competitive disadvantage.
OUR PRODUCT CONTAINS ENCRYPTION TECHNOLOGY WHOSE EXPORT IS RESTRICTED BY LAW,
WHICH MAY SLOW OUR GROWTH OR RESULT IN SIGNIFICANT COSTS.
The U.S. and Canadian governments generally limit the export of encryption
technology, which our product incorporates. A variety of cryptographic products
generally require export approvals from certain U.S. government agencies in the
case of exports from the U.S., and from Canadian government agencies in the case
of exports from Canada, although there are currently no restrictions on exports
of these products from Canada into the U.S. If any export approval that we
receive is revoked or modified, if our software is unlawfully exported or if the
U.S. or the Canadian government adopts new legislation or regulations
restricting export of software and encryption technology, we may not be able to
distribute our solution to potential customers, which will cause a decline in
our sales. We may need to incur significant costs and divert resources to
develop replacement technologies or may need to adopt inferior substitute
technologies to satisfy these export restrictions. These replacement or
substitute technologies may not be the preferred security technologies of our
customers, in which case, our business may not grow. In addition, we may suffer
similar consequences if the laws of any other country limit the ability of third
parties to sell encryption technologies to us.
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WE RELY ON THIRD PARTY SOFTWARE, TECHNOLOGY AND CONTENT, THE LOSS OF WHICH COULD
FORCE US TO USE INFERIOR SUBSTITUTE TECHNOLOGY OR TO CEASE OFFERING OUR PRODUCT.
We must now, and may in the future, license or otherwise obtain access to
the intellectual property of third parties. For example, we have entered into a
license agreement with Certicom and Consensus for use of their encryption
technology. We have also entered into license agreements with third party
content providers. In addition, we use, and will use in the future, certain
third party software that may not be available to us in the future on
commercially reasonable terms or at all. For example, we could lose our ability
to use this software if the rights of our suppliers to license it were
challenged by individuals or companies that asserted ownership of these rights.
Our loss of, or inability to maintain or obtain, any required intellectual
property could require us to use substitute technology, which could be more
expensive or of lower quality or performance, or force us to cease offering our
product. Moreover, some of our license agreements are non-exclusive and,
therefore, our competitors may have access to the same technology that we
license.
IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED, WE MAY LOSE OUR
COMPETITIVE ADVANTAGE.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. We seek to protect our software, documentation and other written
materials under trade secret and copyright laws, as well as confidentiality
provisions in our contracts with our customers, all of which afford limited
protection. We also seek to protect our proprietary technology under patent
laws. We have applied for patents, although none have been issued to date. We
have also applied for several trademark registrations for our trademarks,
including "724 Solutions", "724 Solutions & Design" and "E-Anywhere" in Canada
and "724 Solutions" and "724 Solutions & Design" in the U.S., although none of
these trademarks has been registered to date.
Despite the measures we have taken to protect our intellectual property, we
cannot assure you that these steps will be adequate, that we will be able to
secure patent or trademark registrations for all of our patent applications or
trademarks, respectively, in Canada, the U.S. or other countries, or that third
parties will not breach the confidentiality provisions in our contracts or
infringe or misappropriate our copyrights, pending patents, trademarks and other
proprietary rights. In the event that a third party breaches the confidentiality
provisions in our contracts or misappropriates or infringes on our intellectual
property, we may not have adequate remedies. In addition, third parties may
independently discover or invent competing technologies or reverse engineer our
trade secrets, software or other technology. Moreover, the laws of some foreign
countries may not protect our proprietary rights to the same extent as do the
laws of the U.S. and Canada. Therefore, the measures we are taking to protect
our proprietary rights may not be adequate.
THIRD PARTIES MAY CLAIM THAT OUR PRODUCT INFRINGES ON THEIR INTELLECTUAL
PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSES FOR LITIGATION OR FOR
DEVELOPING OR LICENSING NEW TECHNOLOGY.
Although we are not currently aware of any claims asserted by third parties
that we infringe on their intellectual property, in the future, they may assert
a claim that our current or future products infringe on their intellectual
property. We cannot predict whether third parties will assert these types of
claims against us or against the licensors of technology licensed to us, or
whether those claims will harm our business. If we are forced to defend against
these types of claims, whether they are with or without any merit or whether
they are resolved in favor of or against us or our licensors, we may face costly
litigation and diversion of management's attention and resources. As a result of
these disputes, we may have to develop costly non-infringing technology, or
enter into licensing agreements. These agreements, if necessary, may not be
available on terms acceptable to us, or at all, which could increase our
expenses or make our product less attractive to our customers.
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OUR YEAR 2000 COMPLIANCE EFFORTS MAY INVOLVE SIGNIFICANT TIME AND EXPENSE, AND
UNCORRECTED PROBLEMS COULD DAMAGE OUR REPUTATION AND FORCE US TO DIVERT
RESOURCES FROM SELLING AND DEVELOPING OUR PRODUCT.
The risks posed by year 2000 issues, which arise because computer systems
and software products may be unable to distinguish between twentieth century
dates and twenty-first century dates, could harm our business in a number of
significant ways. Both before and after January 1, 2000, computer systems and
software used by many companies in a wide variety of industries, including
technology, finance and communications, will produce erroneous results or fail
unless they have been modified or upgraded to process date information
correctly. If we experience disruptions as a result of the year 2000 problem,
our revenue could decline and we may incur significant costs to correct any
problems. Although we believe that our software product, internally developed
systems and technology are year 2000 compliant, our systems and technology
nevertheless could be substantially impaired or cease to operate due to year
2000 problems. We may face claims based on year 2000 issues arising from the
integration of multiple products, including ours, within an overall system. Our
customers may also cease or delay the purchase and installation of new complex
systems, such as our software product, as a result of, and during, their own
internal year 2000 testing.
Our solution is integrated with the systems of financial institutions, which
use our software to deliver information and services over the networks of
wireless and other network service providers to Internet-enabled devices. If
their software processes information erroneously, or fails to deliver
information or to otherwise operate, as a result of their failure to process
information relating to year 2000 issues, the services enabled by our solution
will not be properly delivered. If this occurs, our solution may become less
attractive to financial institutions as consumer demand for the services enabled
by our solution decreases. In addition, because we expect to receive revenue
under some of our contracts based on per user fees, our revenue will be reduced
if additional users are discouraged from purchasing the services supported by
our solution as a result of perceived or actual difficulties in delivering these
services in light of year 2000 issues.
IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE FORCED TO
DISCONTINUE PRODUCT DEVELOPMENT, REDUCE OUR SALES AND MARKETING EFFORTS OR
FOREGO ATTRACTIVE BUSINESS OPPORTUNITIES.
We may not have sufficient capital to fund our operations and additional
capital may not be available on acceptable terms, if at all. Any of these
outcomes could adversely impact our ability to respond to competitive pressures
or prevent us from conducting all or a portion of our planned operations. We
expect that the net proceeds from this offering and cash on hand will be
sufficient to meet our working capital and capital expenditure needs for at
least the next 12 months. After that, we may need to raise additional funds, and
additional financing which may not be available on acceptable terms, if at all.
We may also require additional capital to acquire or invest in complementary
businesses or products or obtain the right to use complementary technologies. If
we issue additional equity securities to raise funds, your ownership percentage
of our company will be reduced.
YOUR TAX LIABILITY MAY INCREASE IF WE ARE TREATED AS A PASSIVE FOREIGN
INVESTMENT COMPANY.
If at any time we qualify as a passive foreign investment company under
U.S. tax laws, you may be subject to adverse tax consequences. We could be a
passive foreign investment company if 75% or more of our gross income in any
year is considered passive income for U.S. tax purposes. For this purpose,
passive income generally includes interest, dividends, some types of rents and
royalties, and gains from the sale of assets that produce these types of income.
In addition, we could be classified as a passive foreign investment company if
the average percentage of our assets during any year that produced passive
income, or that were held to produce passive income, is at least 50%. If we are
classified as a passive foreign investment company, and if you sell any of our
common shares or receive some types of distributions from us, you may have to
pay taxes that are higher than if we were not
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considered a passive foreign investment company. It is impossible to predict how
much your taxes would increase, if at all.
Based on the nature of our revenue and our anticipated corporate structure,
we may be treated as a passive foreign investment company. To determine whether
we are a passive foreign investment company, we will be required to examine each
year our revenue and expenses and the value of our assets. The tests are complex
and require, among other things, that we determine how much of our income from
our license agreements each year will be passive income. We do not have the
necessary data to determine whether these tests will be met for the year 2000 or
future years, nor can we predict whether the tests are likely to be met.
Moreover, the manner in which the tests apply to our business is not certain. We
urge you to consult your own tax advisor to discuss the potential consequences
to you if at any time we qualify as a passive foreign investment company. See
"Income Tax Consequences--U.S. Federal Income Tax Considerations--Passive
Foreign Investment Companies".
OUR ABILITY TO ISSUE PREFERRED SHARES COULD MAKE IT MORE DIFFICULT FOR A THIRD
PARTY TO ACQUIRE US TO THE DETRIMENT OF HOLDERS OF COMMON SHARES.
Provisions in our articles of incorporation may make it difficult for a
third party to acquire control of us, even if a change in control would be
beneficial to our shareholders. Our articles authorize our board to issue, at
its discretion, an unlimited number of preferred shares. Without shareholder
approval, our board has the authority to attach special rights, including voting
or dividend rights, to the preferred shares. Preferred shareholders who possess
these rights could make it more difficult for a third party to acquire our
company.
RISK FACTORS RELATED TO OUR INDUSTRY
OUR BUSINESS WILL NOT GROW IF USE OF THE INTERNET DOES NOT CONTINUE TO GROW.
Our future success is substantially dependent on continued growth in the use
of the Internet. Our business may be adversely impacted if the number of users
on the Internet does not increase or if commerce over the Internet does not
become more accepted and widespread. The use and acceptance of the Internet may
not increase for a number of reasons, including the cost and availability of
Internet access.
Published reports have also indicated that capacity constraints caused by
growth in the use of the Internet may impede further development of the Internet
to the extent that users experience delays, transmission errors and other
difficulties. If the necessary infrastructure, products, services or facilities
are not developed, or if the Internet does not become a viable and widespread
commercial medium, we will not be able to grow our business.
OUR BUSINESS WILL NOT GROW IF THE USE OF WIRELESS DATA SERVICES DOES NOT
CONTINUE TO GROW.
The markets for wireless data services and related products are still
emerging, and continued growth in demand for, and acceptance of, these services
remains uncertain. Our solution depends on the acceptance of wireless data
services and Internet-enabled devices in the commercial and financial markets.
Current barriers to market acceptance of these services include cost,
reliability, platform and distribution channel constraints, safety,
functionality and ease of use. We cannot be certain that these barriers will be
overcome. Since the market for our solution is new and evolving, it is difficult
to predict the size of this market or its future growth rate, if any. Our future
financial performance will depend in large part upon the continued demand for
on-line financial services through wireless application devices. We cannot
assure you that a sufficient volume of subscribers will demand financial
services or will seek financial services provided through the Internet on
wireless application devices. If the market for wireless on-line financial
services grows more slowly than we currently anticipate, our revenue may not
grow.
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LACK OF CONSUMER CONFIDENCE IN THE SECURITY OF ON-LINE FINANCIAL TRANSACTIONS
COULD LIMIT ADOPTION OF OUR SOLUTION, WHICH COULD PREVENT US FROM BECOMING
PROFITABLE.
Consumers will not adopt on-line financial services if they are not
confident that financial transactions over the Internet can be undertaken
securely and confidentially. Although there is security technology currently
available for on-line transactions, many Internet users do not use the Internet
for commercial transactions because of continued security concerns. These
concerns may be heightened by well-publicized security breaches of any
Internet-related service, which could deter consumers from adopting the services
provided by our solution. If consumers do not gain confidence in the security
for on-line financial transactions that the current technologies provide, our
revenue will not increase.
CHANGES IN GOVERNMENT REGULATIONS MAY RESULT IN INCREASED EXPENSES, TAXES OR
LICENSING FEES WHICH COULD DECREASE THE DEMAND FOR OUR PRODUCT AND NEGATIVELY
IMPACT OUR RESULTS.
We are not currently subject to direct regulation by any governmental
agency, other than regulations applicable to businesses generally and laws and
regulations directly applicable to access to, or commerce on, the Internet.
However, a number of legislative and regulatory proposals under consideration by
federal, state, provincial, local and foreign governmental organizations may
lead to laws or regulations concerning various aspects of the Internet,
including but not limited to, on-line content, user privacy, taxation, access
charges and liability for third-party activities. Additionally, it is uncertain
how existing laws governing issues such as property ownership, copyright, trade
secrets, libel and personal privacy will be applied to the Internet. The
adoption of new laws or the broader application of existing laws may expose us
to significant liabilities and additional operational requirements and may
decrease the growth in the use of the Internet, which could in turn decrease the
demand for our product and increase our cost of doing business.
RISK FACTORS RELATED TO THIS OFFERING
A LIMITED NUMBER OF SHAREHOLDERS WILL COLLECTIVELY CONTINUE TO OWN A MAJORITY OF
OUR COMMON SHARES AFTER THIS OFFERING AND MAY ACT, OR PREVENT CERTAIN TYPES OF
CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER SHAREHOLDERS.
Immediately after this offering, our five principal shareholders, including
entities affiliated with members of our management team, will own more than 75%
of our outstanding common shares. Accordingly, these shareholders may, if they
act together, exercise significant influence over all matters requiring
shareholder approval, including the election of a majority of the directors and
the determination of significant corporate actions after this offering. This
concentration could also have the effect of delaying or preventing a change in
control that could be otherwise beneficial to our shareholders.
THE MARKET PRICE OF OUR COMMON SHARES IS LIKELY TO BE VOLATILE, WHICH MAY RESULT
IN LITIGATION THAT COULD BE COSTLY AND DIVERT OUR RESOURCES.
Stock markets have recently experienced extreme price and volume
fluctuations, particularly for the shares of technology companies. These
fluctuations are often unrelated to the operating performance of particular
companies. The broad market fluctuations may adversely affect the market price
of our common shares. When the market price of a company's stock drops
significantly, shareholders often institute securities class action lawsuits
against that company. A lawsuit against us could cause us to incur substantial
costs and could divert the time and attention of our management and other
resources.
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FUTURE SALES OF COMMON SHARES BY OUR EXISTING SHAREHOLDERS COULD CAUSE OUR SHARE
PRICE TO FALL.
If our shareholders sell substantial amounts of our common shares in the
public market, the market price of our common shares could fall. The perception
among investors that these sales will occur could also produce this effect.
After this offering, based upon the number of common shares outstanding as of
December 31, 1999, we will have 35,402,426 common shares outstanding. All of the
6,000,000 common shares we will issue in this offering will generally be
immediately available for resale in the public markets, other than shares
purchased by our affiliates. In accordance with applicable securities laws and
after giving effect to lock-up agreements executed by our directors, executive
officers and existing shareholders, the common shares outstanding after this
offering will be available for sale in the public market beginning 180 days
after the date of this prospectus, and additional common shares issuable upon
the exercise of stock options will be available for sale once we file a
registration statement relating to our stock option plans. See "Shares Eligible
for Future Sale".
OUR SECURITIES HAVE NO PRIOR PUBLIC MARKET AND OUR SHARE PRICE MAY DECLINE AFTER
THE OFFERING.
Before this offering, there has been no public market for our common shares,
and an active public market for our common shares may not develop or be
sustained after this offering. If an active public market for our common shares
does not develop, the liquidity of your investment may be limited, and our share
price may decline below its initial public offering price. The initial public
offering price will be determined by negotiations between us and the
representative of the underwriters and may bear no relationship to the price
that will prevail in the public market.
WE WILL HAVE BROAD DISCRETION IN HOW WE USE THE PROCEEDS OF THIS OFFERING, AND
OUR USE OF THOSE PROCEEDS MAY NOT YIELD A FAVORABLE RETURN.
We intend to use the proceeds from this offering for general corporate
purposes, including the development of our application hosting service, and
potential acquisitions. Accordingly, we will have broad discretion in using
these proceeds. You will not have the opportunity to evaluate the economic,
financial or other information that we may use to determine how we use these
proceeds.
YOU WILL SUFFER IMMEDIATE AND SUBSTANTIAL DILUTION.
The initial public offering price of our common shares will significantly
exceed the net tangible book value per share of our common shares. Accordingly,
if you purchase common shares in this offering, you will incur immediate and
substantial dilution of your investment. If the outstanding options to purchase
our common shares are exercised, you will incur additional dilution.
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FORWARD-LOOKING STATEMENTS
Statements under "Prospectus Summary", "Risk Factors", "Management's
Discussion and Analysis of Financial Condition and Results of Operations",
"Business" and elsewhere in this prospectus about our future results, levels of
activity, performance, goals or achievements or other future events constitute
forward-looking statements. These statements involve known and unknown risks,
uncertainties and other factors that may cause actual results or events to
differ materially from those anticipated in our forward-looking statements.
These factors include, among others, those listed under "Risk Factors" or
described elsewhere in this prospectus.
In some cases, you can identify forward-looking statements by our use of
words such as "may", "will", "should", "could", "expects", "plans", "intends",
"anticipates", "believes", "estimates", "predicts", "potential" or "continue" or
the negative or other variations of these words, or other comparable words or
phrases.
Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. We are under no
duty to update any of our forward-looking statements after the date of this
prospectus, other than as required by law. You should not place undue reliance
on forward-looking statements.
GENERAL INFORMATION IN PROSPECTUS
Unless we state otherwise, the information in this prospectus assumes no
exercise of the underwriters' over-allotment option and gives effect to the
two-for-one split of our common shares that occurred on December 30, 1999.
We have applied for registration of the trademarks "724 Solutions", "724
Solutions & Design" and "E-Anywhere" in Canada and "724 Solutions" and "724
Solutions & Design" in the U.S. All other trademarks or service marks appearing
in this prospectus are the trademarks or service marks of the companies that use
them.
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USE OF PROCEEDS
We expect to receive about $142.8 million in net proceeds from the sale of
6,000,000 common shares in this offering, based on the initial public offering
price of $26.00 per common share. We estimate that the net proceeds will be
about $164.6 million if the underwriters' over-allotment option is exercised in
full. The principal purposes of this offering are to obtain additional capital,
to create a public market for our common shares and to facilitate our future
access to the public capital markets.
We currently expect to use approximately $20 million to $40 million from the
net proceeds of this offering towards the development of our application hosting
service, and $20 million to $30 million for research and development expenses.
We currently do not have specific plans with respect to the remaining net
proceeds from this offering. We expect to use these remaining net proceeds for
general corporate purposes. In particular, we may use a portion of the net
proceeds to fund acquisitions of, or investments in, businesses, products or
technologies that expand, complement or are otherwise related to our current
business. However, we have no present agreements or commitments with respect to
any acquisition or investment. Our plans with respect to the allocation of these
proceeds among the uses described above may change after the date of this
prospectus. In particular, the types of any acquisitions or investments that we
may make will largely depend upon the business opportunities that we identify,
if any, which we cannot predict at this time. Pending these uses, we expect to
invest the net proceeds in short-term, interest-bearing investment grade
securities.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common shares. We
currently intend to retain any future earnings to fund the development and
growth of our business and we do not anticipate paying any cash dividends in the
foreseeable future.
EXCHANGE RATES
As of January 27, 2000, the noon buying rate in New York City for cable
transfers in Canadian dollars was Cdn.$1.00 equals $0.6969. The following table
sets forth, for each period presented, the high and low exchange rates, the
average of the exchange rates on the last day of each month during the period
indicated, and the exchange rates at the end of the period indicated for one
Canadian dollar expressed in U.S. dollars, based on the noon buying rate for
cable transfers payable in Canadian dollars as certified for customs purposes by
the Federal Reserve Bank of New York.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
---------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- --------------
<S> <C> <C> <C> <C> <C> <C>
End of period...................... $0.7143 $0.7323 $0.7301 $0.6999 $0.6504 $0.6805
Average for period................. $0.7194 $0.7299 $0.7353 $0.7246 $0.6757 $0.6711
High for period.................... $0.7634 $0.7519 $0.7519 $0.7463 $0.7092 $0.6897
Low for period..................... $0.7092 $0.7042 $0.7246 $0.6944 $0.6329 $0.6536
</TABLE>
20
<PAGE>
CAPITALIZATION
The table below describes our capitalization as of September 30, 1999:
- on an actual basis;
- on a pro forma basis to give effect to the issuance of 10,082,066 common
shares for aggregate proceeds of $41.1 million in October 1999; and
- on a pro forma basis as adjusted to give effect to the issuance of
10,082,066 common shares in October 1999 and to reflect the estimated net
proceeds from the sale of 6,000,000 common shares to be sold in this
offering based on the initial public offering price of $26.00 per share.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1999
-----------------------------------
PRO FORMA AS
ACTUAL PRO FORMA ADJUSTED
-------- --------- ------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
Cash and cash equivalents................................... $28,044 $69,134 $211,964
======= ======= ========
Shareholders' equity:
Unlimited number of common shares authorized;
19,320,360 shares issued and outstanding (actual),
29,402,426 common shares issued and outstanding (pro
forma) and 35,402,426 common shares issued and
outstanding (pro forma as adjusted)(1).................. 37,907 78,997 221,827
Deferred stock-based compensation........................... (150) (150) (150)
Accumulated deficit......................................... (10,404) (10,404) (10,404)
------- ------- --------
Total capitalization........................................ $27,353 $68,443 $211,273
======= ======= ========
</TABLE>
- ------------------------
(1) The number of shares outstanding as of September 30, 1999, after giving
effect to the issuance of 10,082,066 common shares in October 1999, in the
table above excludes the following:
- outstanding options as of the date of this prospectus to purchase
2,809,098 common shares under our stock option plans at a weighted average
exercise price of $3.25 per share; and
- common shares issued upon the exercise of stock options after
September 30, 1999.
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999, was
$68.4 million or $2.33 per share. Pro forma net tangible book value per share
represents the amount of our total assets less total liabilities as of
September 30, 1999, divided by the number of common shares outstanding and
adjusted to give effect to the issuance of 10,082,066 common shares for net
proceeds of $41.1 million in October 1999. After giving effect to the sale of
the 6,000,000 common shares offered at the initial public offering price of
$26.00 per share and after deducting the underwriting discounts and commissions
and estimated offering expenses payable by us, our pro forma net tangible book
value as of September 30, 1999, would have been $211.3 million, or $5.97 per
share. This represents an immediate increase in pro forma net tangible book
value of $3.64 per share to existing shareholders and an immediate dilution in
net tangible book value of $20.03 per share to new investors of common shares in
this offering. This amount is equal to 77.0% of our initial public offering
price of $26.00 per share. The following table illustrates this dilution on a
per share basis:
<TABLE>
<CAPTION>
<S> <C>
Estimated initial public offering price per share........... $26.00
Pro forma net tangible book value per share as of
September 30, 1999..................................... 2.33
Increase attributable to new investors.................. 3.64
------
Pro forma net tangible book value per share after this
offering.................................................. 5.97
------
Dilution per share to new investors......................... $20.03
======
</TABLE>
The following table sets forth, as of December 31, 1999, the difference
between the number of common shares purchased, the total consideration paid and
the average price per share paid by the existing holders of our common shares
and by the new investors, before deducting underwriting discounts and
commissions and estimated offering expenses payable by us at the initial public
offering price of $26.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------------- --------------------- PRICE PER
NUMBER PERCENTAGE AMOUNT PERCENTAGE SHARE
---------- ---------- -------- ---------- ---------
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
Existing shareholders..................... 29,402,426 83.1% $ 75,255 32.5% $ 2.56
New investors............................. 6,000,000 16.9% 156,000 67.5% 26.00
---------- ------ -------- ------
Total..................................... 35,402,426 100.0% $231,255 100.0%
========== ====== ======== ======
</TABLE>
To the extent that any shares are issued upon the exercise of options or
warrants that were outstanding as of December 31, 1999 or granted after that
date, or reserved for future issuance under our stock option plans, there will
be further dilution to new investors. For a more detailed discussion of our
stock option plans and outstanding options to purchase common shares see
"Management--Stock Option Plans", "Description of Share Capital" and notes 4
and 12 to our consolidated financial statements.
22
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
Our consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. These principles conform in
all material respects with U.S. generally accepted accounting principles except
as disclosed in note 11 to our consolidated financial statements. You should
read the following selected consolidated financial data with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
our consolidated financial statements and notes appearing elsewhere in this
prospectus. The consolidated statements of operations data for the period from
July 28, 1997 (inception) to December 31, 1997, for the year ended December 31,
1998 and the nine months ended September 30, 1998 and 1999, and the consolidated
balance sheets data as of December 31, 1997 and 1998 and as of September 30,
1999, are derived from our consolidated financial statements that have been
audited by KPMG LLP, Independent Auditors, which are included elsewhere in this
prospectus.
<TABLE>
<CAPTION>
PERIOD FROM NINE MONTHS ENDED
JULY 28, 1997 SEPTEMBER 30,
(INCEPTION) TO YEAR ENDED -------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
------------------ ------------------ -------- --------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Software development from a related
party.................................. $ -- $ 1,678 $ 1,049 $ 1,314
Services................................. -- 208 208 788
Less: Stock-based compensation related to
software development................... -- (1,395) (785) (1,273)
------ ------- ------- -------
Net revenue............................ -- 491 472 829
Operating expenses:
Cost of services revenue................. -- 61 61 819
Research and development................. 44 2,277 1,134 4,592
Sales and marketing...................... 39 412 209 1,134
General and administrative............... 82 547 255 2,175
------ ------- ------- -------
Total operating expenses............... 165 3,297 1,659 8,720
------ ------- ------- -------
Income (loss) from operations.......... (165) (2,806) (1,187) (7,891)
Interest income............................ 10 107 69 341
------ ------- ------- -------
Income (loss) before income taxes...... (155) (2,699) (1,118) (7,550)
Income taxes............................... -- -- -- --
------ ------- ------- -------
Net income (loss)...................... $ (155) $(2,699) $(1,118) $(7,550)
====== ======= ======= =======
Basic and diluted net income (loss) per
share.................................... $(0.06) $ (0.47) $ (0.24) $ (0.57)
====== ======= ======= =======
Shares used in computing basic and diluted
net income (loss) per share (in
thousands)............................... 2,752 5,784 4,564 13,301
====== ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, AS OF
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
(IN THOUSANDS OF U.S. DOLLARS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................................... $1,299 $2,976 $28,044
Working capital............................................. 1,267 2,333 25,716
Total assets................................................ 1,321 3,892 32,444
Total shareholders' equity.................................. 1,288 3,193 27,353
</TABLE>
23
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
YOU SHOULD READ THE FOLLOWING DISCUSSION IN CONJUNCTION WITH OUR
CONSOLIDATED FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES APPEARING ELSEWHERE
IN THIS PROSPECTUS.
OVERVIEW
Our company was established in July 1997 to conceive, design and deliver an
Internet infrastructure solution that enables financial institutions to deliver
financial information and services using a broad range of Internet-enabled
devices. Our technology may be adapted for use by other types of on-line
merchants and for other applications.
For the period from July 1997 to May 1999, we were in a development phase,
conducting research and developing our product. In May 1999, we launched our
product on a trial basis. During this trial, a limited number of Bank of
Montreal's customers were able to access banking and brokerage services and
lifestyle content, including news, stock quotes, weather, lottery results and
horoscopes, through Internet-enabled devices, specifically PalmPilot connected
organizers and mobile phones. This trial was completed in September 1999. During
the period May through September 1999, we filled key management positions in our
sales and marketing departments, attracted Bank of America, Citigroup and Sonera
Corporation as additional investors, entered into license agreements with Bank
of America and Wells Fargo and continued to develop our product.
Our consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. These principles conform in
all material respects with U.S. generally accepted accounting principles, except
as disclosed in note 11 to our consolidated financial statements.
SOURCES OF REVENUE
Our primary sources of revenue are revenue generated under our license
agreements and services revenue. Historically, our services revenue has
consisted primarily of implementation and customer service fees. In the future,
we believe that our services revenue will also include amounts derived from
maintenance fees, the operation of our application hosting service, revenue
sharing arrangements and commissions on e-commerce transactions.
CURRENT SOURCES OF REVENUE
LICENSE FEES
Our two initial license agreements were with Bank of Montreal and Bank of
America and used a fixed fee license model. Under this model, our customer pays
us a fixed annual license fee upon execution of the license agreement
periodically thereafter during the term of the agreement. The use of this model
helped provide us with the initial cash flow that was necessary to fund our
development and start-up costs.
After raising additional capital in August 1999 through the issuance of
common shares, we had the financial resources to forego this fixed fee license
model in favor of a variable fee license model. Our agreement with Wells Fargo
uses this model. The variable fee license model is based on a per user fee. The
transition of our revenue model from fixed fee to variable fee will have two
significant consequences: first, we will no longer receive large initial
payments under our license agreements; and second, we expect our revenue stream
to vary with the number of our customers' users. We expect that these variable
fees will be subject to a minimum quarterly payment and we expect to provide
incentive discounts to our customers based on the number of their users.
24
<PAGE>
Under the fixed fee license model, we recognize revenue when we have
executed an agreement with a customer, delivery and acceptance have occurred,
and the collection of the related receivable is deemed probable. Under the
variable fee license model, we commence the recognition of revenue when those
same conditions have been satisfied. Under the variable fee license model,
revenue from the minimum payments is recognized on a monthly basis. Revenue
associated with user fees in excess of any minimum payments is recognized on a
quarterly basis when the amount is determined.
Through September 30, 1999, our software development revenue consisted of
amounts earned under our technology license agreement with Bank of Montreal,
which agreement required us to perform the relevant research and development
work on a best efforts basis. There were no specific product deliverables set
forth under the agreement. The revenue relating to this contract has been
recognized ratably over its term.
IMPLEMENTATION AND CUSTOMER SERVICE FEES
Revenue from implementation and customer services includes fees for
implementation, consulting and training services. We currently rely and expect
to continue to rely on a combination of our own resources and third-party
consulting organizations to deliver these services to our customers. Customers
are charged a fee based on time and expenses. Revenue from implementation and
customer service fees is recognized on a monthly basis as the services are
performed.
FUTURE SOURCES OF REVENUE
MAINTENANCE FEES
We expect to receive revenue from maintaining and servicing our product for
our customers. The maintenance fee will typically be equal to a percentage of
the customer's license fee. If associated with the fixed fee license model, the
maintenance amounts received will be deferred and recognized on a straight-line
basis over the contract period. When associated with the variable fee license
model, any minimum payments will be recognized on a monthly basis. Maintenance
revenue in excess of any minimum payments will be recognized on a quarterly
basis when the amount is determined.
APPLICATION HOSTING SERVICE FEES
Some of our existing customers require us, and some of our potential
customers may require us, to host and manage the server infrastructure and
software platform as part of the implementation of our solution. We are
currently building the capacity to provide this service. Once implemented, we
plan to provide this service for a monthly fee based upon the number of our
customers' users.
NINE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUE
Our revenue, before the offset of stock-based compensation, increased from
$1.3 million for the nine months ended September 30, 1998 to $2.1 million for
the nine months ended September 30, 1999. Our software development revenue,
before the offset of stock-based compensation, increased from $1.0 million for
the nine months ended September 30, 1998 to $1.3 million for the nine months
ended September 30, 1999, due primarily to four additional months of revenue
realized in 1999 from our contract with Bank of Montreal. Our service revenue
increased from $208,000 for the nine months ended September 30, 1998 to $788,000
for the nine months ended September 30, 1999 due to additional contracts for
consulting and software design services.
STOCK-BASED COMPENSATION RELATED TO SOFTWARE DEVELOPMENT REVENUE. Under our
April 30, 1998 subscription agreement with Bank of Montreal, we granted an
option to Bank of Montreal to subscribe for 2,428,570 common shares for
Cdn.$1 million. This option was only exercisable in the event that
25
<PAGE>
Bank of Montreal extended its technology license agreement for a second year. On
the date the option was granted and exercised, the fair value of the 2,428,570
common shares was Cdn.$6.1 million, resulting in a stock-based compensation
charge of Cdn.$5.1 million, or U.S.$3.3 million. This stock-based compensation
charge is being attributed to software development revenue over the term of the
technology license agreement ratably in proportion to the revenue recognized
under the agreement.
Stock-based compensation related to software development revenue increased
from $785,000 for the nine months ended September 30, 1998 to $1.3 million for
the nine months ended September 30, 1999. This increase was primarily due to the
increase in the related software development revenue from $1.0 million for the
nine months ended September 30, 1998 to $1.3 million for the nine months ended
September 30, 1999.
OPERATING EXPENSES
COST OF SERVICES REVENUE. Our cost of services revenue consists of salaries
and related expenses for our consulting services, customer support,
implementation and training services, costs of third parties contracted to
provide consulting services to customers and an allocation of our facilities,
administration and depreciation expenses. In the future, our cost of revenue
will also include software licensing expenses and royalties paid to third
parties for integration of their software into our platform.
Our cost of services revenue increased from $61,000 for the nine months
ended September 30, 1998 to $819,000 for the nine months ended September 30,
1999 due to payments to third party consultants and the addition of
implementation and customer service personnel.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of compensation and related costs for research and development
personnel, including independent contractors and consultants, software licensing
expenses and royalties and allocated operating expenses.
Research and development expenses increased from $1.1 million for the nine
months ended September 30, 1998 to $4.6 million for the nine months ended
September 30, 1999. This increase largely reflects the addition of personnel to
our research and development department which grew from 23 employees as of
September 30, 1998 to 69 employees as of September 30, 1999, primarily to
support the second release of our software.
SALES AND MARKETING. Sales and marketing expenses include compensation,
public relations and advertising, trade shows, marketing materials and allocated
operating expenses.
Sales and marketing expenses increased from $209,000 for the nine months
ended September 30, 1998 to $1.1 million for the nine months ended
September 30, 1999. This increase is primarily attributable to the hiring of
additional sales and marketing personnel, together with increased travel and
related expenses. Our sales and marketing department grew from one employee as
of September 30, 1998 to 14 employees as of September 30, 1999, including one
employee based in Europe. We expect that our sales and marketing expenses will
continue to increase as we expand internationally. This increase reflects the
opening of a sales office in San Francisco in 1999 and an increase in our
representation in Europe and Asia.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries and benefits for corporate personnel and other general and
administrative expenses such as professional fees, facilities and travel, net of
any allocation to our research and development and sales and marketing
departments. Our corporate staff includes several of our executive officers and
our business development, financial planning and control, legal, human resources
and corporate administration staff.
Our general and administrative expenses increased from $255,000 for the nine
months ended September 30, 1998 to $2.2 million for the nine months ended
September 30, 1999. The corporate staff increased from five employees as of
September 30, 1998 to 23 employees as of September 30, 1999.
26
<PAGE>
INTEREST INCOME
Interest income, which increased from $69,000 for the nine months ended
September 30, 1998 to $341,000 for the nine months ended September 30, 1999, was
derived from cash and cash equivalent balances, representing primarily the
unused portion of the proceeds from our issuances of common shares.
PERIOD FROM JULY 28, 1997 (INCEPTION) TO DECEMBER 31, 1997 COMPARED TO THE YEAR
ENDED DECEMBER 31, 1998
We were established in July 1997 and therefore have a limited operating
history for the period ended December 31, 1997. During this period, we commenced
a market research study to develop strategies for financial institutions with
respect to the use of the Internet and wireless services.
REVENUE
We did not have any revenue for the period ended December 31, 1997. We
recognized $1.9 million of revenue, before the offset of stock-based
compensation, for the year ended December 31, 1998, which included $1.7 million
of software development revenue and $208,000 of services revenue. Our software
development revenue consisted of fees under our agreement with Bank of Montreal,
while our services revenue consisted of payments from Bank of Montreal for our
consulting work.
STOCK-BASED COMPENSATION RELATED TO SOFTWARE DEVELOPMENT
REVENUE. Stock-based compensation related to software development revenue was
$1.4 million for the year ended December 30, 1998 and consisted of the ratable
allocation of deferred stock-based compensation arising upon the exercise of the
Bank of Montreal option.
OPERATING EXPENSES
COST OF SERVICES REVENUE. Cost of services revenue was $61,000 for the year
ended December 31, 1998 and consisted of salaries and related expenses for our
consulting work.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$44,000 for the period ended December 31, 1997 to $2.3 million for the year
ended December 31, 1998, as we hired 33 employees in connection with the initial
release of our software.
SALES AND MARKETING. Sales and marketing expenses increased from $39,000
for the period ended December 31, 1997 to $412,000 for the year ended
December 31, 1998, reflecting the establishment of our sales and marketing
department.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $82,000 for the period ended December 31, 1997 to $547,000 for the year
ended December 31, 1998, primarily as a result of the increase in the size of
our corporate infrastructure.
INTEREST INCOME
Interest income, which increased from $10,000 for the period ended
December 31, 1997 to $107,000 for the year ended December 31, 1998, was derived
from cash and cash equivalent balances, representing primarily the unused
portion of the proceeds from our issuances of common shares.
QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statements of
operations data for each of the seven most recent quarters ended September 30,
1999. The information has been derived from our unaudited consolidated financial
statements that, in management's opinion, have been prepared on a basis
consistent with the audited consolidated financial statements contained
elsewhere
27
<PAGE>
in this prospectus and includes all adjustments consisting of only normal
recurring adjustments necessary for fair presentation of information when read
in conjunction with our audited consolidated financial statements and related
notes. These operating results are not necessarily indicative of results for any
future period. You should not rely on them to predict our future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
--------- --------- ---------- --------- --------- --------- ----------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenue:
Software development................ $ -- $ 419 $ 630 $ 629 $ 548 $ 383 $ 383
Services............................ 208 -- -- -- 34 -- 754
Less: Stock-based compensation
related to software development
revenue........................... -- (91) (694) (610) (531) (371) (371)
------ ------ ------ ------- ------- ------- -------
Net revenue....................... 208 328 (64) 19 51 12 766
Operating expenses:
Cost of services revenue............ 61 -- -- -- -- 20 799
Research and development............ 124 372 638 1,143 1,171 1,402 2,019
Sales and marketing................. 27 81 101 203 207 303 624
General and administrative.......... 41 104 110 292 332 629 1,214
------ ------ ------ ------- ------- ------- -------
Total operating expenses.......... 253 557 849 1,638 1,710 2,354 4,656
------ ------ ------ ------- ------- ------- -------
Income (loss) from operations......... (45) (229) (913) (1,619) (1,659) (2,342) (3,890)
Interest income....................... 18 20 31 38 61 28 252
------ ------ ------ ------- ------- ------- -------
Net income (loss)................. $ (27) $ (209) $ (882) $(1,581) $(1,598) $(2,314) $(3,638)
====== ====== ====== ======= ======= ======= =======
Basic and diluted net income (loss)
per share........................... $(0.01) $(0.04) $(0.18) $ (0.17) $ (0.14) $ (0.20) $ (0.22)
====== ====== ====== ======= ======= ======= =======
Shares used in computing basic and
diluted net income (loss) per share
(in thousands)...................... 4,000 4,667 5,000 9,286 11,429 11,609 16,870
====== ====== ====== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------
MAR. 31, JUN. 30, SEPT. 30, DEC. 31, MAR. 31, JUN. 30, SEPT. 30,
1998 1998 1998 1998 1999 1999 1999
--------- --------- ---------- --------- --------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
AS A PERCENTAGE OF NET REVENUE:
Revenue:
Software development from a
related party................... 0.0% 127.7% 984.4% 3,310.5% 1,074.5% 3,191.7% 50.0%
Services.......................... 100.0 0.0 0.0 0.0 66.67 0.0 98.4
Less: Stock-based compensation
related to software
development..................... 0.0 (27.7) (1,084.4) (3,210.5) (1,041.2) (3,091.7) (48.4)
----- ----- -------- -------- -------- --------- ------
Net revenue..................... 100.0 100.0 (100.0) 100.0 100.0 100.0 100.0
----- ----- -------- -------- -------- --------- ------
Operating expenses:
Cost of services revenue.......... 29.3 0.0 0.0 0.0 0.0 166.67 104.3
Research and development.......... 59.6 113.4 996.9 6,015.8 2,296.1 1,168.3 263.6
Sales and marketing............... 13.0 24.7 157.8 1,068.4 405.9 2,525.0 81.5
General and administrative........ 19.7 31.7 171.9 1,536.8 651.0 5,241.7 158.5
----- ----- -------- -------- -------- --------- ------
Total operating expenses........ 121.6 169.8 1,326.6 8,621.1 3,352.9 19,616.7 607.8
----- ----- -------- -------- -------- --------- ------
Income (loss) from operations....... (21.6) (69.8) (142.7) (8,521.1) (3,252.9) (19,516.7) (507.8)
Interest income..................... 8.7 6.1 48.4 200.0 119.6 233.3 32.9
----- ----- -------- -------- -------- --------- ------
Net income (loss)............... (13.0) (63.7) (1,378.1) (8,321.1) (3,133.3) (19,283.3) (474.9)
===== ===== ======== ======== ======== ========= ======
</TABLE>
28
<PAGE>
REVENUE
Our quarterly software development revenue, before the offset of stock-based
compensation, for the seven quarters ended September 30, 1999 is derived from
our technology license agreement with Bank of Montreal. We recognized revenue of
approximately $210,000 per month over the ten month period from April 30, 1998
to February 28, 1999. Beginning April 1, 1999 we deferred a portion of the
revenue received under this agreement in connection with Bank of Montreal's
waiver of its exclusive rights to our technology in Canada. We expect to
recognize these amounts in 2000 upon the expiration of these rights. See
"Certain Transactions".
Our services revenue for the quarter ended March 31, 1998 relates to a
market research study that we conducted to develop strategies for financial
institutions with respect to the use of the Internet and wireless services. Our
services revenue in the quarter ended September 30, 1999 related to a customer
contract for consulting and software design services.
OPERATING EXPENSES
Our quarterly operating expenses have increased primarily due to the growth
of our operations, in particular the increase in our staff and management.
STOCK-BASED COMPENSATION
From October 1, 1999 to January 20, 2000, we granted options to purchase
approximately 782,436 common shares under our stock option plans at a weighted
average exercise price of $9.44 per share. We have recorded deferred stock-based
compensation related to these options of approximately $6.9 million based upon
the proposed initial public offering price of our common shares. This deferred
stock-based compensation will be amortized on a straight line basis over three
years.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through issuances of common
shares together with revenue from operations. Through September 30, 1999, we
received aggregate proceeds of $34.2 million from the issuance of our common
shares. As of September 30, 1999, we had working capital of $25.7 million, which
included $28.0 million in cash and cash equivalents. In October 1999, we
received aggregate proceeds of $41.1 million from additional issuances of our
common shares.
Net cash used in operating activities was $123,000 for the period from
July 28, 1997 to December 31, 1997, $4,000 for the year ended December 31, 1998,
and $3.8 million for the nine months ended September 30, 1999. Net cash used in
operating activities for the nine months ended September 30, 1999 reflects the
operating loss of $7.6 million offset by depreciation of $445,000, amortization
of stock-based compensation of $1.4 million and net changes in working capital
of $1.9 million, primarily related to the deferred revenue from fixed fee
licenses.
Cash provided from financing activities was $1.4 million for the period from
July 28, 1997 to December 31, 1997, $2.6 million for the year ended
December 31, 1998 and $30.1 million for the nine months ended September 30,
1999. These cash flows reflect the proceeds received from issuances of our
common shares.
Cash used in investing activities was $21,000 for the period from July 28,
1997 to December 31, 1997, $927,000 for the year ended December 31, 1998 and
$1.2 million for the nine months ended September 30, 1999. Cash used in
investing activities reflects purchases of property and equipment in each
period. These expenditures consisted of purchases of computer hardware and
software, office furniture and equipment and leasehold improvements. We expect
that our capital expenditures will continue to increase in the future.
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We expect our operating expenses to grow significantly, particularly
research and development expenses and sales and marketing expenses. In addition,
we expect to incur substantial operating expenses of $60 million to $80 million
in 2000 as we open our planned application hosting facilities and additional
sales offices. These expenses may vary depending upon the pace at which we open
these facilities and sales offices. If the net proceeds from this offering are
insufficient to fund our operating expenses, we currently plan to fund these
expenses from cash on hand and revenue from our operations.
Our future liquidity and capital requirements will principally depend on our
rate of growth and the means by which we achieve our growth. For example, we may
utilize cash resources to fund acquisitions or investments in complementary
businesses or technologies. We believe that the net proceeds from the sale of
the common shares in this offering, together with cash on hand and revenue from
our operations, will be sufficient to meet our cash requirements for at least
the next 12 months.
IMPACT OF FOREIGN EXCHANGE RATE EXPOSURE
Substantially all of our revenue is expected to be earned in U.S. dollars. A
significant portion of our expenses is incurred in Canadian dollars. Changes in
the value of the Canadian dollar relative to the U.S. dollar may result in
currency translation gains and losses and could adversely affect our operating
results. To date, foreign currency exposure has been minimal. However, in the
future we intend to hedge all or a significant portion of our annual estimated
Canadian dollar expenses to minimize our Canadian dollar exposure. We are in the
process of implementing our currency strategy with respect to other foreign
currencies.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products were coded
to accept only two-digit entries in date code fields. Both before and after the
year 2000, these date code fields will need to accept four-digit entries to
enable the computer systems and software products to distinguish
twenty-first century dates from twentieth century dates. Any of our computer
programs or hardware that have date-sensitive software or embedded computer
chips which have not been upgraded to be compliant with the requirements of the
year 2000 changeover may recognize a date using "00" as the year 1900 rather
than the year 2000. This could result in a system failure or miscalculations
causing disruptions of operations, including among other things, a temporary
inability to properly process transactions internally or in conjunction with
external computer systems on which we depend to provide our customers with our
product and services. Although we have not suffered from any of these types of
events to date, we may do so in the future.
OUR GENERAL READINESS
The year 2000 requirements affect the computers, software and other
equipment that we use, operate or maintain for our operations. Substantially all
of our software was developed after awareness of these issues became widespread
in the software industry, such that our software was designed with reference to
preventing year 2000 related difficulties from arising. Nonetheless, we have
adopted an internal policy to ensure that our product remains year 2000
compliant. We have conducted interface testing with all other products with
which our product interacts to determine if there are areas where the interfaces
themselves are not year 2000 compliant. We have taken proactive measures,
implementing a program of year 2000 awareness procedures for our employees,
customers and licensors to verify that all necessary procedures have been
undertaken and to ensure that our document management processes are constantly
reviewed to ensure year 2000 compliance. To the best of our knowledge, none of
our internal systems or equipment which are necessary for the conduct of our
business has any defects, errors or deficiencies relating to the year 2000 which
are not capable of being
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remedied, and all expenses associated with this remedial work have been fully
provided for in our business plans.
We have also taken steps to ensure that our non-information technology
systems are year 2000 compliant. In particular, we have established plans to
ensure that our critical systems, including our electrical power, communications
and payroll systems, will not be impaired as a result of issues relating to the
year 2000. We have also devised an internal communications plan and a
contingency plan which designates certain individuals to respond to particular
year 2000 related problems if one occurs.
INDEPENDENT VERIFICATION AND VALIDATION
We engaged an independent consulting firm to conduct a verification of all
of our computer software source code. The review assessed our computer software
code, and a preliminary report has been issued. This report identified one
problem in the source code that related to year 2000 problems. We have made the
appropriate change to our source code.
THIRD PARTY TECHNOLOGY SYSTEMS
If the software used by other entities with which our software interacts,
particularly the software used by the financial institutions with which our
software is integrated, fails to properly distinguish the year 2000 from the
year 1900, the services provided by these financial institutions to their
customers using our software will be substantially disrupted, will provide
erroneous information or will fail to properly process transactions. In addition
to computers and related systems, the operation of our office and facilities
equipment, such as fax machines, telephone switches, security systems and other
common devices, may be affected by the year 2000 problem.
COST OF OUR YEAR 2000 EFFORTS
We have incurred aggregate expenses of approximately $85,000 since our
inception in connection with this process, and do not expect to incur any
significant additional expenditures in this regard.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS
We believe that it is not possible to determine with complete certainty that
all year 2000 related problems affecting us have been identified or corrected.
The number of devices and systems that could be affected and the interactions
among these devices and systems are numerous. We believe that there exists the
potential for a significant number of operational inconveniences and
inefficiencies, and possible disputes and claims related to products or services
used or provided by us.
CONTINGENCY PLANS
We have taken measures to ensure that our internal systems and equipment are
year 2000 compliant for both hardware and software. All of our operating systems
on all critical servers have been upgraded, and all individual computers and
tools have been verified as year 2000 compliant. We perform a daily back-up of
all critical information. In the event of a failure, we estimate that the
information technology infrastructure necessary to run our internal business
operations could be restored.
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BUSINESS
OVERVIEW
We provide an Internet infrastructure solution to financial institutions
that enables them to offer personalized and secure on-line banking, brokerage
and e-commerce services across a wide range of Internet-enabled wireless and
consumer electronic devices. Our solution currently enables consumers to access
on-line banking and brokerage services through network service providers using
digital mobile phones, personal digital assistants, two-way pagers and personal
computers. Our customers do not currently offer e-commerce services based upon
our solution, but have advised us that they expect to begin to do so this year.
With critical security features built in, our solution can be quickly
implemented and integrated with existing systems, and scaled or expanded to
accommodate future growth. Using our platform, financial institutions may build
on their consumers' trust and provide new levels of service in an easy to use,
personalized way.
The emergence of the Internet is having a significant effect on the delivery
of financial services to consumers. As a group, on-line consumers represent an
affluent and important market segment. These consumers are increasingly using
new methods, including wireless technologies, to access the Internet. The
convergence of the Internet and digital wireless technologies presents new
opportunities for financial institutions. Using our platform, financial
institutions can differentiate their services to retain and strengthen their
existing customer relationships and attract new customers.
Our objective is to become the leading provider of Internet infrastructure
solutions for the secure delivery of transaction and information services to
consumers. Our target market includes the largest financial institutions
worldwide. Bank of America, Citigroup, Bank of Montreal and Wells Fargo are in
various stages of implementing our solution. These institutions have a worldwide
customer base with approximately 152 million customer relationships.
INDUSTRY OVERVIEW
GROWTH OF THE INTERNET
The Internet has emerged as a global communications medium to deliver and
share information and conduct business electronically. International Data
Corporation (IDC) estimates that the number of worldwide Internet users will
grow from approximately 142 million users in 1998 to 502 million users by the
end of 2003. The dramatic growth in the number of Internet users has led to a
proliferation of information and services on the Internet, including financial
services, e-mail, e-commerce, news and lifestyle content. We believe that
consumers are increasingly seeking personalized and practical Internet
applications that they can use in their daily activities.
GROWTH OF DIGITAL WIRELESS COMMUNICATIONS
Digital wireless communications have grown rapidly due to declining consumer
costs, expanding network coverage, the availability of extended service features
such as voice and text messaging and the proliferation of wireless devices.
These wireless devices include personal digital assistants such as PalmPilot
connected organizers, and mobile phones such as the Neopoint 1000 and
Qualcomm PDQ, as well as two-way pagers such as those developed by Research In
Motion. Dataquest estimates that there were approximately 217 million digital
wireless subscribers worldwide at the end of 1998 and projects that this number
of subscribers will grow to approximately 828 million by the end of 2003. Recent
developments in wireless technology and deployment of digital data networks have
enabled the introduction of wireless data applications such as financial
services, news and lifestyle content.
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CONVERGENCE OF WIRELESS COMMUNICATIONS AND THE INTERNET
The convergence of wireless communications and the Internet has created new
opportunities for the delivery of wireless data services. Dataquest estimates
that the number of wireless data subscribers worldwide will grow from
approximately 16 million at the end of 1998 to approximately 111 million at the
end of 2003. We expect that the convergence of wireless communications and the
Internet will enable the delivery of wireless multimedia applications, including
voice, data, image and video. International wireless technology groups, such as
the Wireless Application Protocol Forum and the Symbian Alliance, have created
global standards for the transmission of wireless applications, which we believe
will lead to mass penetration of the market for wireless devices and services.
GROWTH OF E-COMMERCE
With the emergence of the Internet as a globally accessible, fully
interactive medium, many individuals and companies that have traditionally
conducted business in person, through the mail or over the telephone now
increasingly conduct business electronically. We expect that consumer use of
e-commerce will accelerate as more individuals gain access to the Internet, as
the cost of Internet access decreases and as security concerns are alleviated.
In some parts of the world, particularly in a number of European and Asian
countries, e-commerce opportunities have been limited because credit cards,
which are currently the only secure form of on-line payment, are not widely
used. We expect these consumers to embrace e-commerce once a direct payment
system is available. According to IDC, Internet users worldwide were expected to
purchase more than $100 billion in goods and services in 1999, increasing to
$1.3 trillion in 2003.
GROWTH OF ON-LINE FINANCIAL SERVICES
THE OPPORTUNITY. Financial services are well suited for Internet
e-commerce. Consumers are increasingly conducting on-line transactions with
banks and securities brokers. These transactions can be faster, less expensive
and more convenient than transactions conducted through a broker, teller
or ATM. IDC expects that the number of users banking on-line in the U.S. will
increase from eight million in 1998 to approximately 40 million by the end
of 2003. In addition, IDC expects the number of on-line brokerage accounts to
continue to grow rapidly from six million in 1998 to 24 million in 2002. The
growth of electronic financial services has intensified price-based competition
among providers of financial services and has increased consumer expectations
for value-added services. Traditional financial institutions are at risk of
having their consumer base eroded by emerging on-line competitors, who are
driving the shift in the delivery of financial products and services from the
traditional physical infrastructure to electronic channels. This potential loss
of consumers creates a sense of urgency for traditional financial institutions
to respond with strategies that build on their unique trust relationship with
consumers and the strengths of their traditional channels and services.
Traditional financial institutions are well positioned to overcome consumer
concerns about security and to drive adoption of on-line services by their large
and attractive customer base. We believe that the increasing popularity of new
Internet-enabled devices will generate greater demand for on-line financial
services and provide an opportunity for financial institutions to deliver secure
personalized service to their consumers.
THE CHALLENGE. Large financial institutions have made significant
investments in computer systems that were not designed to facilitate e-commerce.
As consumers increasingly demand services through the Internet and other
electronic channels, financial institutions require a solution that enables
their existing systems to exchange information with their consumers across a
variety of Internet-enabled devices. This exchange requires a complex bridging
architecture that can interface with a variety of access devices, communication
protocols, operating systems, and network and security technologies. The
solution must also be secure, to protect the integrity and confidentiality of
information, and scalable, to
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process an increasing number of transactions. The ideal solution must also
enable rapid deployment and the flexibility to add additional functions and
services.
THE 724 SOLUTION
We provide an Internet infrastructure solution that enables the delivery of
secure and personalized electronic information services, transactions and
payments using a broad range of mass-market wired and wireless Internet-enabled
devices, including digital mobile phones, personal computers and personal
digital assistants.
We are initially focused on providing our solution to large financial
institutions worldwide. Financial institutions are in a position to use their
large consumer base and unique trust relationship with consumers to accelerate
the adoption of on-line financial services. Our solution provides a robust and
scalable platform that enables financial institutions to deliver branded
financial services to their consumers on Internet-enabled devices in a
personalized, secure and cost efficient manner.
Our platform uses an open architecture and industry standards. The
architecture has been specifically designed to be extendable, allowing for the
addition of new devices, content and services.
724 SOLUTIONS FINANCIAL SERVICES PLATFORM
[Diagram]
[The diagram illustrates that different types of consumer devices connect to
network access providers. These network access providers connect to 724's
network and device gateway. 724's network and device gateway connects to 724's
services infrastructure, which connects to 724's transaction and content
gateway. The transaction and content gateway connects to financial institutions,
merchants and content providers. The administrative function supports the
overall architecture and provides a feed to a data warehouse. Security is
provided between each of these points in the system.]
Our architecture has four major components:
- THE NETWORK AND DEVICE GATEWAY provides access to a variety of
Internet-enabled devices and networks to ensure a consistent consumer
experience. Our platform automatically determines the appropriate
presentation of information for the device being used.
- THE SERVICES INFRASTRUCTURE enables: consumer applications, such as
banking, brokerage and e-commerce; personalization of the user experience;
notification services based on the consumer's interests and priorities;
and targeted marketing services. The services infrastructure also enables
session management, which ensures the continuity of a transaction over the
network. The architecture is supported by an overall administrative
function designed for easy and efficient management.
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- THE TRANSACTION AND CONTENT GATEWAY connects to a financial institution's
existing infrastructure through a server using Open Financial Exchange
(OFX) or Extensible Markup Language (XML), two communication standards
that permit the electronic exchange of data, and to merchants and content
providers through the use of XML.
- THE SECURITY LAYER provides security throughout the communication and
payment process from the consumer through to the network service provider.
Our solution is compatible with existing security technology used by
financial institutions and wireless and other network service providers.
We believe our solution will enable financial institutions to maintain and
deepen consumer relationships and accelerate the adoption of Internet-based
financial services. Our solution can be rapidly implemented, integrates easily
with existing systems, addresses security issues, is scalable and provides a
robust platform for future growth. Key benefits of our solution include:
- SPEED TO MARKET: Launched in May 1999, our solution can be rapidly
installed, branded and offered to consumers.
- EASE OF INTEGRATION WITH EXISTING SYSTEMS: Our platform links to a
financial institution's existing systems, enabling financial institutions
to preserve their existing investment, and to extend the productivity and
functionality of their existing infrastructure to new electronic channels.
- SECURITY: The security framework of our platform addresses financial
institutions' stringent security standards, creating an environment of
trust for consumers and allowing merchants to offer e-commerce services
with reduced fraud related concerns.
- SCALABILITY AND MANAGEABILITY: Our solution is designed to add users
efficiently and effectively. We believe that it can support significant
growth in users with little increase in infrastructure. It has a built in
set of tools to easily manage recovery, redundancy and deployment.
- ABILITY TO EXPAND FUNCTIONALITY: Our platform is designed to facilitate
the addition of new devices, content and services. It provides a robust
platform for the growth of electronic financial services and e-commerce.
- MAINTAIN AND DEEPEN CONSUMER RELATIONSHIPS: Our solution allows financial
institutions to connect directly with consumers wherever they can obtain
wired or wireless Internet access. Our solution also allows consumers to
set up their own personal preferences and alerts for an easy to use
experience. The information contained in the personalization and
notification databases provides our customers with a competitive advantage
in building consumer loyalty through the delivery of value-added services.
We believe that our solution benefits our customers and the companies with
which we have strategic relationships by enabling the delivery of differentiated
on-line financial services. These services increase consumer loyalty and drive
wireless airtime usage, consumer electronic device sales, and the purchase of
other products and services.
OUR STRATEGY
Our objective is to become the leading provider of an Internet
infrastructure for the secure delivery of services using a broad range of
Internet-enabled devices. Our strategy is to:
FOCUS ON LARGE FINANCIAL INSTITUTIONS: We are initially focusing on
providing our solution to large financial institutions worldwide, particularly
banks and brokerage firms. We believe that large financial institutions have
both the scale and global consumer base to maximize the adoption of services
based on our product. Financial institutions that have an aggregate of
approximately 152 million customer relationships worldwide are in various stages
of implementing our solution. We believe that the trust
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relationship these institutions have with consumers, combined with our secure
payment infrastructure, will accelerate consumer adoption of on-line financial
services and e-commerce transactions.
ACCELERATE WORLDWIDE ADOPTION OF OUR SOLUTION: In an effort to encourage
rapid deployment of our solution by financial institutions, we are:
- Establishing relationships and alliances worldwide with wireless and other
network service providers, device manufacturers and content and technology
providers;
- Providing a compelling consumer experience through a consistent
user-friendly interface on a variety of Internet-enabled devices;
- Building a worldwide application hosting service; and
- Reducing our customers' initial cost of using our solution by charging a
variable license fee based on the number of users per month.
EXPAND OUR PLATFORM: Our architecture is designed to be extendable,
enabling our customers to continue to offer additional on-line services across a
variety of protocols, operating systems, networks and devices to maximize
consumer reach. We expect to further expand our reach by supporting additional
devices and broadening our functionality by introducing new applications,
content and services. For example, we plan to integrate into our solution public
key infrastructure (PKI), technology which facilitates the management of the
tools necessary to ensure authentication of user identity and the
non-repudiation of transactions. We believe this security feature is essential
for the widespread adoption of e-commerce transactions. Additionally, we have
established our Advanced Technology Center (ATC) to, among other things, gain
early access to device, wireless and network technologies.
PURSUE SELECTIVE ACQUISITIONS TO EXPAND OUR CAPABILITIES: We intend to
pursue acquisitions of companies and technologies that we believe will allow us
to quickly increase the scale and scope of our operations, such as expanding our
research and development team, expanding into new geographical markets or
industry sectors and providing new services.
DEVELOP APPLICATIONS FOR OTHER SECTORS: Once we have established a
significant presence in the financial services sector, we expect to use many of
the components of our architecture in other industries such as insurance, sales
force management and logistics.
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OUR PLATFORM AND RELATED SERVICES
Our platform enables the delivery of secure and personalized electronic
information, services, transactions and payments using a broad range of
mass-market wired and wireless Internet-enabled devices. Our platform is
extendable across a wide array of protocols, operating systems and networks,
enabling financial institutions to deliver personalized transactions, services
and information to their customers over a wide range of communications networks.
Our platform architecture is illustrated below:
[Diagram]
[The diagram illustrates that 724's network and device gateway connects with
724's services infrastructure. The services infrastructure consists of consumer
applications, (including banking, brokerage and e-commerce services),
personalization, notification and alerts, targeted marketing services, session
management. The services infrastructure connects to 724's transaction and
content gateway. The administration function supports the overall architecture
and provides a feed to a data warehouse. Security is provided between each of
these points in the system.]
NETWORK AND DEVICE GATEWAY
The network gateway transforms data from our platform into formats suitable
for use in a wide variety of wired and wireless networks including Code Division
Multiple Access (CDMA), Global System for Mobile Communication (GSM), Time
Division Multiple Access (TDMA), Cellular Digital Packet Data (CDPD), Mobitex
and Internet Protocol. Almost all digital mobile systems worldwide use one of
these major types of wireless access formats for voice and data communications.
This gateway enables our customers to quickly deploy their services through
multiple network service providers and allows for new protocols to be supported
without changes to our architecture.
The device gateway supports the presentation of our applications on multiple
devices. It recognizes the type of device a consumer is using and optimizes the
format of the information for the characteristics of that particular device
type. Our software automatically formats information delivered to a device using
style sheets programmed in Extensible Markup Language (XML) or Extensible Style
Language (XSL), a widely used language in Internet communications. This approach
enables our customers to deliver services over many types of access devices, and
allows new devices to be supported without changes to our architecture. The
network and device gateway ensures consumers receive a consistent and
user-friendly experience regardless of the device used.
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SERVICES INFRASTRUCTURE
CONSUMER APPLICATIONS. Our platform enables the delivery of applications
that include the following:
BANKING
- account information and statements
- credit card statements
- intra-bank transfers
- bill payment
- bill presentment*
SECURITY ANALYSIS
- trading data and charting
- detailed stock quotes
- watchlists
- alerts
E-COMMERCE*
- direct purchase and payment
- travel services
BROKERAGE
- investment statements
- holdings and activities
- balances and open orders
- order placement and confirmation*
INFORMATIONAL
- news
- weather
- horoscopes
- lottery results
----------------------------
* Expected to be offered by our customers this year.
These applications are designed to be easy to use by consumers and provide
functions that can be quickly delivered to market.
PERSONALIZATION. Our solution enables consumers to customize their services
through a single set-up procedure. Once completed, a consumer's preferences are
stored in a unique profile on the network rather than on a specific device.
Thereafter, a consumer may use any Internet-enabled device to access his or her
account to retrieve information and conduct transactions without repeating the
set-up procedure. Changes in preferences made by a consumer on one device will
automatically be reflected on all other devices used by that consumer.
NOTIFICATION AND ALERTS. Our platform allows consumers to be notified
immediately of specific events such as stock price movements or releases of
relevant research. In the future, we expect that our platform will allow
notification of changes in a bank account balance above or below a previously
specified amount. The notification service supports a variety of alert
mechanisms such as text messages using e-mail and standard mobile network short
messaging service (SMS), which facilitates the transmission of messages between
subscribers and external systems such as e-mail, paging and voicemail.
TARGETED MARKETING SERVICES. Using data generated from personalized
profiles, financial institutions have the ability to gain a better understanding
of their consumers' needs and interests. Our targeted marketing service allows
the distribution of information directly to their consumers with personalized
messages or services based on their preferences.
SESSION MANAGEMENT. Our platform's session management system ensures
continuity of a transaction over the network. For example, if a user is
disconnected during a transaction but is able to reconnect within a prescribed
period of time, the user can complete the transaction without repeating the log
in process or previous entries.
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ADMINISTRATION
The administration functions allow our platform to be managed within a
customer's existing computer infrastructure. Through these services, platform
administrators can start and stop individual servers, add or remove resources
such as hardware from the platform without disrupting service, monitor
performance and perform system back-up procedures. These administration services
can be integrated with popular systems management tools, allowing our platform
to be monitored as part of a financial institution's overall computing
environment. We provide a feed into a data warehouse of all transactions
recorded by the system.
TRANSACTION AND CONTENT GATEWAY
Our platform interfaces with the existing systems of financial institutions
through the transaction and content gateway. This connection is made using Open
Financial Exchange (OFX), an industry standard specification for the exchange of
financial data between financial institutions and consumers through the
Internet, or using Extensible Markup Language (XML). Merchants and content
providers connect to our system through an XML interface. This gateway allows
customers to quickly and easily connect to our platform and to extend the value
of their existing systems.
SECURITY
Our security framework is based on a strict methodology of threat
evaluation, risk analysis and policy creation, designed to address
authentication, authorization, privacy, integrity and non-repudiation. A
conventional user id/password mechanism provides user identification and
authentication. Our software incorporates standard cryptography protocols that
ensure the confidentiality of communications between servers, including Secure
Socket Layer (SSL) and Transport Layer Security (TLS), enhanced with Elliptical
Curve Cryptography (ECC) cypher-suites from Certicom, to ensure the privacy of
transactions and communications. These security technologies require minimal
computing power for encrypting and decrypting messages, making them well suited
for secure communications to wireless handheld devices. We are currently working
to incorporate Public Key Infrastructure (PKI) technology into our applications
to provide additional support for user authentication and non-repudiation. Use
of PKI technology, which supports digital signatures, is expected to grow as a
means of creating a secure e-commerce environment over the Internet or virtual
private networks. This security framework addresses financial institutions'
rigorous security requirements, creating an environment of trust for consumers
and allowing merchants to offer e-commerce services with reduced fraud related
concerns.
IMPLEMENTATION AND CUSTOMER SERVICE
We offer our customers consulting services regarding the installation and
deployment of our platform as well as ongoing product support. Services offered
during installation include training, configuration and connectivity to existing
systems. We believe that our customer support and consulting services result in
improved customer satisfaction and loyalty, a shorter sales process, faster
implementation and an increase in the sales of our product.
Customers have the option of implementing our solution using their in-house
personnel or using personnel provided by one of our designated third party
service providers. We bring together and coordinate the technology and resources
needed to deliver a single solution to customers who do not wish to use their
in-house resources to implement our solution.
APPLICATION HOSTING SERVICE
We are establishing an application hosting service to host and manage the
server infrastructure and software platform for our customers. These application
hosting facilities will support the scalability of
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our platform. We expect to provide these services worldwide, with facilities
based in Europe, Asia and North America. We may acquire or partner with third
parties to provide this service. We may also provide this service by
establishing application hosting facilities of our own or through a combination
of these strategies. We expect to incur significant expenses in the year 2000 in
order to establish application hosting facilities requested by our customers or
potential customers.
TECHNOLOGY
Our open-architecture platform communicates with our customers' systems via
an industry standard called Open Financial Exchange (OFX) gateway. Our platform
supports connectivity with Windows NT, the Internet, and database servers
compliant with Open Database Connectivity (ODBC), a standard protocol for
accessing database servers. We are enhancing our platform to support Sun
Microsystems' Solaris operating system and other standards including Financial
Information Exchange (FIX), a messaging standard that permits real-time
electronic securities transactions. Our open architecture allows us to
continually integrate best-in-class technology, ensuring that our customers'
needs are met on a timely basis.
Our architecture complies with Common Object Request Broker Architecture
(CORBA), a standard for applications software design used widely in the software
industry. We also use other widely accepted standards in developing our product,
including the following:
- encryption technologies such as Certicom's Elliptical Curve Cryptography
(ECC) and Secure Socket Layer (SSL), and RC4, a technology that permits
the encryption of large amounts of data;
- Hypertext Transfer Protocol (HTTP), the fundamental transport protocol for
Internet access on a client and server system; and
- Simple Mail Transport Protocol (SMTP), a standard protocol for e-mail
transmissions among different types of systems.
We are a full member of the Wireless Application Protocol Forum, an industry
association that has developed a leading standard for wireless information and
telephony services on digital mobile phones and other digital wireless devices.
Members of this organization include network service providers, device
manufacturers, leading infrastructure providers and software developers.
Our programs are written in C++ and Java, widely accepted standard
programming languages for developing object-oriented applications. We also make
extensive use in our software applications of Extensible Markup Language (XML),
which was completed by the World Wide Web Consortium in 1998.
RESEARCH AND DEVELOPMENT
As of December 31, 1999, our research and development department consisted
of 103 people in four business units: program management, product definition,
architecture and product development. These units are responsible for assessing
new technologies, new release schedules, product architecture, security,
performance engineering, product requirements, quality assurance and product
support.
Our research and development expenditures were $44,000 in the period from
July 28, 1997 (inception) to December 31, 1997, $2.3 million for the year ended
December 31, 1998 and $4.6 million for the nine months ended
September 30, 1999.
In August 1999, we established our Advanced Technology Center (ATC) as part
of our architecture group. The ATC is primarily a research center focused on
rapidly developing innovative technologies from the concept stage to the
prototype stage. The ATC's main objectives are to gain early access to emerging
technologies, improve our products and services, expedite deployment to our
customers and
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create mutually beneficial relationships with customers, network service
providers and device manufacturers. As of December 31, 1999, the ATC employed
11 individuals with expertise in specialized areas such as carrier, database and
encryption technologies. To reflect the importance of the ATC in our research
and development process, we plan to increase the size of this group.
In July 1999, we established the Performance Engineering Group (PEG), a
group within our architecture group. The objective of PEG is to establish
benchmarks for our technology, to recommend and validate reference architectures
and to provide feedback to the architecture and product groups. We invest
heavily in performance engineering to ensure that our solution will be scalable
for large numbers of users and transaction volumes.
CUSTOMERS
We currently market our product and services to large financial institutions
such as banks and brokerages. Bank of Montreal, Bank of America, Citigroup and
Wells Fargo are in various stages of implementing our solution.
BANK OF MONTREAL
Bank of Montreal is a leading Canadian bank, which as of October 1999,
including its U.S. subsidiaries, had approximately Cdn.$231 billion in total
assets and approximately seven million retail customers. Bank of Montreal is a
fully integrated financial institution offering brokerage services through its
broker subsidiaries.
In May 1999, our platform enabled Bank of Montreal to become the first
financial institution in North America to launch an integrated wireless banking
and brokerage application in a market trial with approximately 350 users. This
service, named Veev, supports the delivery of banking, brokerage and lifestyle
applications through wireless phones and PalmPilot connected organizers. Bank of
Montreal has announced the success of its market trial and is currently in the
process of rolling out the Veev service throughout Canada.
In December 1999, Harris Bank, a U.S. subsidiary of Bank of Montreal,
announced its plans to commence a market trial of an on-line service based upon
our solution to customers in the Chicago, Illinois area.
BANK OF AMERICA
Bank of America, with $621 billion in assets as of September 30, 1999, is
the parent company of Bank of America, N.A., the largest bank in the U.S. The
bank serves more than 30 million households and 2 million businesses across the
country. Bank of America is a leading on-line banking provider in the U.S., with
more than 1.6 million on-line customers.
In July 1999, Bank of America announced that it intends to begin piloting
wireless on-line banking services using our solution this year.
CITIGROUP
Citigroup is a diversified holding company whose businesses provide a broad
range of financial services to consumer and corporate customers worldwide. As of
September 30, 1999, Citigroup had approximately $687.5 billion in total assets
and 100 million customer relationships with consumer operations in more than
50 countries.
In August 1999, Citigroup announced its intention to implement our solution
worldwide under the leadership of its e-Citi division. In December 1999, we
entered into a master technology license agreement with Citicorp Strategic
Technology Corporation, a subsidiary of Citigroup, which will enable
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<PAGE>
us to license our technology to Citigroup's subsidiaries. We expect to enter
into one or more additional agreements with a number of Citigroup's subsidiaries
worldwide, including Citibank and Salomon Smith Barney Inc., to deliver our
solution to their customers.
WELLS FARGO
Wells Fargo is a diversified financial services company providing banking,
insurance, investments, mortgage and consumer products and services. As of
September 30, 1999, Wells Fargo had $203 billion in assets and approximately
15 million customers.
In September 1999, Wells Fargo entered into a licensing agreement with us
that will enable it to begin to deliver on-line banking services to its
customers this year.
STRATEGIC RELATIONSHIPS
We are establishing worldwide relationships with wireless and other network
service providers, device manufacturers, technology companies and content
providers to facilitate the adoption of our customers' on-line products and
services. We anticipate that some of these relationships will lead to formal
arrangements in which we incorporate new technologies into our solution, or in
which we adapt our solution to support new types of devices. Through strategic
relationships, we are able to gain technological leadership, worldwide access
and positioning and an early awareness of emerging Internet technologies. Our
participation in the development of these technologies at an early stage gives
us a competitive advantage to bring new products and services to our customers.
Currently, we are working with network service providers such as Bell Mobility
and Sprint; device manufacturers such as 3Com, Ericsson, Motorola, Neopoint,
Nokia, Qualcomm and Research In Motion; software and technology companies such
as Certicom and Sun Microsystems; and system integrators such as Deloitte &
Touche. We believe that our solution benefits each of these types of companies,
as greater demand for digital wireless financial services increases consumer
loyalty and drives wireless airtime usage, consumer electronic device sales and
the consumption of other products and services.
SALES AND MARKETING
As of December 31, 1999, we employed 20 people in sales. We intend to hire
additional people as we expand our Toronto sales team and establish sales teams
in New York, San Francisco, the U.K., continental Europe and the Asia Pacific
region. Our sales employees receive incentive compensation based on individual
sales volume. Deloitte & Touche assists us in selling and in implementing our
solution directly to large financial institutions worldwide.
As of December 31, 1999, we employed eight people in our marketing
department. Our marketing strategy consists of the following elements:
- DEFINE AND SELL OUR CATEGORY: We are driving a new category of consumer
services through a branding campaign for the personal financial
marketplace. We believe this will raise consumer expectations and create
demand for new services, while enabling financial institutions to meet
these expectations and demands.
- BUILD OUR IMAGE: We are seeking a corporate image that reflects
leadership, an understanding of our customers' business, technological
innovation and credibility. To achieve this, we intend to establish joint
marketing campaigns to showcase the success of our customers and the
network service providers and device manufacturers with whom we work.
- SEEK MARKET LEADERSHIP: By selling and deploying our solution to leading
financial institutions, we seek to gain early market share in the
provision of on-line solutions for financial institutions. Where possible,
we will take advantage of opportunities to conduct marketing activities
with our
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<PAGE>
customers and the network operators and device manufacturers with whom we
work to create marketing programs.
COMPETITION
The market for our product and services is becoming increasingly
competitive. The widespread adoption of open standards may make it easier for
new market entrants and existing competitors to introduce products that compete
against ours. We believe that we will compete primarily on the basis of the
quality, functionality, ease of integration of our product and the price of our
services. As a provider of a comprehensive Internet solution to financial
institutions, we assess potential competitors based primarily on their
management, functionality and range of services, the security and scalability of
their architecture, and their client base, geographic focus and capitalization.
Our current and potential competitors include:
- FINANCIAL INSTITUTIONS WITH IN-HOUSE SOLUTIONS: Financial institutions
that develop their own in-house solution with internal expertise and
outsourced service providers and products are a primary source of
competition. These include Celestial Securities Limited's wireless trading
service in Hong Kong; the wireless trading capability developed by
Fidelity using Research In Motion's two-way pagers and the wireless
trading service offered by DLJ Direct in the U.S.; the wireless brokerage
service provided by the on-line broker Fimatex in France; and a wireless
banking service offered by Barclays in the U.K.
- SOFTWARE VENDORS FOCUSED ON FINANCIAL INSTITUTIONS: Competitors include
Aether Systems and w-Trade. In addition, various companies active in the
Internet banking and brokerage businesses with a primary focus on back-end
processing, middleware or front-end personal computer platforms for retail
Internet banking are potential competitors. These include companies such
as S1 Corporation, CosmosBay, Brokat, TIBCO Software and Sanchez Computer
Associates.
- NETWORK SERVICE PROVIDERS: Sprint and BellSouth in the U.S. and NTT
DoCoMo in Japan are leaders in wireless data services. NTT DoCoMo provides
consumers with wireless banking services from over 50 banks as part of its
recently launched i-Mode service. Other network service providers with
advanced wireless data service initiatives include US West, Bell Atlantic,
AT&T Wireless Data Services, Nextel, Airtouch and Omnipoint in the U.S.,
Vodafone, British Telecom, Cellnet, Orange and One 2 One in the U.K.,
Deutsche Telecom in continental Europe, J-Phone, DDI and IDO in Japan,
SingTel and MobileOne in Singapore, and Telstra, Optus and Vodafone in
Australia.
- DEVICE MANUFACTURERS: Ericsson, Motorola, Nokia and Matsushita are
pursuing wireless data service opportunities. Nokia recently announced
that it is working with Deutsche Bank's direct banking unit on a wireless
banking application, and that it plans to work with TD Waterhouse in North
America to develop a wireless trading service.
- SOFTWARE VENDORS, SERVICES VENDORS AND PORTALS: Companies that provide
browsers for digital mobile phones and the infrastructure to link devices
to network service providers and the Internet, such as Phone.com and
Microsoft MSN, are positioning themselves for the dramatic growth of
wireless data services. Companies offering wireless data services such as
e-mail, calendar access, aggregation of content, and a mobile e-commerce
platform include InfoSpace.com, mobilefinance.com, Wireless Knowledge (a
joint venture between Qualcomm and Microsoft), Research In Motion, Go
America, EmailPager, Logica, CMG and portals, such as America Online,
Yahoo! and Excite@Home. Software companies primarily focused on commercial
wireless applications are potential competitors in the future, including
Qualcomm Wireless Business Systems, Nettech Systems, Dynamic Mobile Data
and Mobimagic Co., a newly formed joint venture between Microsoft and NTT
Mobile.
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INTELLECTUAL PROPERTY RIGHTS
We protect our proprietary technology through a combination of contractual
confidentiality provisions, trade secrets, and patent, copyright and trademark
laws. We have applied for patents and to have several of our trademarks
registered, including "724 Solutions", "724 Solutions & Design" and "E-Anywhere"
in Canada and "724 Solutions" and "724 Solutions & Design" in the U.S. To date,
none of these patents has been issued and none of these trademarks has been
registered. Despite the measures we have taken to protect our intellectual
property, we cannot assure you that third parties will not breach the
confidentiality provisions in our contracts or infringe or misappropriate our
copyrights, pending patents, trademarks and other proprietary rights. We may not
be able to secure patent or trademark registrations for all of our patent
applications or trademarks. We cannot assure you that third parties will not
independently discover or invent competing technologies or reverse engineer our
trade secrets, software or other technology. Moreover, the laws of some foreign
countries may not protect our proprietary rights to the same extent as do the
laws of the U.S. and Canada. Therefore, the measures we are taking to protect
our proprietary rights may not be adequate.
We also rely on technology and other intellectual property licensed to us by
third parties. For example, we have entered into a license agreement with
Certicom and Consensus for use of their encryption technology. We have also
entered into license agreements with third party content providers. In addition,
we use certain third party software that may not be available to us on
commercially reasonable terms or prices or at all in the future. Moreover, some
of our license agreements are non-exclusive, and therefore, our competitors may
have access to the very same technology licensed to us.
To date, we have not been notified that our product infringes on the
proprietary rights of third parties, but third parties could claim infringement
by us with respect to our existing or future products. Any claim of this kind,
whether or not it has merit, could result in costly litigation, divert
management's attention, cause delays in product installation, or cause us to
enter into royalty or licensing agreements on terms that may not be acceptable
to us.
EMPLOYEES
As of December 31, 1999, we had a total of 183 employees. None of our
employees is covered by any collective bargaining agreements. We believe that
our relations with our employees are good.
LEGAL PROCEEDINGS
We are not currently subject to any material legal proceedings; however, we
may from time to time become a party to various legal proceedings arising in the
ordinary course of our business.
FACILITIES
Our registered and head office is located in Toronto, Ontario in a
75,014 square foot facility under a lease which expires in 2005.
CORPORATE HISTORY AND MATERIAL SUBSIDIARIES
The Company was incorporated under the BUSINESS CORPORATIONS ACT (Ontario)
on July 28, 1997. Pursuant to Articles of Amalgamation dated July 7, 1999, the
Company amalgamated with 1344495 Ontario Limited, a wholly owned subsidiary, and
continued under the name 724 Solutions Inc. Pursuant to Articles of Amendment
dated December 30, 1999, the Company effected a two-for-one split of its common
shares. The Company also carries on its business through three wholly-owned
subsidiaries: 724 Solutions International SRL, 724 Solutions Corp. and
724 Solutions (UK) Limited, which are corporations incorporated under the laws
of Barbados, the state of Delaware and the United Kingdom, respectively.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information with respect to our executive
officers and directors as of the date of this prospectus:
<TABLE>
<CAPTION>
NAME AGE TITLE
- ---- -------- -----
<S> <C> <C>
Gregory Wolfond.......................... 38 Chairman and Chief Executive Officer
Christopher Erickson..................... 34 President, General Counsel, Secretary and
Director
Andre Boysen............................. 35 Chief Technology Officer and Director
Kerry McLellan........................... 38 Chief Operating Officer and Director
Karen Basian............................. 37 Chief Financial Officer
Mina Wallace............................. 44 Executive Vice President of Field
Operations
Alistair Rennie.......................... 34 Senior Vice President of Marketing
Lloyd F. Darlington...................... 54 Director
Martin A. Stein.......................... 59 Director
James D. Dixon........................... 56 Director
Harri Vatanen............................ 37 Director
Alan Young............................... 33 Director
</TABLE>
GREGORY WOLFOND. Mr. Wolfond co-founded our company in July 1997 and has
served as Chief Executive Officer since September 1997 and Chairman since April
1998. In 1987, Mr. Wolfond founded Footprint Software Inc., a financial services
software company specializing in object-oriented agent and sales technologies
with an emphasis on branch automation. At Footprint, Mr. Wolfond helped to
develop systems designed for ease of use across large financial institutions.
IBM purchased Footprint in May 1995, and Mr. Wolfond continued to serve as Chief
Executive Officer of Footprint until July 1997. While at IBM, Mr. Wolfond helped
develop IBM's network computing technology for the financial services industry.
Mr. Wolfond has a BA in Computer Science from the University of Western Ontario.
Mr. Wolfond resides in Toronto, Ontario.
CHRISTOPHER ERICKSON. Mr. Erickson co-founded our company with
Mr. Wolfond. He has served as President and General Counsel since our inception
and as a director since July 1998. In 1989, he founded Cygnus Computer
Associates Ltd., a software engineering firm that specialized in developing
client-server applications. While continuing to act as President of Cygnus he
joined Fasken Campbell Godfrey, a Canadian law firm, as a corporate/commercial
technology lawyer in 1994. In July 1997 he sold his interest in Cygnus and left
Fasken Campbell Godfrey to start our company. He is a director of the
Washington, D.C. based Computer Law Association and Chairman of the E-Commerce
Subcommittee of the Investment Funds Institute of Canada. He has also served as
a director of the Foundation for Responsible Computing and as a director and
general counsel to the Interactive Multimedia Arts and Technologies Association.
Mr. Erickson is a graduate of the computer engineering program (B.Sc.) at the
University of Waterloo and of the University of Toronto Law School (LLB). He is
a licensed professional engineer (P.Eng.) and a lawyer qualified to practice in
Ontario. Mr. Erickson resides in Toronto, Ontario.
ANDRE BOYSEN. Mr. Boysen has served as our Chief Technology Officer since
March 1998 and as a director since July 1998. He has extensive experience in the
financial software and telecommmunications industry. Mr. Boysen acted as Chief
Technology Officer for Footprint between March 1996 and March 1998. As CEO of
Footprint's Asia Pacific operations between 1994 and 1996, he established its
operations in Australia, New Zealand, Hong Kong, Singapore and Thailand. Between
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1990 and 1994, he served as CEO of Open Systems Limited, which developed turnkey
client-server systems for several large companies. He sold his interest in Open
Systems when he joined Footprint. Mr. Boysen has a B.Sc. in Computer Engineering
from the University of Ottawa and an MBA from the Richard Ivey School of
Business at the University of Western Ontario. Mr. Boysen resides in Toronto,
Ontario.
KERRY MCLELLAN. Dr. McLellan joined our company in August 1998 as Executive
Vice-President, Strategy. He was appointed a director in March 1999 and Chief
Operating Officer in April 1999. He has previously managed several service
companies including Applied Business Research Limited and Melansons Waste
Management. He has acted as a consultant for Canadian and U.S. banks, and
technology and telecommunications companies. He also was involved in the
establishment of Symcor, a Canadian multi-bank consortium for cheque and payment
processing. He holds a PhD in Business Strategy, specializing in technology and
banking from the Richard Ivey School of Business at the University of Western
Ontario. Dr. McLellan resides in Westfield, New Brunswick.
KAREN BASIAN. Ms. Basian joined our company as Chief Financial Officer in
February 1999. In September 1994, she joined Frito-Lay as Finance Director, and
became Director of Strategic Planning in July 1995. She served as Chief
Financial Officer and Vice-President, Finance at Hostess Frito-Lay from
September 1996 to February 1999. She has also held positions with Bain & Company
(from March 1989 to August 1994) where she served as a consultant and with
Deloitte & Touche (from September 1984 to December 1987) where she specialized
in international tax. Ms. Basian serves on the Board of the Alumni Association
for the University of Western Ontario. Ms. Basian has an Honors degree in
Business Administration from the University of Western Ontario, an MBA from IMD,
Lausanne, Switzerland and is a Chartered Accountant. Ms. Basian resides in
Toronto, Ontario.
MINA WALLACE. Ms. Wallace joined our company in April 1999 as Executive
Vice President of Field Operations. In 1991, she joined PeopleSoft Canada Co. as
Vice President of Sales, and became General Manager of Sales in 1996. Between
1986 and 1991, she held an executive sales position at Dun & Bradstreet
Software. Ms. Wallace has a Bachelor of Education and an MBA from the University
of Manitoba. Ms. Wallace resides in Toronto, Ontario.
ALISTAIR RENNIE. Mr. Rennie joined our company in April 1999 as Senior Vice
President of Marketing. In 1989, Mr. Rennie joined IBM as a business analyst and
held various product management and marketing positions with IBM until April
1999, becoming Program Director, Applications Server Marketing, in 1997.
Mr. Rennie has a BA in Economics and an Honors degree in Business Administration
from the University of Western Ontario. Mr. Rennie resides in Toronto, Ontario.
LLOYD F. DARLINGTON. Mr. Darlington has served as a director since
July 1998. Mr. Darlington was originally appointed to our board as a nominee of
Bank of Montreal under a shareholder agreement with our strategic investors.
Since May 1996, he has acted as Chief Technology Officer and General Manager of
Bank of Montreal. He is a director of Cebra Inc., Bank of Montreal's
wholly-owned electronic commerce subsidiary, and of Symcor Inc., a payment
processing corporation owned and operated by three of Canada's major financial
institutions. He began his career with Bank of Montreal in 1967 and, since 1980,
has held a variety of executive positions. Most recently, he served as Executive
Vice President, Operations from 1989 to 1996. Mr. Darlington received a BA in
English and Psychology from McGill University and an MBA from Concordia
University. Mr. Darlington resides in Toronto, Ontario.
MARTIN A. STEIN. Mr. Stein has served as a director since September 1998.
He is the President of Sonoma Mountain Ventures, a company he founded in
October 1998. Prior to founding Sonoma Mountain Ventures, Mr. Stein served as
Vice-Chairman of Technology and Operations of Bank America Corporation, was a
member of the bank's Office of the Chairman and served as
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Vice-Chairman of the capital budget committee. Mr. Stein joined Bank America in
June 1990 as Executive Vice-President. Before joining Bank America, Mr. Stein
served as Executive Vice President and Chief Information Officer of Paine Webber
in New York. Mr. Stein is a member of the board of several companies in the
financial services and technology industries, including Bank of Hawaii, LYNX
Photonic Networks and Wall Street Access. Mr. Stein has also served as a
director of Sequent Computer Systems, Payment Net and FICS (a Belgian software
company). Mr. Stein received a BA from Saint John's University, attended New
York University's Graduate School of Business, and received an Honorary
Doctorate in Commercial Science from Saint John's University. Mr. Stein resides
in San Francisco, California.
JAMES D. DIXON. Mr. Dixon has served as a director since June 1999.
Mr. Dixon was originally appointed to our board as a nominee of Bank of America
under a shareholder agreement with our strategic investors. He has served as
Group Executive of Bank of America Technology and Operations, a subsidiary of
Bank of America Corporation, since September 1998. From 1991 until the merger of
NationsBank Corporation and Bank America Corporation, Mr. Dixon served as
President of NationsBank Services, Inc. Prior to that, he served as Chief
Financial Officer of C&S/Sovran Corporation, a predecessor to NationsBank.
Mr. Dixon resides in Atlanta, Georgia.
HARRI VATANEN. Mr. Vatanen has served as a director since August 1999.
Mr. Vatanen was originally appointed to our board as a nominee of Sonera under a
shareholder agreement with our strategic investors. He is the founder and
President of Sonera SmartTrust and Senior Vice President of Sonera Corporation,
formerly Telecom Finland Ltd. Mr. Vatanen has worked in the telecommunications
industry for more than 15 years. Prior to joining Sonera, Mr. Vatanen worked at
a communications services management consulting company. Prior to working as a
consultant, he worked for Nokia Datacommunications in the product development
and international sales and marketing departments as a development manager of
future projects. Mr. Vatanen has a Master of Science in telecommunications,
information technology, and economics from Helsinki University of Technology.
Mr. Vatanen resides in London, U.K.
ALAN YOUNG. Mr. Young has served as a director since August 1999.
Mr. Young was originally appointed to our board as a nominee of Citigroup under
a shareholder agreement with our strategic investors. Since March 1998, he has
served as Vice-President, Access Devices and Distribution Technologies for
e-Citi, a division of Citigroup. From March 1995 to March 1998, Mr. Young served
as Vice President of Engineering of Viacom Inc., where he had responsibility for
implementing Viacom's worldwide satellite distribution strategy. From
September 1991 to March 1995, he served as a Technical Manager for MTV Europe
where he had responsibility for developing MTV Europe's satellite distribution
strategy. Mr. Young graduated from the University of York with a Masters degree
in Engineering. From August 1988 to September 1991, Mr. Young worked for British
Telecom, developing service specifications for television satellite uplink
facilities. Mr. Young resides in New Canaan, Connecticut.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board has a Compensation Committee, a Stock Option Committee, an Audit
Committee and a Corporate Governance Committee.
COMPENSATION COMMITTEE. The Compensation Committee will review and make
recommendations to our board concerning the terms of the compensation packages
provided to our senior executive officers, including salary, bonus and awards
under any new compensation plans that we may adopt in the future. Our
Compensation Committee will also supervise the Stock Option Committee's
administration of our "2000 Stock Option Plan", establish guidelines for our
Stock Option Committee with respect to granting of options to our employees. See
"--Stock Option Plans". The members of our
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Compensation Committee are Gregory Wolfond, Christopher Erickson, Kerry
McLellan, Martin A. Stein and Alan Young.
STOCK OPTION COMMITTEE. The Stock Option Committee has administered our
Canadian stock option plan and our U.S. stock option plan, determining which
individuals received grants of awards under these plans, and the terms of these
grants. Upon completion of the offering, no further grants of options will be
made under either of these plans and our Stock Option Committee will begin to
administer our "2000 Stock Option Plan", subject to the guidelines determined by
our Compensation Committee. See "--Stock Option Plans". The members of the Stock
Option Committee are Christopher Erickson and Andre Boysen.
AUDIT COMMITTEE. The Audit Committee oversees the retention, performance
and compensation of our independent auditors, and the establishment and
oversight of our systems of internal accounting and auditing control. The
members of our Audit Committee are Kerry McLellan, Lloyd F. Darlington and
James D. Dixon. We expect to appoint two new members to our board at our annual
shareholders meeting that we plan to convene this year, each of which will
become members of our audit committee.
CORPORATE GOVERNANCE COMMITTEE. The Corporate Governance Committee develops
and monitors our approach to corporate governance issues, establishes procedures
for the identification of new nominees to our board, develops and implements
orientation procedures for new directors and assesses the effectiveness of our
board and its committees. The members of our Corporate Governance Committee are
Christopher Erickson, Kerry McLellan, Lloyd F. Darlington, Martin Stein and
Alan Young.
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EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
For the year ended December 31, 1999, our aggregate cash compensation
payments to our executive officers and directors for services rendered in these
capacities was approximately $975,000.
The following table sets forth all compensation we paid to our Chief
Executive Officer and each of our executive officers whose total salary and
bonus exceeded Cdn.$100,000 (approximately $65,000) in the years indicated.
Other than Christopher Erickson, we did not compensate any of these individuals
in 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
----------------------------- UNDERLYING
OTHER ANNUAL OPTIONS
NAME AND PRINCIPAL POSITION YEAR SALARY ($) COMPENSATION ($) GRANTED (#)
- --------------------------- -------- ---------- ---------------- ------------
<S> <C> <C> <C> <C>
Gregory Wolfond............................. 1998 $179,400 $ -- --
Chairman and Chief Executive Officer
Christopher Erickson........................ 1998 97,500 -- 400,000
President and General Counsel 1997 26,700 -- --
Andre Boysen(1)............................. 1998 81,250 -- 400,000
Chief Technology Officer
Kerry McLellan(2)........................... 1998 65,650 13,000 400,000
Chief Operating Officer
</TABLE>
- ------------------------
(1) Mr. Boysen joined our company in March 1998.
(2) Dr. McLellan joined our company in August 1998. In addition, the amount
under "Other Annual Compensation" includes a monthly travel allowance of
$2,600 in 1998.
OPTION GRANTS DURING FISCAL 1998
We granted options under our Canadian stock option plan to the officers
named in the summary compensation table during the year ended December 31, 1998
as follows:
<TABLE>
<CAPTION>
MARKET VALUE OF
COMMON SHARES % OF TOTAL OPTIONS COMMON SHARES
UNDER OPTIONS GRANTED UNDER EXERCISE PRICE UNDERLYING OPTIONS ON
NAME GRANTED (#) PLANS IN 1998 (%) ($/SHARE) DATE OF GRANT(1)($) EXPIRATION DATE
- ---- ------------- ------------------ -------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Andre Boysen......... 400,000 21.4 $0.32 $0.32 March 2008
Kerry McLellan....... 400,000 21.4 0.32 0.32 August 2008
</TABLE>
- ------------------------
(1) There was no public market for our common shares as of December 31, 1998.
Therefore, the amounts set forth in this column represent the fair market
value of each of our common shares as of that date, as determined by our
board.
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<PAGE>
OPTIONS EXERCISED IN LAST FISCAL YEAR
The officers named in the summary compensation table did not exercise any
options during the year ended December 31, 1998. The following table sets forth
the estimated value as of December 31, 1998 of the exercisable and unexercisable
options held by these officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT YEAR END (#) YEAR END ($)(1)
--------------------------- ---------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
(IN THOUSANDS OF
U.S. DOLLARS)
Christopher Erickson........................... 266,666 133,334 $347 $173
Andre Boysen................................... 200,000 200,000 260 260
Kerry McLellan................................. 150,000 250,000 195 325
</TABLE>
- ------------------------
(1) The value of an "in-the-money" option represents the difference between the
aggregate estimated fair market value of the common shares issuable upon
exercise of the option and the aggregate exercise price of the option. There
was no public market for our common shares as of December 31, 1998.
Therefore, the amounts set forth in this column represent the fair market
value of our common shares as of December 31, 1998, $1.63 per share, as
determined by our board.
DIRECTOR, EMPLOYEE AND CONSULTANT STOCK OPTIONS
As of September 30, 1999, our directors, employees and consultants held
options to purchase an aggregate of 2,211,594 of our common shares. Our
executive officers held options to acquire 1,370,000 of these common shares,
exercisable at prices ranging from $0.34 to $1.71, expiring at dates ranging
from September 22, 2007 to February 22, 2009. Those of our board members who are
not executive officers held options to acquire 108,000 common shares,
exercisable at prices ranging from $1.71 to $3.75, expiring at dates ranging
from September 14, 2008 to August 16, 2009. Our employees, excluding our
executive officers, held options to acquire 673,594 common shares, exercisable
at prices ranging from $0.34 to $3.75, expiring at dates ranging from
February 2, 2008 to September 27, 2009. Our consultants held options to acquire
60,000 common shares exercisable at a price of $3.75, expiring August 2, 2004.
COMPENSATION OF DIRECTORS
We do not presently pay any cash compensation to directors for serving on
our board, but we do reimburse directors for out-of-pocket expenses for
attending board and committee meetings. Of our non-executive officers, only
Martin A. Stein received stock options for his participation on our board. In
September 1998, Sonoma Mountain Ventures, a consulting company controlled by
Mr. Stein, received options under our Canadian stock option plan to purchase
48,000 common shares at $1.71 per share.
EMPLOYMENT CONTRACTS
Each of our executive officers listed under "Management" has an employment
agreement with us. Each employment agreement provides each executive officer
with a compensation package which includes salary and benefits competitive with
industry standards and options to purchase common shares pursuant to our current
stock option plans. We retain all proprietary and intellectual property rights
in everything created, developed or conceived of by any of our employees while
employed with us. So long as any employee, including executive officers, is
employed by us, they are bound by non-competition and non-solicitation covenants
during their term of employment and for one year thereafter.
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We have purchased a key-man employee insurance policy with respect to
Gregory Wolfond, our Chairman and Chief Executive Officer, providing coverage of
approximately $1.3 million.
STOCK OPTION PLANS
We currently have a Canadian stock option plan, a U.S. stock option plan,
and a new 2000 stock option plan, each of which is intended to attract, retain
and motivate key employees, officers, directors and consultants. The Stock
Option Committee of our board of directors administers the option plans. The
Stock Option Committee determines, among other things, the eligibility of
individuals to participate in the plans and the term, vesting periods and the
price of options granted under the plans. The board has reserved an aggregate of
3,200,000 common shares for issuance under our Canadian and U.S. plans and an
additional 2,000,000 common shares under the new 2000 plan. As of the date of
this prospectus, options to purchase 2,809,098 shares at a weighted average
exercise price of $3.25 per share have been granted under the Canadian stock
option plan and the U.S. stock option plan. After this offering, we expect to
only issue options under our 2000 plan.
CANADIAN STOCK OPTION PLAN. This plan was adopted in September 1997 and
provides for the grant of options to employees, officers, directors and advisors
of our company and our affiliates. All options granted under the plan have a
maximum term of 10 years and will have an exercise price per share of no less
than the fair market value of our common shares on the date of the option grant.
If an optionee's employment is terminated without cause, the vested portion of
any grant will remain exercisable until their expiration date. In the event of
termination for cause, the vested portion of any grant will remain exercisable
for a period of 30 days after the date of termination. Unvested options will
expire on termination unless the options would have vested within six months or
within the required statutory notice period following a termination without
cause, whichever is earlier, or within one year if termination is due to death
or disability. If a change of control of our company occurs, all options become
immediately vested and exercisable.
U.S. STOCK OPTION PLAN. This plan was adopted in October 1999 and provides
for the grant of options and restricted shares to employees, officers, directors
and consultants of our company and our affiliates. The plan provides for the
grant of both incentive stock options and non-qualified stock options.
Incentive stock options granted under the plan have a maximum term of
10 years, or five years in the case of incentive stock options granted to an
employee who owns common shares having more than 10% of the voting power of our
company. The exercise price of incentive stock options will be no less than the
fair market value of our common shares on the date of the grant, or 110% of the
fair market value in the case of an incentive stock option granted to an
employee who owns common shares having more than 10% of the voting power of our
company. Non-qualified stock options granted under the plan have a maximum term
of 10 years and an exercise price of no less than 85% of the fair market value
of our common shares on the date of the grant, or 110% of the fair market value
for those employees who own common shares representing more than 10% of the
voting power. Restricted shares granted under the plan have a maximum term of
10 years and an exercise price of no less than 85% of the fair market value of
our common shares on the date of the grant, or 100% of the fair market value in
the case of restricted shares granted to an employee who owns common shares
having more than 10% of the voting power. We have a right to repurchase shares
from optionees within 90 days after termination.
2000 STOCK OPTION PLAN. In December 1999, we adopted a new stock option
plan, the "2000 Stock Option Plan", which will be implemented upon completion of
this offering. Options granted under the existing plans will be unaffected by
the adoption of the new plan. Our Stock Option Committee will administer the new
plan, subject to the guidelines determined by our Compensation Committee. These
guidelines are expected to set forth, among other things, aggregate monthly
grant limits under the plan,
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and the number of options that may be granted to employees of particular
seniority levels. The new plan will provide for the grant of options to all
employees, officers, directors and consultants of our company and our affiliates
worldwide. Both incentive stock options and non-qualified stock options will be
available to U.S. residents. Options held by any person under the new plan
together with any other options granted to that person may not at any time
exceed 5% of the aggregate number of common shares outstanding from time to
time. The options granted under the new plan will have a maximum term of
10 years and an exercise price no less than the fair market value of our common
shares on the date of the grant, or 110% of fair market value in the case of an
incentive stock option granted to an employee who owns common shares having more
than 10% of the voting power. If a change of control of our company occurs, all
options granted under this plan will become fully vested and exercisable.
DIRECTORS' AND OFFICERS' INDEMNIFICATION
Under the Business Corporations Act, we are permitted to indemnify our
directors and officers and former directors and officers against costs and
expenses, including amounts paid to settle an action or satisfy a judgment in a
civil, criminal or administrative action or proceeding to which they are made
parties because of their position as directors or officers, including an action
against us. In order to be entitled to indemnification under this Act, the
director or officer must act honestly and in good faith with a view to our best
interests, and in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, the director or officer must have
reasonable grounds for believing that his or her conduct was lawful.
Under our by-laws, we may indemnify our directly held subsidiaries' current
and former directors and our and our directly held subsidiaries' current and
former officers, employees and agents. Our by-laws also provide that, to the
fullest extent permitted by the Act, we are authorized to purchase and maintain
insurance on behalf of our and our subsidiaries' current and past directors,
officers, employees and agents against any liability incurred by them in their
duties. Our shareholders' agreement with our strategic investors listed under
"Principal Shareholders" also requires us to indemnify our directors under
specified circumstances. We believe that the provisions of our by-laws and the
shareholders' agreement are necessary to attract and retain qualified persons as
directors and officers.
Currently, there is no pending litigation or proceeding where a current or
past director, officer or employee is seeking indemnification, nor are we aware
of any threatened litigation that may result in claims for indemnification. We
have purchased a liability insurance policy covering our directors and officers
and officers and the directors and officers of our subsidiaries.
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CERTAIN TRANSACTIONS
BANK OF MONTREAL
In April 1998, we entered into a license agreement with Bank of Montreal,
which currently holds 3,428,570 of our common shares. Under this agreement, we
have also agreed to provide to Bank of Montreal related support and maintenance
services. Bank of Montreal has agreed, through February 29, 2000, to license all
of our technology that is now, or that during the term of the agreement will be,
available to our customers. The license fee for the first two years of the
agreement was Cdn. $3.0 million annually. The license is extendable annually at
the option of Bank of Montreal, and Bank of Montreal has informed us that it
intends to extend the license for an additional one year term. With each
extension, Bank of Montreal's license will include any upgrades developed and
provided to or intended to be provided to our customers during that extension
period. Bank of Montreal will retain the right to use all of the technology
previously licensed under the agreement whether or not the license is extended.
If Bank of Montreal does not extend the general license, it may specifically
license additional technology from us that is made generally available to our
customers. The fee for this additional technology will be equal to the lowest
price at which this technology is made available to our other customers that
process similar volumes of business with our solution.
Initially, Bank of Montreal had the right to be the exclusive Canadian
financial institution to which we would license our technology. In
November 1998, Bank of Montreal agreed to waive this right in return for a
refund of a portion of its annual license fee based on fees paid by each other
Canadian financial institution in each year in which its license is in effect.
Bank of Montreal will not be entitled to receive this refund if it does not
annually extend its general license.
BANK OF AMERICA
In June 1999, we entered into a license agreement with Bank of America,
National Trust & Savings Association, an affiliate of Bank of America and a
predecessor of Bank of America, N.A. Bank of America currently holds 3,200,000
of our common shares. Bank of America has agreed, through February 1, 2001, to
license all of our technology that is now, or that during the term of the
agreement will be, available to our customers. The license is extendable
annually at the option of Bank of America. With each extension, Bank of
America's license will include any upgrades developed and provided to or
intended to be provided to our customers during that extension period. Bank of
America will retain the right to use all of the technology previously licensed
under the agreement whether or not the license is extended.
If Bank of America does not subscribe for an extension of its general
license in February 2001 or annually thereafter, it will have the right,
exercisable for four years after it ceases to subscribe to the general license,
to specifically license additional technology from us that is made generally
available to our customers. For two years after it ceases to subscribe to the
general license, Bank of America will retain the right to reinstate the license
by repaying the aggregate amount of fees that would otherwise have been paid had
the license been renewed each year.
In June 1999, we also entered into a software maintenance and support
agreement with Bank of America under which Bank of America pays an annual
maintenance fee. We charge Bank of America on a time and materials basis in
connection with installation, implementation and modification of customized code
and enhancements. This agreement has an initial term of two years and is
renewable annually at the option of the parties.
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CITIGROUP
Citigroup has announced its intention to implement our solution worldwide
under the leadership of its e-Citi division. We are working with a number of
Citigroup's subsidiaries, including Citibank and Salomon Smith Barney Inc., to
deliver our solution to their banking and brokerage customers. Citicorp
Strategic Technology Corporation, a subsidiary of Citigroup, currently holds
6,400,000 of our common shares.
In December 1999, we entered into a master technology license agreement with
Citicorp Strategic Technology Corporation. The initial term of the master
agreement will be five years. The agreement enables Citigroup and its affiliates
to license our technology by entering into a separate agreement to be bound by
the terms of the master agreement. The specific terms of any agreement of this
type, including the specific technology to be licensed, the license fees to be
paid to us, the term, and other material terms, may vary. To date, neither
Citicorp Strategic Technology Corporation or any other Citigroup affiliate has
entered into a definitive agreement under the master agreement to license any
technology from us.
Citicorp Strategic Technology Corporation is required to pay to us a
specified minimum amount during each year that the master agreement is in
effect, whether or not Citigroup or any Citigroup affiliates actually enters
into agreements under the master agreement to license our technology. These
required payments to us will increase each year of the agreement, up to
specified maximum levels, based on specified targets relating to the number of
world-wide Citigroup customers that use services based upon our solution, the
number of Citigroup affiliates that license our technology and the amount of
revenue generated under this agreement. Our revenues under the master license
agreement will remain at the minimum amounts if we do not enter into additional
agreements under the master agreement.
We have agreed to provide to each Citigroup licensee maintenance services
relating to the technology that we license under the master agreement. These
maintenance services will include, among other things, the provision of updates
and upgrades to our technology that are generally made available to our
customers. The master agreement also provides that we will perform services for
Citigroup affiliates that license our technology under the agreement, including
consulting, development, implementation and other services. The terms of any
services of this type, including the fees to be paid to us for these services,
will be set forth in a separate agreement that will be entered into by us and
the applicable Citigroup affiliate.
We have agreed to purchase from Citicorp Strategic Technology Corporation a
range of consulting services that are described in the master agreement. These
services will include consulting services relating to the promotion of our
technology for adoption by Citigroup's affiliates. We will pay for these
services an amount that will be calculated based upon the number of Citigroup
affiliates that enter into agreements to license our technology during the first
year of the master agreement.
SONOMA MOUNTAIN VENTURES
Since August 1999, we have received consulting services from Sonoma Mountain
Ventures, an entity controlled by Martin A. Stein, one of our directors. Sonoma
provides, upon our request, strategic planning advice in connection with our
customer services. The consulting arrangement is for a two year term ending in
August 2001. Sonoma will receive a monthly fee of approximately $34,000,
together with options to purchase an aggregate of 48,000 of our common shares.
MCLELLAN PATENT APPLICATION
In July 1999, we entered into an agreement with Dr. Kerry McLellan, our
Chief Operating Officer, in which we purchased his rights under patent
applications filed in the U.S. and Canada relating to a
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security system for electronic transactions. We paid Dr. McLellan a nominal
purchase price for these rights and agreed to reimburse him for the expenses
that he incurred in filing these applications. The applications cover a security
system that we do not expect to incorporate into our product in the near future.
Under our agreement, we have agreed to pay Dr. McLellan a portion of any
licensing fees that we receive from any license of the rights covered by these
patent applications and a portion of the proceeds of any sale of these rights.
Dr. McLellan also has the right to repurchase the rights covered by the patent
applications from us until a U.S. patent covering the technology is issued or
May 2002, whichever is earlier. We have the right to terminate Dr. McLellan's
royalty rights, rights to receive a portion of any sale proceeds and right to
buy back these rights until July 2003.
BLUE SKY CAPITAL CORPORATION AND 1319079 ONTARIO INC.
In September 1997, we issued 3,999,800 common shares, together with an
option to purchase an additional 4,000,000 common shares, to Blue Sky Capital
Corporation, an entity controlled by our Chairman and Chief Executive Officer,
for an aggregate purchase price for the common shares and the option of
approximately Cdn. $2.0 million. The option was transferred to a second entity
under his control, 1319079 Ontario Inc., and was exercised in October 1998 at an
exercise price of Cdn. $0.50 per share.
REGISTRATION RIGHTS
We are a party to a shareholder agreement with all of our existing
shareholders. This agreement provides that, subject to specified limitations, if
we propose to register or qualify for public distribution of any of our common
shares under the securities laws of the U.S. or Canada, all of our existing
shareholders, other than those owning less than 5% of the issued and outstanding
common shares, have the right to include their common shares in the public
distribution. Furthermore, holders of 21,402,426 of our common shares acting as
a group, may require us to qualify a prospectus for, or effect the registration
of, all or part of the common shares in the public distribution. These demand
rights apply during the period commencing nine months after the date of this
offering and ending on the fourth anniversary of this offering. The number of
shares to be included in a public distribution can be limited by the
underwriters of that offering.
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PRINCIPAL SHAREHOLDERS
The following table provides information regarding the beneficial ownership
of our common shares as of December 31, 1999, and as adjusted to reflect the
sale of 6,000,000 common shares in this offering as to:
- each person or entity who beneficially owns more than 5% of our
outstanding common shares;
- each of our directors;
- each of the executive officers listed in the summary compensation table;
and
- all of our directors and executive officers as a group.
Except as otherwise indicated, the persons named in the table have sole
voting and investment power with respect to all common shares held by them.
Percentage ownership is based on 29,402,426 shares of common shares outstanding
as of December 31, 1999, and 6,000,000 additional common shares to be issued in
this offering.
<TABLE>
<CAPTION>
PERCENTAGE OF SHARES BENEFICIALLY OWNED
NUMBER OF SHARES ----------------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED BEFORE THE OFFERING AFTER THE OFFERING
- ---------------- ------------------ ------------------- ------------------
<S> <C> <C> <C>
Gregory Wolfond(1).......................... 8,000,000 27.2% 22.6%
c/o 724 Solutions Inc.
4101 Yonge Street, Suite 702
Toronto, ON M2P 1N6 Canada
Sonera Corporation(2)....................... 6,400,000 21.8% 18.1%
P.O. Box 106, Fin-00051
Teollisuuskatu 15
Helsinki, Finland
Citigroup Inc.(3)........................... 6,400,000 21.8% 18.1%
153 East 53rd Street
New York, NY 10043
Bank of Montreal............................ 3,428,570 11.7% 9.7%
55 Bloor Street East
Third Floor
Toronto, ON
Canada M4W 3N5
Bank of America Corporation................. 3,200,000 10.9% 9.0%
Bank of America Corporate Center
100 North Tryon Street
Charlotte, NC 28255
Christopher Erickson(4)..................... 333,332 * *
Andre Boysen(4)............................. 266,666 * *
Kerry McLellan(4)........................... 233,332 * *
Martin A. Stein(5).......................... 34,000 * *
All directors and executive officers as a
group (12 persons)(6)..................... 8,867,330 29.3% 24.4%
</TABLE>
- ------------------------
* Less than 1% of the outstanding common shares.
(1) These shares are held of record by privately-held entities of which
Mr. Wolfond is the majority shareholder or has the sole power to vote and to
direct the disposition of their shares.
(2) These shares are held of record by SmartTrust Holding B.V., a subsidiary of
Sonera Corporation.
(3) These shares are held of record by Citicorp Strategic Technology
Corporation, a subsidiary of Citigroup Inc.
(4) These common shares are issuable upon the exercise of options that are
presently vested or that vest prior to February 29, 2000.
(5) Includes 20,000 common shares issuable upon the exercise of options that are
presently vested or that vest prior to February 29, 2000. Also includes
14,000 shares issuable upon the exercise of options that are presently
vested or that vest prior to February 29, 2000 that have been granted to
Sonoma Mountain Ventures, an entity controlled by Mr. Stein. See "Certain
Transactions."
(6) Includes 867,330 common shares that are issuable upon the exercise of
options that are presently vested or that vest prior to February 29, 2000.
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DESCRIPTION OF SHARE CAPITAL
AUTHORIZED AND ISSUED SHARE CAPITAL
COMMON SHARES
Our authorized share capital consists of an unlimited number of common
shares, of which 29,402,426 were issued and outstanding as of December 31, 1999.
Holders of common shares are entitled to one vote per share on all matters to be
voted on at all meetings of shareholders and to receive dividends as and when
declared by our board of directors. Upon the voluntary or involuntary
liquidation, dissolution or winding up of our company, the holders of common
shares are entitled to share ratably in our remaining assets available for
distribution, after payment of liabilities. A holder of common shares will have
no preemptive, redemption or conversion rights upon completion of this offering.
PREFERRED SHARES
Our articles provide that our board of directors has the authority, without
further action by the shareholders, to issue an unlimited number of preferred
shares in one or more series. These preferred shares may be entitled to dividend
and liquidation preferences over the common shares. The board is able to fix the
designations, powers, preferences, privileges and relative, participating,
optional or special rights of any preferred shares issued, including any
qualifications, limitations or restrictions. Special rights which may be granted
to a series of preferred shares may include dividend rights, conversion rights,
voting rights, terms of redemption and liquidation preferences, any of which may
be superior to the rights of the common shares. Preferred share issuances could
decrease the market price of the common shares and may adversely affect the
voting and other rights of the holders of common shares. The issuance of
preferred shares could also have the effect of delaying or preventing a change
in control of our company.
SHARE SPLIT
On December 30, 1999, we filed articles of amendment to split all of our
outstanding and reserved common shares on a two-for-one basis. Unless otherwise
specified, disclosure in the prospectus is based on post-split numbers.
PRIOR SALES
The following are the only transactions involving the sale of common shares
for the 12 months prior to the date of this prospectus.
1. In June 1999, we issued 541,790 common shares for an aggregate
subscription price of $2.0 million.
2. In July 1999, we issued 950,000 common shares for an aggregate
subscription price of $3.6 million.
3. In August 1999, we issued 6,400,000 common shares for an aggregate
subscription price of $24.5 million.
4. In October 1999, we issued 5,450,000 common shares for an aggregate
subscription price of $20.8 million, 2,658,210 common shares for an
aggregate subscription price of $10.2 million, and 1,973,856 common
shares for an aggregate subscription price of $10.0 million.
5. In January 2000, we issued 185,332 common shares for an aggregate
subscription price of approximately $79,850 upon the exercise of employee
stock options.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for our common shares is Montreal Trust
Company of Canada, 8th Floor, 151 Front Street West, Toronto, Ontario M5J 2N1.
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SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the offering, based upon the number of common shares
outstanding as of December 31, 1999, a total of 35,402,426 common shares will be
outstanding (36,302,426 common shares if the underwriters exercise their
over-allotment option in full). All of the common shares sold in the offering in
the U.S. and Canada will be freely tradable without restriction under either the
Securities Act of 1933, except for any such shares which may be acquired by an
affiliate of ours, as that term is defined in Rule 144 promulgated under the
Securities Act of 1933 or applicable Canadian securities laws (except by
"control persons", as defined under these laws).
U.S. RESALE RESTRICTIONS
All of our common shares issued prior to this offering are "restricted
securities" as this term is defined under Rule 144, in that such shares were
issued in private transactions not involving a public offering and may not be
sold in the U.S. in the absence of registration other than in accordance with
Rule 144 under the Securities Act of 1933 or another exemption from
registration. In general, under Rule 144 as currently in effect, any of our
affiliates or any person (or persons whose shares are aggregated in accordance
with Rule 144) who has beneficially owned our common shares which are treated as
restricted securities for at least one year would be entitled to sell within any
three-month period a number of shares that does not exceed the greater of 1% of
our outstanding common shares (approximately 354,024 shares based upon the
number of common shares expected to be outstanding after the offering) or the
reported average weekly trading volume in our common shares during the four
weeks preceding the date on which notice of such sale was filed under Rule 144.
Sales under Rule 144 are also subject to manner of sale restrictions and notice
requirements and to the availability of current public information concerning
our company. In addition, affiliates of our company must comply with the
restrictions and requirements of Rule 144 (other than the one-year holding
period requirements) in order to sell common shares that are not restricted
securities (such as common shares acquired by affiliates in market
transactions). Furthermore, if a period of at least two years has elapsed from
the date restricted securities were acquired from us or from one of our
affiliates, a holder of these restricted securities who is not an affiliate at
the time of the sale and who has not been an affiliate for at least three months
prior to such sale would be entitled to sell the shares immediately without
regard to the volume, manner of sale, notice and public information requirements
of Rule 144.
Upon closing of this offering, we intend to file a registration statement
for the resale of the common shares that are authorized for issuance under our
existing and new stock option plans. We expect this registration statement to
become effective immediately upon filing. Shares issued pursuant to our stock
option plans to U.S. residents after the effective date of that registration
statement (other than shares issued to our affiliates and the employees
described below) generally will be freely tradable without restriction or
further registration under the Securities Act of 1933.
We, along with our directors, executive officers and current shareholders
have agreed, for a period of 180 days after the date of this prospectus, not to
offer or sell any of our common shares, subject to limited exceptions, without
the prior written consent of Credit Suisse First Boston. In addition,
substantially all of our employees that hold options to purchase at least
1,000 common shares that are either currently vested or that vest prior to the
end of that period will be bound by the same obligation. See "Underwriting."
CANADIAN RESALE RESTRICTIONS
Excluding any common shares purchased in this offering, as of December 31,
1999, Canadian residents held 11,428,570 common shares and options or warrants
to purchase 2,545,678 common shares. Under applicable Canadian securities laws,
all such common shares or common shares issuable upon exercise of such options
may not be sold or otherwise disposed of for value, except pursuant to a
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prospectus, a discretionary exemption or a statutory exemption available only in
specific limited circumstances, until we have been a reporting issuer for at
least 12 months, 18 months in the case of a control person under applicable
Canadian securities laws, in the province in which such shareholder or optionee
resides. We will become a reporting issuer when we file this prospectus with the
securities regulatory authorities of those provinces and when those authorities
issue receipts for the prospectus. We expect that the receipts will be issued on
or about the date of this prospectus. We have applied to these regulatory
authorities for a discretionary exemption that would permit sales of our common
shares by residents of these provinces who are our employees, consultants or
other service providers and acquire such shares upon the exercise of stock
options after we have been a reporting issuer for 180 days, provided that the
particular employee, consultant or service provider has held the common shares
or stock options for a combined period of at least one year, and that the sale
is made through the facilities of The Nasdaq National Market.
If the discretionary exemption is granted or other steps taken to allow the
sale of such common shares are successful, 1,333,670 common shares issued or
issuable upon the exercise of outstanding and vested options, which would
otherwise be subject to the resale restrictions described above, will be
eligible for resale 180 days after the completion of this offering.
ESCROWED SECURITIES
We are seeking discretionary relief from securities regulators in each of
the provinces of Canada to be exempt from applicable escrow rules, in accordance
with the policies of The Toronto Stock Exchange concerning the disposition of
shares held by certain persons related to a company engaging in an initial
public offering. In the event such relief is not obtained, several holders of
common shares will have to enter into an escrow agreement with us and a trustee.
Pursuant to this agreement, these shares will be placed in escrow with the
trustee by the shareholders. Of the escrowed shares deposited with the trustee,
one third will be released on each of the first, second and third anniversaries
of the date on which receipt for this prospectus is issued, or earlier with the
consent of The Toronto Stock Exchange.
REGISTRATION RIGHTS
For a description of the registration rights held by the holders of our
outstanding common shares, see "Certain Transactions."
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INCOME TAX CONSEQUENCES
In this section we summarize certain of the U.S. and Canadian federal income
tax considerations that may be relevant to purchasers of common shares in this
offering who:
- are U.S. persons within the meaning of the U.S. Internal Revenue Code of
1986, as amended (the "Internal Revenue Code"), including a purchaser who,
or that, is a citizen or resident of the U.S., a corporation or
partnership created or organized under the laws of the U.S. or any
political subdivision thereof or therein, an estate, the income of which
is subject to U.S. federal income tax regardless of the source, or a trust
if a court within the U.S. is able to exercise primary supervision over
the administration of the trust and one or more U.S. persons have the
authority to control all substantial decisions of the trust;
- for purposes of the Income Tax Act (Canada) (the "Income Tax Act") and the
Canada-U.S. Income Tax Convention (1980) (the "Convention"), are resident
in the U.S. and are not nor are deemed to be resident in Canada;
- hold our common shares as capital assets for purposes of the Internal
Revenue Code and capital property for purposes of the Income Tax Act; and
- deal at arm's length with us for purposes of the Income Tax Act and the
Internal Revenue Code.
For purposes of this discussion, we will refer to beneficial owners of
common shares who satisfy the above conditions as "Unconnected U.S.
Shareholders." Such persons do not include, and this summary does not apply to,
persons who are "financial institutions" as defined in Section 142.2 of the
Income Tax Act and non-resident insurers that carry on business in Canada and
elsewhere.
We will assume, for purposes of this discussion, that you are an Unconnected
U.S. Shareholder. The tax consequences to a purchaser of common shares who is
not an Unconnected U.S. Shareholder may differ substantially from the tax
consequences discussed in this section. This discussion does not purport to deal
with all aspects of U.S. or Canadian federal income taxation that may be
relevant to particular Unconnected U.S. Shareholders or to certain classes of
Unconnected U.S. Shareholders who are subject to special treatment under the
U.S. or Canadian federal income tax laws, including, but not limited to,
Unconnected U.S. Shareholders who own, actually or constructively, 10% or more
of the total combined voting power of all classes of our shares, financial
institutions, dealers in securities, banks, insurance companies, tax-exempt
organizations, broker-dealers, individual retirement and other tax-deferred
accounts, U.S. persons whose functional currency (as defined in Section 985 of
the Internal Revenue Code) is not the U.S. dollar, and Unconnected U.S.
Shareholders holding common shares as part of a "straddle", "hedge" or
"conversion transaction".
This discussion is based upon:
- the Income Tax Act and regulations under the Income Tax Act;
- the Internal Revenue Code and existing and proposed regulations under the
Internal Revenue Code;
- the Convention;
- the current administrative policies and practices published by Revenue
Canada;
- all specific proposals to amend the Income Tax Act and the regulations
under the Income Tax Act that have been publicly announced by the Minister
of Finance (Canada) prior to the date of this prospectus;
- the administrative rulings, practice and policies of the U.S. Internal
Revenue Service (the "IRS"); and
- applicable U.S. and Canadian judicial decisions,
all as of the date hereof and all of which are subject to change (possibly on a
retroactive basis) and differing interpretation. We do not discuss the potential
effects of any proposed legislation in the U.S. and do not take into account the
tax laws of the various provinces or territories of Canada or the tax laws of
the various state and local jurisdictions of the U.S. or foreign jurisdictions.
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THIS DISCUSSION IS MERELY A GENERAL DESCRIPTION OF THE U.S. AND CANADIAN
FEDERAL INCOME TAX CONSIDERATIONS MATERIAL TO A PURCHASE OF COMMON SHARES AND IT
IS NOT INTENDED TO BE, NOR SHOULD IT BE CONSTRUED AS, LEGAL OR TAX ADVICE TO ANY
PERSON PURCHASING COMMON SHARES. THIS DISCUSSION DOES NOT DEAL WITH ALL POSSIBLE
TAX CONSEQUENCES RELATING TO AN INVESTMENT IN OUR COMMON SHARES. WE HAVE NOT
TAKEN INTO ACCOUNT YOUR PARTICULAR CIRCUMSTANCES AND DO NOT ADDRESS ALL
CONSEQUENCES TO YOU UNDER PROVISIONS OF U.S. OR CANADIAN INCOME TAX LAW.
THEREFORE, YOU SHOULD CONSULT YOUR OWN TAX ADVISOR REGARDING THE PARTICULAR TAX
CONSEQUENCES TO YOU OF PURCHASING, OWNING AND DISPOSING OF COMMON SHARES,
INCLUDING THE APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS,
AND ANY CHANGES IN APPLICABLE LAWS.
U.S. FEDERAL INCOME TAX CONSIDERATIONS
You generally will be required to include the U.S. dollar value of any
dividend distribution which you receive on the common shares in ordinary income
to the extent of our current and accumulated earnings and profits, as determined
under U.S. federal income tax principles. The U.S. dollar value of any
distribution received in Canadian dollars will be determined based on the spot
exchange rate for the date of receipt. The amount of the distribution required
to be included in gross income will be determined without reduction for Canadian
withholding tax. Therefore, in the event that the distribution is subject to
Canadian withholding tax, you generally will be required to report gross income
in an amount greater than the cash received. To the extent any dividend
distribution paid by us exceeds our current and accumulated earnings and
profits, your pro rata share of the excess amount will be treated first as a
return of capital up to your adjusted tax basis in our common shares (with a
corresponding reduction in basis), and then as a gain from the sale or exchange
of the common shares. Unconnected U.S. Shareholders should consult their tax
advisors regarding the tax treatment of foreign currency gain or loss, if any,
on Canadian dollars received. Dividends paid by us on our common shares
generally will not be eligible for the "dividends received" deduction.
Subject to certain conditions and limitations, you may be entitled to claim
a credit for U.S. federal income tax purposes in an amount equal to the U.S.
dollar value of any Canadian taxes withheld on any distributions that we make.
Alternatively, you may in some circumstances claim a deduction for the amount of
Canadian tax withheld in a taxable year, but only if you do not elect to claim a
foreign tax credit in respect of any foreign taxes paid by you in that year. In
general, the amount of allowable foreign tax credits in any year cannot exceed
your regular U.S. federal income tax liability for the year attributable to
certain foreign source income. Because distributions in excess of our current
and accumulated earnings and profits generally will not give rise to foreign
source income, you may be unable to claim a foreign tax credit in respect of
Canadian withholding tax imposed on the excess amount unless, subject to
applicable limitations, you have other foreign source income. However,
limitations on the use of foreign tax credits generally will not apply to an
electing individual Unconnected U.S. Shareholder whose creditable foreign taxes
during a tax year do not exceed $300 ($600 for joint filers) if such
individual's gross income for the tax year from non-U.S. sources consists solely
of certain items of "passive income" reported on a "payee statement" furnished
to the Unconnected U.S. Shareholder. In addition, an Unconnected U.S.
Shareholder will be denied a foreign tax credit with respect to taxes withheld
from dividends received on the common shares to the extent such Unconnected U.S.
Shareholder has not held the common shares for a minimum period or to the extent
such Unconnected U.S. Shareholder is under an obligation to make certain related
payments with respect to substantially similar or related property. The rules
relating to foreign tax credits are extremely complex and the availability of a
foreign tax credit depends on numerous factors. You should consult your own tax
advisor concerning the application of the U.S. foreign tax credit rules to your
particular situation.
You generally will recognize gain or loss on the sale, exchange or other
disposition of your common shares in an amount equal to the difference, if any,
between the amount realized on the sale, exchange or disposition and your
adjusted tax basis in the common shares. Any gain or loss you recognize upon the
sale, exchange or disposition of common shares held as capital assets generally
will be long-term or short-term capital gain or loss, depending on whether the
shares have been held by you
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for more than one year. Gain or loss resulting from a sale, exchange or
disposition of the common shares generally will be U.S. source for U.S. foreign
tax credit purposes unless it is attributable to an office or other fixed place
of business outside the U.S. and other conditions are met.
Dividend payments with respect to the common shares and proceeds from the
sale, exchange or disposition of common shares may be subject to information
reporting to the IRS and possible U.S. backup withholding tax at a rate of 31%.
Backup withholding will not apply, however, to an Unconnected U.S. Shareholder
who furnishes a correct taxpayer identification number and makes any other
required certification or who is otherwise exempt from backup withholding.
Generally, an Unconnected U.S. Shareholder will provide such certification on
IRS Form W-9. Amounts withheld under the backup withholding rules may be
credited against a holder's tax liability, and a holder may obtain a refund of
any excess amounts withheld under the backup withholding rules by timely filing
the appropriate form for refund with the IRS.
PASSIVE FOREIGN INVESTMENT COMPANIES
The rules governing "passive foreign investment companies" can have
significant tax effects on Unconnected U.S. Shareholders. If we are a passive
foreign investment company for any taxable year in which you own our common
shares, the U.S. federal income tax consequences to you of owning and disposing
of your common shares may differ from those described above. We will be
classified as a passive foreign investment company for any taxable year if
either:
- 75% or more of our gross income is "passive income," which generally
includes interest, dividends, some types of rents and royalties and gains
from the sale or exchange of assets that produce passive income; or
- the average percentage, by fair market value, or, in some cases, by
adjusted tax basis, of our assets that produce or are held for the
production of "passive income" is 50% or more.
In the event that we are a passive foreign investment company, distributions
by us which constitute "excess distributions," as defined in Section 1291 of the
Internal Revenue Code, and gains from the disposition of our common shares are
subject to special rules, pursuant to which an Unconnected U.S. Shareholder
generally must allocate the gain or excess distribution ratably to each day in
such holder's holding period for the common shares. The portion of the gain or
excess distribution allocated to the taxable year in which the gain was
recognized or the excess distribution was received and any taxable year during
which we were not a passive foreign investment company would be taxed as
ordinary income for the current year. The portion of the gain or excess
distribution allocated to each of the other taxable years would be subject to
tax at the maximum ordinary income rate in effect for such taxable year and an
interest charge would be imposed on the resulting tax liability determined as if
that liability had been due with respect to that prior year. In general, an
excess distribution is that portion of the total distributions, including a
return of capital, received by an Unconnected U.S. Shareholder in a taxable year
in excess of 125% of the average annual distributions received by the
Unconnected U.S. Shareholder in the three immediately preceding taxable years,
or the Unconnected U.S. Shareholder's holding period, if shorter. The tax and
interest charge on amounts allocated to the taxable years during which we are a
passive foreign investment company, other than the taxable year in which the
gain was recognized or excess distribution was received, would be includible in
the holder's U.S. federal income tax liability for the current taxable year.
This portion of your tax liability could not be offset by net operating losses,
and gains (but not losses) realized on the sale of the common shares could not
be treated as capital in nature, notwithstanding that the common shares were
held as capital assets. However, if an Unconnected U.S. Shareholder makes a
timely election to treat us as a qualified electing fund under section 1295 of
the Internal Revenue Code, and if other requirements are satisfied, the above
described rules generally will not apply. Instead, the Unconnected U.S.
Shareholder would include annually in his gross income his pro rata share of our
ordinary earnings and net capital gain, regardless of whether such income or
gain was actually distributed. Tax on the income resulting from
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the qualified electing fund election, however, may be deferred, subject to an
interest charge imposed on such tax when due.
In addition, subject to specific limitations, Unconnected U.S. Shareholders
owning actually or constructively marketable shares in a passive foreign
investment company may in certain circumstances, make an election under
section 1296 of the Internal Revenue Code to mark that stock to market annually,
rather than being subject to the above-described rules. Amounts included in or
deducted from income under this mark to market election and actual gains and
losses realized upon disposition, subject to specific limitations, will be
treated as ordinary gains or losses.
An Unconnected U.S. Shareholder who beneficially owns shares of a passive
foreign investment company must file an annual return with the IRS.
Based upon the nature of our revenue and our anticipated corporate
structure, we may be treated as a passive foreign investment company. To
determine whether we are a passive foreign investment company, we will be
required to examine each year our revenue and expenses and the value of our
assets. The tests are complex and require, among other things, that we determine
how much of our income from our license agreements each year will be passive
income. We do not have the necessary data to determine whether these tests will
be met for the year 2000 or future years, nor can we predict whether the tests
are likely to be met. Moreover, the manner in which the tests apply to our
business is not certain. Neither we nor our advisors have the duty, or will
undertake, to inform you of a determination that we are or have become a passive
foreign investment company, and we do not currently intend to take actions
necessary to permit you to make a "qualified electing fund election" in the
event we are determined to be a passive foreign investment company. You are
urged to consult your own tax advisor with respect to the potential consequences
to you if at any time we qualify as a passive foreign investment company,
including the advisability of making a mark to market election if such election
is available.
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS
In this section, we summarize the material anticipated Canadian federal
income tax considerations relevant to your purchase of common shares. This
section will only apply if you do not use or hold and are not deemed to use or
hold the common shares in, or in the course of, carrying on a business in Canada
for the purposes of the Income Tax Act.
Under the Income Tax Act, as an Unconnected U.S. Shareholder, you will
generally be exempt from Canadian tax on a capital gain realized on an actual or
deemed disposition of the common shares unless you, persons with whom you did
not deal at arm's length for the purposes of the Income Tax Act, or you and such
persons owned or had interests in or rights to acquire 25% or more of our issued
common shares of any class of the capital stock of our company at any time
during the five year period immediately preceding the disposition or deemed
disposition. Where a capital gain realized on a disposition or deemed
disposition of our common shares is subject to tax under the Income Tax Act, the
Convention will exempt the capital gain from Canadian tax if, on the disposition
of our shares, the value of our common shares is not derived principally from
real property situated in Canada. This relief under the Convention may not be
available if you had a permanent establishment or fixed base available in Canada
during the 12 months immediately preceding the disposition of the shares.
Dividends paid, credited or deemed to have been paid or credited on the
shares to Unconnected U.S. Shareholders will generally be subject to a Canadian
withholding tax at a rate of 25% under the Income Tax Act. Under the Convention,
the rate of withholding tax generally applicable to Unconnected U.S.
Shareholders who beneficially own the dividends is reduced to 15%. In the case
of Unconnected U.S. Shareholders that are companies that beneficially own at
least 10% of our voting shares, the rate of withholding tax on dividends is
reduced to 5%.
The Canadian federal government does not currently impose any estate taxes
or succession duties, however, if you die, there is generally a deemed
disposition of the common shares held at that time for proceeds of disposition
equal to the fair market value of the shares immediately before your death.
Capital gains realized on the deemed disposition, if any, will generally have
the income tax consequences described above.
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UNDERWRITING
Credit Suisse First Boston Corporation is acting as representative for the
underwriters named below. Each of the U.S. and Canadian underwriters has agreed
to purchase the number of common shares set forth below opposite its name. Their
obligations are contained in a U.S. underwriting agreement and a Canadian
underwriting agreement, each dated January 27, 2000.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ----------------- ---------
<S> <C>
Credit Suisse First Boston Corporation...................... 1,954,687
FleetBoston Robertson Stephens Inc.......................... 977,344
Thomas Weisel Partners LLC.................................. 977,344
Dain Rauscher Incorporated.................................. 84,375
E*OFFERING Corp............................................. 84,375
Invemed Associates LLC...................................... 84,375
National Bank Financial Inc................................. 84,375
Scotia Capital (USA) Inc.................................... 84,375
SoundView Technology Group, Inc............................. 84,375
TD Securities (USA) Inc..................................... 84,375
---------
Subtotal................................................ 4,500,000
---------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CANADIAN UNDERWRITERS SHARES
- --------------------- ---------
<S> <C>
Nesbitt Burns Inc........................................... 510,000
RBC Dominion Securities Inc................................. 495,000
Credit Suisse First Boston Securities Canada Inc............ 495,000
---------
Subtotal................................................ 1,500,000
---------
Total................................................. 6,000,000
=========
</TABLE>
Each of the U.S. offering and the Canadian offering is conditional upon the
closing of the other.
The underwriting agreements provide that the underwriters are obligated to
purchase all of the common shares in the offering if any are purchased, other
than those shares covered by the over-allotment option described below. The
underwriting agreements also provide that if an underwriter defaults, the
purchase commitments of non-defaulting underwriters may be increased or the
offerings of common shares may be terminated. The obligations of the
underwriters under each underwriting agreement may be terminated at their
discretion on the basis of their assessment of the state of the financial
markets and also upon the occurrence of certain stated events.
We have granted to the underwriters a 30-day option exercisable by the
representative to purchase on a pro rata basis up to 900,000 additional common
shares from us at the initial public offering price less the underwriting
discounts and commissions. The option may be exercised only to cover any
over-allotments of common shares.
The U.S. underwriters and the Canadian underwriters are entering into an
inter-syndicate agreement providing for, among other things, the coordination of
their activities. Pursuant to the inter-syndicate agreement, sales may be made
between the U.S. underwriters and the Canadian underwriters at a price per
common share equal to the initial public offering price less an amount not
greater than the per common share amount of the selling concession or
commissions to dealers applicable to such shares. Pursuant to the
inter-syndicate agreement, each U.S. underwriter will agree to not offer or
sell, directly or indirectly, any common shares or distribute any prospectus
relating to the offering within
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Canada, and each Canadian underwriter will agree to offer or sell, directly or
indirectly, common shares or distribute any prospectus relating to the offering,
only in Canada.
The underwriters will offer our common shares initially at the public
offering price on the cover page of this prospectus, and to selling group
members at that price less a concession of $1.09 per common share. The
underwriters and selling group members may allow a discount of $0.10 per common
share on sales to other broker/dealers. After the initial public offering, the
public offering price, concession and discount may only be changed by the
representative.
The following table summarizes the compensation and estimated expenses we
will pay.
<TABLE>
<CAPTION>
TOTAL
-------------------------------
WITHOUT WITH
PER SHARE OVER-ALLOTMENT OVER-ALLOTMENT
--------- -------------- --------------
<S> <C> <C> <C>
Underwriting discounts and commissions payable by us.... $ 1.82 $10,920,000 $12,558,000
Expenses payable by us.................................. $ 0.375 $ 2,250,000 $ 2,250,000
</TABLE>
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 555,000 common shares for our employees, directors
and certain other persons associated with us who have expressed an interest in
purchasing common shares in the offering. The number of shares available for
sale to the general public in the offering will be reduced to the extent that
these persons purchase the reserved shares. Any reserved shares which are not
purchased will be offered by the underwriters to the general public on the same
terms as the other shares.
E*OFFERING, one of the U.S. underwriters, anticipates that a portion of the
shares allocated to it, as a member of the underwriting syndicate, will be
distributed electronically using the Internet by E*TRADE Securities, Inc.
E*OFFERING will distribute the remainder of the shares allocated to it to
institutional customers that it contacts by telephone, without use of the
Internet.
The underwriters have informed us that they do not expect discretionary
sales to exceed 10% of the common shares being offered.
We and our executive officers, directors and current shareholders have
agreed that we will not, except under limited circumstances, offer, sell,
contract to sell, pledge or otherwise dispose of, directly or indirectly, or
file with the Securities and Exchange Commission or the securities commission of
any province of Canada, a registration statement or prospectus relating to any
of our common shares or securities convertible into or exchangeable or
exercisable for any of our common shares, or publicly disclose the intention to
make any such offer, sale, pledge, disposition or filing, without the prior
written consent of Credit Suisse First Boston Corporation, for a period of
180 days after the date of this prospectus. In addition, substantially all of
our employees that hold options to purchase at least 1,000 common shares that
are either currently vested or that vest prior to the end of that period will be
bound by the same obligation. However, following the closing of this offering,
we will be permitted to file a registration statement relating to the shares
authorized for issuance under our stock option plans.
We have agreed to indemnify the underwriters against liabilities under the
Securities Act and the securities legislation of each Canadian province, or
contribute to payments which the underwriters may be required to make in respect
of those liabilities.
The Toronto Stock Exchange has conditionally approved the listing of our
common shares under the symbol "SVN". Listing is subject to our fulfilling all
of the requirements of The Toronto Stock Exchange on or before April 12, 2000
including the distribution of the common shares to a minimum number of public
shareholders. We have applied for our common shares to be approved for quotation
on The Nasdaq National Market under the symbol "SVNX". This quotation is subject
to our meeting the relevant quotation standards.
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Before this offering, there has been no public market for our common shares.
The initial public offering price is to be determined through negotiations
between us and the representative of the underwriters. The principal factors
considered in determining the initial public offering price, in addition to
prevailing market conditions, include:
- the recent market prices of, and the demand for, publicly traded common
stock of generally comparable companies;
- our current financial condition;
- the history of, and the prospects for, our company and the industry in
which we compete;
- the ability of our management;
- our past and present operations;
- the prospects for, and anticipated timing of, our future revenue;
- the present state of our development;
- the percentage interest being sold by us as compared to our valuation; and
- the above factors in relation to market values and various valuation
measures of other companies engaged in activities similar to ours.
The representative, on behalf of the underwriters, may engage in
over-allotment, stabilizing transactions, syndicate covering transactions,
penalty bids and "passive" market making, in accordance with Regulation M under
the Securities Exchange Act of 1934.
- Over-allotment involves syndicate sales in excess of the offering size,
which creates a syndicate short position.
- Stabilizing transactions permit bids to purchase the underlying security
so long as the stabilizing bids do not exceed a specified maximum.
- Syndicate covering transactions involve purchases of the common shares in
the open market after the distribution has been completed in order to
cover syndicate short positions.
- Penalty bids permit the representative to reclaim a selling concession
from a syndicate member when the common shares originally sold by such
syndicate member are purchased in a stabilizing transaction or a syndicate
covering transaction to cover syndicate short positions.
- In "passive" market making, market makers in the common shares who are
underwriters or prospective underwriters may, subject to certain
limitations, make bids for or purchases of the common shares until the
time, if any, at which a stabilizing bid is made.
In accordance with the applicable policies of several Canadian provinces,
the underwriters may not, throughout the period of distribution, bid for or
purchase common shares. Exceptions, however, exist where the bid or purchase is
not made to create the appearance of active trading in, or raising prices of,
the common shares. These exceptions include a bid or purchase permitted under
the by-laws and rules of The Toronto Stock Exchange relating to market
stabilization and passive market making activities and a bid or purchase made
for and on behalf of a customer where the order was not solicited during the
period of distribution. We have been advised that in connection with the
offering and pursuant to the first exception mentioned above, the underwriters
may over-allot or effect transactions which stabilize or maintain the market
price of the common shares at levels other than those which might otherwise
prevail on the open market.
These stabilizing transactions, syndicate covering transactions and penalty
bids may cause the price of the common shares to be higher than it would
otherwise be in the absence of these transactions. The transactions may be
effected on The Nasdaq National Market and The Toronto Stock Exchange or
otherwise and, if commenced, may be discontinued at any time.
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Thomas Weisel Partners LLC, one of the U.S. underwriters, was organized and
registered as a broker/dealer under the U.S. securities laws in December 1998.
Since December 1998, Thomas Weisel Partners LLC has been named as a lead or
co-manager on 110 filed public offerings of equity securities, of which 79 have
been completed, and has acted as a syndicate member in an additional 54 public
offerings of equity securities. Thomas Weisel Partners LLC does not have any
material relationship with us or any of our officers, directors or other
controlling persons, except with respect to its contractual relationship with us
pursuant to the U.S. underwriting agreement entered into in connection with this
offering.
The common shares are being offered by the several underwriters, subject to
prior sale, when, as and if issued to and accepted by them, subject to approval
of legal matters by counsel for the underwriters and other conditions. The
underwriters reserve the right to withdraw, cancel or modify these offers and to
reject orders in whole or in part.
The common shares will be ready for delivery in Toronto, Ontario on or about
February 2, 2000.
LEGAL MATTERS
Goodman Phillips & Vineberg, Toronto, will pass upon the legality of the
common shares offered by this prospectus. Morrison & Foerster LLP, New York,
New York, is acting as our U.S. legal counsel with respect to the offering.
Shearman & Sterling and Osler, Hoskin & Harcourt LLP are acting as U.S. and
Canadian counsel, respectively, to the underwriters. In connection with this
offering, several attorneys of Goodman Phillips & Vineberg, Toronto, and
Morrison & Foerster LLP are expected to purchase up to 20,500 and 8,500,
respectively, of the common shares that will be offered by the underwriters.
EXPERTS
Our consolidated balance sheets as of December 31, 1997 and 1998 and
September 30, 1999 and our consolidated statements of operations, shareholders'
equity and cash flows for the period from July 28, 1997 (date of inception) to
December 31, 1997, the year ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999 included in this prospectus have been audited by
KPMG LLP, Independent Auditors, and have been so included in reliance upon the
reports of that firm given upon their authority as experts in accounting and
auditing. KPMG LLP's address is 4120 Yonge Street, Suite 500, Toronto, Ontario
M2P 2B8.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a registration
statement on Form F-1 covering the common shares being sold in this offering. We
have not included in this prospectus all of the information contained in the
registration statement, and you should refer to the registration statement and
its exhibits for further information.
Any statement regarding any of the contracts or other documents referred to
in this prospectus is not necessarily complete. If the contract or document is
filed as an exhibit to the registration statement, the contract or document is
deemed to modify the description contained in this prospectus. You must review
the exhibits themselves for a complete description of the contract or document.
You may review a copy of the registration statement, including exhibits and
schedules filed with it, at the Commission's public reference facilities in
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, and
at the regional offices of the Commission located at 7 World Trade Center,
13th Floor, New York, New York 10048 and at the Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may also
obtain copies of such materials from the Public Reference Section of the
Commission, Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C., 20549, at prescribed rates. You may call the Commission at
1-800-SEC-0330 for
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further information on the public reference rooms. These Commission filings are
also available to the public from commercial document retrieval services.
Prior to this offering, we have not been required to file reports with the
Commission. Following consummation of the offering, we will be required to file
reports and other information with the Commission under the U.S. Securities
Exchange Act of 1934 and with the securities regulators in each of the provinces
of Canada under the applicable provincial securities legislation. You are
invited to read and copy any reports, statements or other information, other
than confidential filings, that we file with the Commission at its public
reference room. These materials can also be inspected on the Securities and
Exchange Commission's Website at http://www.sec.gov, and the Canadian System for
Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com).
We intend to file with the Commission annual reports on Form 20-F. In
addition, in order to comply with the rules of The Nasdaq Stock Market's
National Market, we intend to furnish to our shareholders an annual report and a
proxy statement prior to each of our annual meetings of shareholders. Our annual
reports will include consolidated financial statements prepared in accordance
with accounting principles generally accepted in Canada which, except as will be
disclosed therein, will conform in all material respects with accounting
principles generally accepted in the U.S. These annual financial statements will
be examined by our independent auditors. We also intend to make available
quarterly reports containing condensed unaudited financial information for each
of the first three quarters of each fiscal year, prepared in accordance with
accounting principles generally accepted in Canada.
ELIGIBILITY FOR INVESTMENT
In the opinion of Goodman Phillips & Vineberg, Toronto, counsel to the
Company, and of Osler, Hoskin & Harcourt LLP, counsel to the Underwriters,
subject to compliance with the prudent investment standards and general
investment provisions and restrictions of the statutes referred to below (and,
where applicable the regulations thereunder) and, in certain cases, subject to
the satisfaction of additional requirements relating to investment policies,
standards, procedures and goals, the purchase of the common shares offered
hereby will not, at the date of issue, be precluded under the following
statutes:
INSURANCE COMPANIES ACT (Canada)
PENSION BENEFITS STANDARDS ACT, 1985 (Canada)
TRUST AND LOAN COMPANIES ACT (Canada)
FINANCIAL INSTITUTIONS ACT
(British Columbia)
LOAN AND TRUST CORPORATIONS ACT (Alberta)
THE INSURANCE ACT (Manitoba)
THE TRUSTEE ACT (Manitoba)
PENSION BENEFITS ACT (Ontario)
LOAN AND TRUST CORPORATIONS ACT (Ontario)
AN ACT RESPECTING INSURANCE (Quebec) (for
an insurer, as defined therein, constituted under the laws of the
Province of Quebec other than a guarantee fund)
AN ACT RESPECTING TRUST COMPANIES AND SAVING COMPANIES (Quebec) (for
saving companies investing their own funds, and by trust companies
investing their own funds and deposits received by them)
SUPPLEMENTAL PENSION PLANS ACT (Quebec)
In the opinion of such counsel, the common shares, if, as and when listed on
a prescribed stock exchange (which presently includes The Toronto Stock
Exchange), will be qualified investments for a trust governed by a Registered
Retirement Savings Plan, a Registered Retirement Income Fund or a Deferred
Profit Sharing Plan under the Income Tax Act and the regulations thereunder, and
under certain proposed amendments to the Income Tax Act, for a trust governed by
a Registered Education Savings Plan. Also in the opinion of such counsel, at the
date of their issue, the common shares will not be "foreign property" for the
purposes of Part XI of the Income Tax Act. The foregoing opinions assume that
there will be no changes in the applicable legislation currently in effect prior
to the date of issue of the common shares.
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MATERIAL CONTRACTS
The only material contracts entered into by the Company during the past two
year period or to which it has become a party, other than in the ordinary course
of business, are as follows:
1. the Amended and Restated Unanimous Shareholders' Agreement dated
October 26, 1999 among the Company and its existing shareholders;
2. the U.S. underwriting agreement dated January 27, 2000 referred to under
"Underwriting";
3. the Canadian underwriting agreement dated January 27, 2000 referred to
under "Underwriting"; and
4. the "2000 Stock Option Plan" referred to under "Management--Stock Option
Plans".
Copies of these agreements, or the relevant provisions thereof, will be
available for inspection at the head office of the Company during normal
business hours during the course of distribution and for a period of 30 days
thereafter.
PROMOTERS
Gregory Wolfond and Christopher Erickson, the Company's Chairman and Chief
Executive Officer, and President, respectively, may each be considered a
promoter of the Company for purposes of Canadian securities laws. In addition to
the executive compensation that each received from the Company which is
disclosed under "Management--Executive Compensation", the Company in September
1997 issued to an entity controlled by Mr. Wolfond 3,999,800 common shares,
together with an option to purchase an additional 4,000,000 common shares for an
aggregate purchase price of approximately Cdn.$2.0 million. See "Certain
Transactions--Blue Sky Capital Corporation and 1319079 Ontario Inc."
PURCHASERS' STATUTORY RIGHTS
Securities legislation in several of the Canadian provinces provides the
purchasers with the right to withdraw from an agreement to purchase securities
within two business days after receipt or deemed receipt of a prospectus and any
amendment. In several of the provinces, securities legislation further provides
the purchaser with remedies for rescission or, in some jurisdictions, damages
where the prospectus and any amendment contains a misrepresentation or is not
delivered to the purchaser, provided that such remedies for rescission or
damages are exercised by the purchaser within the time limit prescribed by the
securities legislation of his province. The purchaser should refer to any
applicable provisions of the securities legislation of his province for the
particulars of these rights or consult with a legal adviser.
69
<PAGE>
724 SOLUTIONS INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of KPMG LLP, Independent Auditors.................... F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
To the Board of Directors of 724 Solutions Inc.
We have audited the consolidated balance sheets of 724 Solutions Inc. as at
December 31, 1997 and 1998 and September 30, 1999 and the consolidated
statements of operations, shareholders' equity and cash flows for the period
from July 28, 1997 (date of inception) to December 31, 1997, the year ended
December 31, 1998 and the nine months ended September 30, 1998 and 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards in Canada. Those standards require that we plan and perform an audit
to obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1997 and 1998 and September 30, 1999 and the results of its operations and its
cash flows for the period from July 28, 1997 (date of inception) to
December 31, 1997, the year ended December 31, 1998 and the nine months ended
September 30, 1998 and 1999 in accordance with generally accepted accounting
principles in Canada.
Generally accepted accounting principles in Canada differ in some respects
from those applicable in the United States (note 11).
<TABLE>
<S> <C>
Toronto, Canada (Signed) KPMG LLP
October 29, 1999, except as to Note 12 Chartered Accountants
which is as of January 20, 2000
</TABLE>
F-2
<PAGE>
724 SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $1,299 $ 2,976 $28,044
Accounts receivable, net of allowance for doubtful
accounts of $0.......................................... 1 35 2,265
Prepaid expenses.......................................... -- 21 498
------ ------- -------
Total current assets.................................... 1,300 3,032 30,807
Property and equipment (note 3)............................. 21 860 1,637
------ ------- -------
Total assets................................................ $1,321 $ 3,892 $32,444
====== ======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 23 $ 236 $ 398
Accrued liabilities....................................... 10 463 1,457
Deferred revenue net of deferred stock-based compensation
of Nil as at December 31, 1997; $420 as at December 31,
1998 and $619 as at September 30, 1999.................. -- -- 3,236
------ ------- -------
Total current liabilities............................... 33 699 5,091
Shareholders' equity (note 4):
Unlimited number of common shares authorized;
4,000,000 common shares issued and outstanding at
December 31,
1997; 11,428,570 common shares at December 31, 1998 and
19,320,360 common shares issued and outstanding at
September 30,
1999.................................................... 1,443 7,752 37,907
Deferred stock-based compensation......................... -- (1,705) (150)
Accumulated deficit....................................... (155) (2,854) (10,404)
------ ------- -------
Total shareholders' equity................................ 1,288 3,193 27,353
------ ------- -------
Total liabilities and shareholders' equity.................. $1,321 $ 3,892 $32,444
====== ======= =======
</TABLE>
<TABLE>
<S> <C>
(Signed) GREGORY WOLFOND (Signed) CHRISTOPHER ERICKSON
Director Director
</TABLE>
See accompanying notes to the consolidated financial statements.
F-3
<PAGE>
724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 28, 1997 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1998 1999
-------------- ------------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Software development (Related party
transactions -- note 8)........................ $ -- $ 1,678 $ 1,049 $ 1,314
Services......................................... -- 208 208 788
Less: Stock-based compensation related to
software development (notes 4 and 8)........... (1,395) (785) (1,273)
------ ------- ------- -------
Net revenue.................................... 491 472 829
Operating expenses:
Cost of services revenue......................... -- 61 61 819
Research and development......................... 44 2,277 1,134 4,592
Sales and marketing.............................. 39 412 209 1,134
General and administrative....................... 82 547 255 2,175
------ ------- ------- -------
Total operating expenses....................... 165 3,297 1,659 8,720
------ ------- ------- -------
Income (loss) from operations.................. (165) (2,806) (1,187) (7,891)
Interest income.................................... 10 107 69 341
------ ------- ------- -------
Income (loss) before income taxes.............. (155) (2,699) (1,118) (7,550)
Income taxes (note 5).............................. -- -- -- --
------ ------- ------- -------
Net income (loss).............................. $ (155) $(2,699) $(1,118) $(7,550)
====== ======= ======= =======
Basic and diluted net income (loss) per share...... $(0.06) $ (0.47) $ (0.24) $ (0.57)
====== ======= ======= =======
Shares used in computing basic and diluted net
income (loss) per share (in thousands)........... 2,752 5,784 4,564 13,301
====== ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-4
<PAGE>
724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DEFERRED
STOCK-BASED
DEFERRED COMPENSATION
STOCK-BASED RELATED TO
COMMON SHARES COMPENSATION SOFTWARE TOTAL
--------------------- RELATED TO & DEVELOPMENT ACCUMULATED SHAREHOLDERS'
NUMBER AMOUNT STOCK OPTIONS REVENUE DEFICIT EQUITY
---------- -------- ------------- -------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, at July 28, 1997
(inception)................. 200 $ 1 $ -- $ -- $ -- $ 1
Net income (loss)............. -- -- -- -- (155) (155)
Issuance of common shares..... 3,999,800 1,442 -- -- -- 1,442
---------- ------- ----- ------- -------- -------
Balances, December 31, 1997... 4,000,000 1,443 -- -- (155) 1,288
Net income (loss)............. -- -- -- -- (2,699) (2,699)
Deferred stock-based
compensation................ -- 414 (414) (3,287) -- (3,287)
Amortization of deferred
stock-based compensation.... -- -- 181 -- -- 181
Allocation of deferred
stock-based compensation to
software development revenue
and deferred revenue........ -- -- -- 1,815 -- 1,815
Issuance on exercise of
options..................... 4,000,000 1,296 -- -- -- 1,296
Issuance of common shares..... 3,428,570 4,599 -- -- -- 4,599
---------- ------- ----- ------- -------- -------
Balances, December 31, 1998... 11,428,570 7,752 (233) (1,472) (2,854) 3,193
Net income (loss)............. -- -- -- -- (7,550) (7,550)
Deferred stock-based
compensation................ -- 41 (41) -- -- --
Amortization of deferred
stock-based compensation.... -- -- 124 -- -- 124
Allocation of deferred
stock-based compensation to
software development revenue
and deferred revenue........ -- -- -- 1,472 -- 1,472
Issuance of common shares..... 7,891,790 30,114 -- -- -- 30,114
---------- ------- ----- ------- -------- -------
Balances, September 30, 1999
(note 12)................... 19,320,360 $37,907 $(150) $ -- $(10,404) $27,353
========== ======= ===== ======= ======== =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-5
<PAGE>
724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
JULY 28, 1997 NINE MONTHS ENDED
(INCEPTION) TO YEAR ENDED SEPTEMBER 30,
DECEMBER 31, DECEMBER 31, -------------------
1997 1998 1998 1999
-------------- ------------- -------- --------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................. $ (155) $(2,699) $(1,118) $(7,550)
Depreciation.................................. -- 88 34 445
Stock-based compensation...................... -- 1,576 939 1,397
Change in operating assets and liabilities:
Accounts receivable......................... (1) (34) -- (2,230)
Prepaid expenses............................ -- (21) (41) (477)
Accounts payable............................ 23 213 112 162
Accrued liabilities......................... 10 453 200 994
Deferred revenue............................ -- 420 827 3,435
------ ------- ------- -------
Net cash from (used in) operating activities...... (123) (4) 953 (3,824)
------ ------- ------- -------
Cash flows from investing activities:
Purchases of property and equipment........... (21) (927) (361) (1,222)
------ ------- ------- -------
Cash used in investing activities................. (21) (927) (361) (1,222)
------ ------- ------- -------
Cash flows from financing activities:
Issuance of common shares..................... 1,443 2,608 698 30,114
------ ------- ------- -------
Cash provided by financing activities............. 1,443 2,608 698 30,114
------ ------- ------- -------
Net increase in cash and cash equivalents......... 1,299 1,677 1,290 25,068
Cash and cash equivalents at beginning of
period.......................................... -- 1,299 1,299 2,976
------ ------- ------- -------
Cash and cash equivalents at end of period........ $1,299 $ 2,976 $ 2,589 $28,044
====== ======= ======= =======
</TABLE>
See accompanying notes to the consolidated financial statements.
F-6
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PERIOD FROM JULY 28, 1997 (INCEPTION) TO DECEMBER 31, 1997,
YEAR ENDED DECEMBER 31, 1998 AND THE NINE MONTHS ENDED SEPTEMBER 30, 1999
1. ORGANIZATION OF THE COMPANY
The Company was established in July 1997 to conceive, design and deliver an
Internet infrastructure solution that enables financial institutions to deliver
financial information and services using a broad range of Internet-enabled
devices. The Company's technology may be adapted for use by other types of
on-line merchants and for other applications.
2. SIGNIFICANT ACCOUNTING POLICIES
These financial statements are stated in U.S. dollars, except as otherwise
noted. They have been prepared in accordance with accounting principles
generally accepted in Canada which, except as disclosed in note 11, conform, in
all material respects, with accounting principles generally accepted in the U.S.
CONSOLIDATION
These consolidated financial statements include the accounts of the Company
and its wholly owned inactive U.S. subsidiary, 724 Solutions Corp., which was
incorporated on September 15, 1999.
CASH AND CASH EQUIVALENTS
Cash consists of deposits with major financial institutions. Cash
equivalents consists of high grade commercial paper with an original maturity of
three months or less at the date of acquisition. As at September 30, 1999, cash
equivalents accounted for approximately 89% of the cash and cash equivalents
balance and consisted of investments in thirty day commercial paper.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments consist of cash and cash equivalents, accounts
receivable, accounts payable and accrued liabilities. The Company determines the
fair value of its financial instruments based on quoted market values or
discounted cash flow analyses. Unless otherwise indicated, the fair values of
financial assets and financial liabilities approximate their recorded amounts.
Financial instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and accounts
receivable. Cash and cash equivalents consist primarily of deposits with major
commercial banks and high-grade commercial paper, the maturities of which are
three months or less from the date of purchase. The Company performs periodic
credit evaluations of the financial condition of its customers. Allowances are
maintained for potential credit losses consistent with the credit risk of
specific customers.
REVENUE RECOGNITION
The Company's revenue consists of contract software development revenue and
services revenue. The contract software development revenue was earned under a
fixed fee contract with the Bank of Montreal, which entitled Bank of Montreal to
a world-wide perpetual license for all technology developed, on a best efforts
basis, over the term of the contract. This revenue has been recognized ratably
over the term of the contract. Services revenue includes implementation and
customer service revenue earned on a time and materials basis.
F-7
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
In the future, the Company's revenue will primarily be derived from (i) the
licensing of a product and (ii) the provision of related services, including
installation, integration, training and maintenance and support. Product revenue
will be recognized when a contract with a customer has been executed, delivery
and acceptance have occurred and the collection of the related receivables is
deemed probable by management. Services revenue will be recognized as the
services are performed. Maintenance and support revenue paid in advance, is
non-refundable and is recognized ratably over the term of the agreements, which
are typically twelve months. Software development, product and services revenue
that has been prepaid but does not yet qualify for recognition as revenue under
the Company's revenue recognition policy is reflected as deferred revenue on the
Company's balance sheet.
RESEARCH AND DEVELOPMENT EXPENSES
Costs related to research, design and development of software products are
charged to research and development expenses as incurred. Software development
costs are capitalized beginning when a product's technological feasibility has
been established, which generally occurs upon completion of a working model, and
ending when a product is available for general release to customers. To date,
completing a working model of the Company's product and the general release of
the product have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
INVESTMENT TAX CREDITS
The Company is entitled to Canadian federal and provincial investment tax
credits which are earned as a percentage of eligible research and development
expenditures incurred in each taxation year.
Investment tax credits are accounted for as a reduction of the related
expenditure for items of a current nature and a reduction of the related asset
cost for items of a long-term nature, provided that the Company has reasonable
assurance that the tax credits will be realized.
STOCK-BASED COMPENSATION
The Company uses the intrinsic value method to account for its stock-based
employee compensation plan. As such, deferred stock-based compensation is
recorded if on the date of grant the current fair value of each underlying
common share exceeds the exercise price per share. Deferred stock-based
compensation is recognized as an expense over the vesting period of the option.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost, net of accumulated depreciation
and amortization, and are amortized over their estimated useful lives. Leasehold
improvements are recorded at cost and amortized over the lesser of their useful
lives or the term of the related lease. Expenditures for
F-8
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
maintenance and repairs have been charged to the statement of operations as
incurred. Depreciation and amortization are computed using the straight-line
method as follows:
<TABLE>
<CAPTION>
<S> <C>
Computer equipment.......................................... 3 years
Computer software........................................... 1 year
Office furniture and equipment.............................. 5 years
Leasehold improvements...................................... 5 years
</TABLE>
The Company regularly reviews the carrying values of its property and
equipment by comparing the carrying amount of the asset to the expected future
cash flows to be generated by the asset. If the carrying value exceeds the
amount recoverable, a writedown is charged to the statements of operations.
CURRENCY TRANSLATION
Effective July 31, 1999, the U.S. dollar became the functional currency of
the Company. This change resulted from the increased significance of U.S. dollar
denominated revenue and expenditures in relation to the Company's Canadian
dollar denominated transactions. In addition, the Company's recent issuances of
common shares have been primarily denominated in U.S. dollars. Exchange gains
and losses resulting from transactions denominated in currencies other than U.S.
dollars are included in the results of operations for the period.
Prior to July 31, 1999, the functional currency of the Company was the
Canadian dollar. Accordingly, monetary assets and liabilities of the Company
that were denominated in foreign currencies were translated into Canadian
dollars at the exchange rate prevailing at the balance sheet date. Transactions
included in operations were translated at the average rate for the period.
Exchange gains and losses resulting from the translation of these amounts were
reflected in the statement of operations in the period in which they occurred.
INCOME TAXES
The Company provides for income taxes under the liability method. Under the
liability method, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying value of existing assets and liabilities and their respective
tax basis and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected to
be recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
USE OF 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 the
disclosure of contingencies at the date of the financial statements and the
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
F-9
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
Computer equipment...................................... $11 $356 $ 966
Computer software....................................... -- 200 400
Office furniture and equipment.......................... 10 172 223
Leasehold improvements.................................. -- 220 581
------ ------ ------
21 948 2,170
Less accumulated depreciation........................... -- 88 533
------ ------ ------
$21 $860 $1,637
====== ====== ======
</TABLE>
4. SHAREHOLDERS' EQUITY
(a) Common share issuances
In September 1997, the Company issued 3,999,800 common shares and granted an
option to acquire an additional 4,000,000 common shares to the founder of the
Company for gross proceeds of Cdn.$1,999,900. The option was exercisable at the
holder's option at a price of $0.50 per common share. The option was exercised
in October 1998.
In April 1998, the Company issued to Bank of Montreal 1,000,000 common
shares for gross proceeds of Cdn.$1,000,000 and provided Bank of Montreal with
an option to subscribe for 2,428,570 additional common shares for
Cdn.$1,000,000, exercisable upon Bank of Montreal's extension of its technology
licensing agreement with the Company for a second year, and payment of the
second year's technology licensing fee. In October 1998, following Bank of
Montreal's extension of the technology license agreement, Bank of Montreal
exercised the option to subscribe for 2,428,570 common shares for
Cdn.$1,000,000. On the date of exercise, the fair value of the 2,428,570 common
shares was determined to be Cdn.$6,071,425, resulting in a stock-based
compensation charge of Cdn.$5,071,425 (U.S.$3,286,943).
In June 1999, the Company issued 541,790 common shares to Bank of America at
a price of $3.69 per share for gross proceeds of $2,000,000 and Bank of America
committed to subscribe for 541,790 additional common shares for $2,000,000. Bank
of America subscribed for the 541,790 additional common shares in October 1999.
In August 1999, the Company issued to Citicorp Strategic Technology
Corporation 950,000 common shares at a price of $3.83 per share for gross
proceeds of $3,633,750. Citicorp Strategic Technology Corporation also
contracted at this time to subscribe for 5,450,000 additional common shares at a
price of $3.83 upon the satisfaction of certain conditions, including the
receipt of applicable regulatory approvals. The option was exercised in
October 1999 (note 12).
In August 1999, the Company granted Bank of America an option to subscribe
for 2,116,420 common shares at a price of $3.90 per share. The option was
exercised in October 1999 (note 12).
F-10
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' EQUITY -- (CONTINUED)
In August 1999, the Company issued 6,400,000 common shares to Sonera
Corporation (formerly known as Sonera Ltd.) for a price of $3.83 per share for
gross proceeds of $24,480,000.
(b) Stock option plan
The Company's stock option plan (the "Plan") provides for the granting of
options to employees, officers, directors, advisors and consultants of the
Company and its affiliates. The maximum number of common shares which may be set
aside for issuance under the Plan is 5,200,000 shares, provided that the Board
of Directors of the Company has the right, from time to time, to increase such
number subject to the approval of the stockholders of the Company when required
by law or regulatory authority. Generally, options issued under the Plan vest
annually over a three year period. The common shares issuable upon exercise of
any option that is cancelled or terminated prior to its exercise will become
available again for grant under the Plan. In accordance with the Plan, the
exercise price of options is determined based on the fair market value per share
on the grant date.
Options granted under the Plan may be exercised during a period not
exceeding ten years from the date of grant, subject to earlier termination if
the optionee ceases to be an employee, officer or director of the Company or any
of its subsidiaries, as applicable. Options issued under the Plan are
non-transferable.
In October 1999, the Company adopted a U.S. stock option plan (the "U.S.
Plan") that provides for the grant of options and restricted shares to
employees, officers, directors and consultants of the Company and its
subsidiaries. As this plan was adopted subsequent to September 30, 1999, no
options under the U.S. Plan were outstanding as of September 30, 1999.
A summary of the status of the Company's options under the Plan as at
September 30, 1999, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING NUMBER OF
NUMBER OF CONTRACTUAL OPTIONS
EXERCISE PRICES OPTIONS LIFE (YEARS) EXERCISABLE
- --------------- --------- ------------ -----------
<S> <C> <C> <C>
$0.34................................................ 1,577,334 8.5 995,996
$1.71................................................ 473,800 9.3 39,500
$3.75................................................ 160,460 9.9 62,000
--------- ---------
2,211,594 1,097,496
========= =========
</TABLE>
F-11
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' EQUITY -- (CONTINUED)
The following table summarizes the continuity of options issued under the
Plan:
<TABLE>
<CAPTION>
1997 1998 1999
--------------------------- --------------------------- ---------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER AVERAGE NUMBER AVERAGE NUMBER AVERAGE
OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE OF OPTIONS EXERCISE PRICE
---------- -------------- ---------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of
period.................. -- $ -- 400,000 $0.35 1,865,000 $0.49
Granted................... 400,000 0.35 1,465,000 $0.54 404,460 2.52
Cancelled................. -- -- -- -- (57,866) 0.51
------- --------- ---------
Outstanding, end of
period.................. 400,000 $0.35 1,865,000 $0.49 2,211,594 $0.88
======= ===== ========= ===== ========= =====
Options exerciseable, end
of period............... 200,000 $0.35 625,166 $0.34 1,097,496 $0.58
======= ===== ========= ===== ========= =====
</TABLE>
The Company recorded deferred stock-based compensation relating to options
issued under the Company's Plan amounting to $414,000 for the year ended
December 31, 1998 and $41,000 for the nine month period ended September 30,
1999. Amortization of deferred stock-based compensation amounted to $181,000 for
the year ended December 31, 1998 and $154,000 and $124,000 for the nine months
ended September 30, 1998 and 1999, respectively, and has been recorded as a
research and development expense in each period.
5. INCOME TAXES
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to income (loss) before income taxes. The sources
and tax effects of the differences are as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD FROM ENDED
JULY 28, 1997 SEPTEMBER 30,
(INCEPTION) TO YEAR ENDED -------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
------------------- ------------------- -------- --------
<S> <C> <C> <C> <C>
Basic rate applied to income (loss)
before provision for income
taxes.............................. $(69) $(1,201) $(498) $(3,360)
Adjustments resulting from:
Scientific research expenses not
deducted for tax................. -- 333 87 770
Stock-based compensation not
deducted for tax................. -- 701 418 622
Other.............................. 45 167 (7) 85
---- ------- ----- -------
(24) -- -- (1,883)
Unrecognized benefit of net operating
losses carried forward............. 24 -- -- 1,883
---- ------- ----- -------
Income taxes......................... $ -- $ -- $ -- $ --
==== ======= ===== =======
</TABLE>
F-12
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES -- (CONTINUED)
Significant components of the Company's deferred tax assets are as follows
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1997 1998 1999
-------- -------- --------------
<S> <C> <C> <C>
Research and development expenses deferred for income tax
purposes................................................ $ -- $ 244 $ 1,138
Net operating losses carried forward...................... 24 24 1,907
Other..................................................... -- -- 90
---- ----- -------
Deferred tax asset........................................ 24 268 3,135
Less valuation allowance.................................. (24) (268) (3,135)
---- ----- -------
$ -- $ -- $ --
==== ===== =======
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible. Management considers
projected future taxable income, uncertainties related to the industry in which
the Company operates, and tax planning strategies in making this assessment. In
order to fully realize the deferred tax assets the Company will need to generate
future taxable income of approximately $7 million prior to the expiration of the
net operating losses carried forward in the years 2003 to 2005. Due to the
uncertainties related to the industry in which the Company operates, the tax
benefit of the above carried forward amounts have been completely offset by a
valuation allowance.
6. LEASE COMMITMENTS
Future minimum lease payments under non-cancellable operating leases for
premises and equipment are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999
--------------
<S> <C>
2000........................................................ $ 609
2001........................................................ 1,051
2002........................................................ 1,045
2003........................................................ 1,029
2004........................................................ 949
2005 and thereafter......................................... 587
</TABLE>
Rent expense for the period from July 28, 1997 (inception) to December 31,
1997, the year ended December 31, 1998 and the nine months ended September 30,
1998 and 1999 was $6,000, $107,000, $17,000 and $307,000, respectively. The
Company is also responsible for certain common area costs at its leased
premises.
F-13
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SEGMENTED INFORMATION
The Company operates in a single reportable operating segment, that is, the
design and delivery of an Internet infrastructure platform that enables
financial institutions to deliver financial information and services to a range
of Internet-enabled devices. The single reportable operating segment derives its
revenue from the sale of software and related services. As at September 30, 1999
all assets related to the Company's operations were located in Canada. Net
revenue is attributable to geographic location based on the location of the
customer, as follows (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD FROM ENDED
JULY 28, 1997 YEAR ENDED SEPTEMBER 30,
(INCEPTION) TO DECEMBER 31, -------------------
DECEMBER 31, 1997 1998 1998 1999
------------------- ------------- -------- --------
<S> <C> <C> <C> <C>
Net revenue by geographic locations:
U.S...................................... $ -- $ -- $ -- $754
Canada................................... -- 491 472 75
---- ---- ---- ----
$ -- $491 $472 $829
==== ==== ==== ====
</TABLE>
For the year ended December 31, 1998, one customer accounted for 100% of
revenue. For the period from January 1, 1999 to September 30, 1999, two
customers have accounted for 100% of revenue. At September 30, 1999, two
customers accounted for 100% of the accounts receivable balance.
8. RELATED PARTY TRANSACTIONS
(a) On April 30, 1998, the Company entered into a share subscription
agreement and a technology license agreement with Bank of Montreal ("BMO").
Pursuant to the share subscription agreement, on April 30, 1998, BMO subscribed
for 1,000,000 of the Company's common shares for Cdn.$1,000,000 and received an
option to subscribe for 2,428,570 additional common shares for Cdn.$1,000,000,
exercisable in the event that BMO extended its technology license agreement for
a second year and paid the second year's technology licensing fee. In
October 1998, upon exercising its right to extend the technology license
agreement, BMO exercised the option and subscribed for 2,428,570 shares for
Cdn.$1,000,000. On the date of exercise, the fair value of the 2,428,570 common
shares was determined to be Cdn.$6,071,425, resulting in a stock-based
compensation charge related to software development revenue of Cdn.$5,071,425
(U.S.$3,286,943). The stock-based compensation is being attributed to the
software development revenue over the term of the technology license agreement
in proportion to the revenue recognized in the first and second years under the
agreement. The excess of the stock-based compensation over the accumulated
allocation to software development revenue has been netted against the related
deferred revenue with the balance being recorded as deferred stock-based
compensation in shareholders' equity. The parties also agreed to a March 1999
payment date for the second year's licensing fee to coincide with the
commencement of the second year's term. As at September 30, 1999, BMO owned
approximately 17.7% of the Company's outstanding common shares (11.6% on a
fully-diluted basis).
The BMO technology license agreement had an initial term of ten months
commencing on April 30, 1998. As noted above, BMO extended the term of the
technology license agreement for a second year and has the option to extend the
term for additional one-year periods thereafter. BMO has indicated it intends to
extend the agreement for a further year. The technology license agreement
F-14
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS -- (CONTINUED)
provides for fixed annual license fees in the first two years of Cdn.$3,000,000
in exchange for a world-wide perpetual license for all technology existing at
the commencement of the license period and all technology developed during each
term of the agreement. The annual license fees in the first two technology
licensing terms of the agreement were subject to refund to the extent that the
Company failed to meet certain spending commitments. As at September 30, 1999,
all spending commitments had been satisfied. Initially BMO had a right to be the
exclusive Canadian financial institution to which the Company would license its
technology. In November 1998, BMO agreed to waive this right in return for a
refund of a portion of its annual license fee, to a maximum of Cdn.$700,000, to
be calculated as a percentage of fees paid by other Canadian financial
institutions, if any, to license the Company's technology. To September 30,
1999, no amounts have been subject to refund under this provision. The Company
has recognized the license fee for each of the first and second term of the
technology license on a straight line basis over the term of the license.
Cdn.$700,000 of the second year's license fee, related to the aforementioned
refundability provision, has been deferred and will either be paid in accordance
with the terms of the agreement or recognized into income when the commitment to
such refund has expired.
(b) On June 1, 1999, the Company entered into a subscription agreement and a
technology licensing agreement with Bank of America ("BofA"). Pursuant to the
subscription agreement BofA subscribed for 541,790 common shares of the Company
for $2,000,000. The subscription agreement also stipulated that BofA would
unconditionally subscribe for an additional 541,790 common shares on
February 1, 2000 for $2,000,000. BofA subscribed for the 541,790 additional
common shares in October 1999 as a result of the Company attracting additional
equity investors at that time.
The technology license agreement provides for a license fee to be paid by
BofA to the Company over a twenty-month period commencing on June 1, 1999, in
exchange for the delivery of specific products over the term of the agreement
and for a license of all technology developed during the license period. If
these products are not delivered, a portion of the license fee payable under
this arrangement is refundable. The Company has recorded the payments received
under this agreement as deferred revenue and will commence to recognize the
revenue under this contract upon the delivery of the products specified in the
technology agreement.
These technology license agreements are extendible annually at the option of
the licensees. In addition, the Company has agreed to provide related support
and maintenance services to the licensees.
F-15
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS -- (CONTINUED)
The following table sets out the balances and transactions with the licensees
relating to these agreements (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------- SEPTEMBER 30,
1997 1998 1999
-------------- -------------- --------------
<S> <C> <C> <C>
RELATED PARTY BALANCES:
Accounts receivable................. $ -- $ 34 $ 750
Deferred revenue.................... -- -- 2,236
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
PERIOD FROM ENDED
JULY 28, 1997 SEPTEMBER 30,
(INCEPTION) TO YEAR ENDED -------------------
DECEMBER 31, 1997 DECEMBER 31, 1998 1998 1999
------------------- ------------------- -------- --------
<S> <C> <C> <C> <C>
RELATED PARTY TRANSACTIONS:
Net revenue:
Software development.................... $ -- $283 $264 $41
Services................................ $ -- $208 $208 $34
</TABLE>
In August 1999, the Company entered into a two year consulting agreement
with a director of the Company providing for a monthly consulting fee of
$34,000, together with options, granted under the option plan, to purchase
48,000 common shares of the Company at an exercise price of $3.75, vesting at a
rate of 2,000 shares per month.
9. EARNINGS PER SHARE
Due to the net loss for all periods presented, all potential common shares
outstanding are considered anti-dilutive and are excluded from the calculation
of diluted loss per share. Common shares that could potentially dilute basic
loss per share in the future were not included in the computation of diluted
loss per share because to do so would have been anti-dilutive for the periods
presented amounted to 10,319,804.
10. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE
The Year 2000 Issue arises because many computerized systems use two digits
rather than four to identify a year. Date-sensitive systems may recognize the
year 2000 as 1900 or some other date, resulting in errors when information using
year 2000 dates is processed. In addition, similar problems may arise in some
systems which use certain dates in 1999 to represent something other than a
date. 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 systems failure which could
affect an entity'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
other third parties, will be fully resolved.
F-16
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES
The financial statements of the Company have been prepared in accordance
with generally accepted accounting principles ("GAAP") as applied in Canada
which conform in all material respects with generally accepted accounting
principles in the U.S.
Supplemental disclosures required under U.S. GAAP include the following:
(a) Recent Accounting Pronouncements:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS No. 130), which establishes standards for
reporting and presentation of comprehensive income. This standard defines
comprehensive income as the changes in equity of an enterprise except those
resulting from stockholder transactions. Comprehensive net income (loss) for the
period from July 28, 1997 (inception) to December 31, 1997, the year ended
December 31, 1998 and the nine months ended September 30, 1998 and 1999,
equalled the net income (loss) for the period.
In June 1997, the Financial Accounting Standards Board issued SFAS No. 131,
"Disclosures About Segments of an Enterprise and Related Information" (SFAS
No. 131). SFAS No. 131 was adopted by the Company in 1997. SFAS No. 131
establishes standards for disclosures about operating segments, product and
services, geographic areas and major customers. The Company operates in a single
reportable operating segment, that is, the design and delivery of an Internet
infrastructure platform that enables financial institutions to deliver financial
information and services to a range of Internet-enabled devices.
In March 1998, the American Institute of Certified Public Accountants issued
SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use" (SOP No. 98-1). SOP No. 98-1 requires entities to
capitalize certain costs related to internal-use software once certain criteria
have been met. For U.S. GAAP purposes, SOP 98-1 was adopted by the Company in
1998. The adoption of SOP No. 98-1 did not have a material impact on the
Company's financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). SFAS No. 133 establishes accounting and
reporting standards requiring that every derivative instrument be recorded in
the balance sheet as either an asset or liability measured at its fair value.
SFAS No. 133, as recently amended, is effective for fiscal years beginning after
June 15, 2000. Management believes the adoption of SFAS No. 133 will not have a
material effect on the Company's financial position or results of operations.
(b) SFAS 123 Pro Forma Information:
SFAS No. 123, "Employee Stock Compensation", encourages, but does not
require, the recording of compensation costs related to stock options valued at
fair value. For companies choosing not to adopt the fair value measurement for
stock based compensation, the pronouncement requires the disclosure of pro forma
net income and net income (loss) per share information as if the Company had
accounted for its stock options issued in 1997 through 1999 under the fair value
method. The Company has elected not to adopt the recording of compensation cost
for stock options at fair value and,
F-17
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES -- (CONTINUED)
accordingly, a summary of the pro forma impact on the statement of operations is
presented in the table below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
PERIOD FROM
JULY 28, 1997
(INCEPTION) TO YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 SEPTEMBER 30, 1999
------------------- ------------------- -------------------
<S> <C> <C> <C>
Net income (loss)........................... $ (155) $(2,699) $(7,550)
Compensation expense related to the fair
value of stock options.................... (4) (23) (48)
------ ------- -------
Pro forma net income (loss)................. $ (159) $(2,722) $(7,598)
====== ======= =======
Pro forma net income (loss) per share....... $(0.06) $ (0.47) $ (0.57)
====== ======= =======
</TABLE>
The fair value of each option granted has been estimated at the date of
grant using the minimal value method and by applying the following assumption:
weighted average risk free interest rate of 4.75% for the period from July 28,
1997 (inception) to December 31, 1997; 5.1% for the year ended December 31,
1998; and 4.9% for the nine months ended September 30, 1999.
The Company has assumed no forfeiture rate, as adjustments for actual
forfeitures are made in the year they occur. The weighted-average grant-date
fair value of options issued was $0.07 and $0.13 for the period from July 28,
1997 (inception) to December 31, 1997 and for the year ended December 31, 1998,
respectively. The weighted-average grant-date fair value of options issued in
the nine month period ended September 30, 1999 was $0.38.
12. SUBSEQUENT EVENTS
The Company's Board of Directors has authorized the initial filing of a
prospectus with regulatory authorities in Canada and the United States that
would permit the Company to sell shares of the Company's common stock in
connection with a proposed initial public offering ("IPO").
The Company has filed articles of amendment to split all of the outstanding
and reserved common shares on a basis of two for one, effective December 30,
1999. The Company's share capital and earnings per share have been restated to
give effect to this share split.
In October 1999, in connection with the fulfillment of subscription
obligations and the exercise of common share purchase options, the Company
issued: (i) 5,450,000 common shares to Citicorp Strategic Technology Corporation
for cash proceeds of $20,846,250; and (ii) 2,658,210 common shares to Bank of
America for cash proceeds of $10,243,456.
In October 1999, the Company completed three private placements for a total
issuance of 1,973,856 common shares at prices of $3.83 and $7.50 per share and
666,668 common shares issuable upon the exercise of a warrant exercisable at a
price of $7.50 per share for total proceeds of $10,000,000. This warrant expired
unexercised on January 14, 2000.
In December 1999, the Company adopted a new stock option plan which will be
implemented upon completion of the Company's initial public offering. Options
granted under the existing plans will be unaffected by the adoption of the new
plan. The new plan will provide for the grant of options to
F-18
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS -- (CONTINUED)
all employees, officers, directors and consultants of the Company and its
affiliates worldwide. Options held by any person under the new plan together
with any other options granted to that person may not at any time exceed 5% of
the aggregate number of common shares outstanding from time to time. The options
granted under the new plan will have a maximum term of 10 years and an exercise
price no less than the fair market value of the common shares on the date of the
grant, or 110% of fair market value in the case of an incentive stock option
granted to an employee who owns common shares having more than 10% of the voting
power of the Company. All options granted under this plan will become fully
vested and exercisable upon a change of control of the Company.
From October 1, 1999 to January 20, 2000, the Company granted options to
acquire 782,436 common shares under its stock option plans at a weighted average
exercise price of $9.44 per share. The Company has recorded deferred stock-based
compensation related to these options of approximately $6.9 million based on the
proposed valuation of its initial public offering. This deferred stock-based
compensation will be amortized on a straight line basis over three years.
F-19
<PAGE>
CERTIFICATE OF THE COMPANY
Dated: January 27, 2000
The foregoing constitutes full, true and plain disclosure of all material
facts relating to the securities offered by this prospectus as required by the
securities laws of all the provinces of Canada and, for the purpose of the
SECURITIES ACT (Quebec), does not contain any misrepresentation likely to affect
the value or the market price of the securities to be distributed.
<TABLE>
<S> <C>
(Signed) GREGORY WOLFOND (Signed) KAREN BASIAN
Chairman and Chief Executive Officer Chief Financial Officer
On behalf of the Board of Directors
(Signed) CHRISTOPHER ERICKSON (Signed) ANDRE BOYSEN
Director Director
</TABLE>
C-1
<PAGE>
CERTIFICATE OF THE UNDERWRITERS
Dated: January 27, 2000
To the best of our knowledge, information and belief, the foregoing
constitutes full, true and plain disclosure of all material facts relating to
the securities offered by this prospectus as required by the securities laws of
all the provinces of Canada and, for the purpose of the SECURITIES ACT (Quebec),
to our knowledge, does not contain any misrepresentation likely to affect the
value or the market price of the securities to be distributed.
<TABLE>
<S> <C> <C>
NESBITT BURNS INC. RBC DOMINION SECURITIES INC. CREDIT SUISSE FIRST BOSTON
SECURITIES CANADA INC.
By: (Signed) W. J. BLAIR AGNEW By: (Signed) DANIEL R. COHOLAN By: (Signed) CHRISTOPHER LEGG
</TABLE>
The following are the names of every person or company having an interest,
either directly or indirectly, to the extent of not less than 5% in the capital
of:
NESBITT BURNS INC.: a wholly-owned subsidiary of The Nesbitt Burns Corporation
Limited, an indirect majority-owned subsidiary of a Canadian chartered bank;
RBC DOMINION SECURITIES INC.: an indirect wholly-owned subsidiary of a Canadian
chartered bank; and
CREDIT SUISSE FIRST BOSTON SECURITIES CANADA INC.: an indirect subsidiary of
Credit Suisse First Boston, a Swiss bank.
C-2
<PAGE>
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