<PAGE>
FILE NO. 333-90143
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 7, 2000
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
--------------------------
724 SOLUTIONS INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
ONTARIO 7372 INAPPLICABLE
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
4101 YONGE STREET, SUITE 702
TORONTO, ONTARIO M2P IN6
(416) 226-2900
(Address and telephone number of Registrant's principal executive offices)
CT CORPORATION SYSTEM
111 8TH AVENUE
NEW YORK, NEW YORK 10011
(212) 247-2882
(Name, address and telephone number of agent for service)
--------------------------
COPIES TO:
<TABLE>
<S> <C> <C> <C>
ROBERT S. TOWNSEND, ESQ. BRIAN LUDMER, ESQ. MARC M. ROSSELL, ESQ. DEBORAH ALEXANDER, ESQ.
MARK L. MANDEL, ESQ. Goodman Phillips & Shearman & Sterling Osler, Hoskin &
Morrison & Foerster LLP Vineberg 599 Lexington Avenue Harcourt LLP
1290 Avenue of the 250 Yonge Street New York, New York 10022 1 First Canadian Place
Americas Suite 2400 (212) 848-4000 P.O. Box 50
New York, New York Toronto, Ontario M5B 2M6 Toronto, Ontario M5X 1B8
10104-0012 (416) 979-2211 (416) 362-2111
(212) 468-8000
</TABLE>
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
--------------------------
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
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<PAGE>
EXPLANATORY NOTE
This Registration Statement includes two forms of prospectuses, one which
will be used for offers in the U.S., and one that will be used for offers in
Canada. The alternative pages for the Canadian prospectus are set forth prior to
Part II of this Registration Statement.
<PAGE>
SUBJECT TO COMPLETION, DATED JANUARY 7, 2000
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
<PAGE>
6,000,000 Shares
[724 SOLUTIONS LOGO]
Common Shares
---------
We are offering common shares in the United States through a
syndicate of U.S. underwriters and common shares in Canada through a
syndicate of Canadian underwriters. The underwriters have an option to purchase
a maximum of 900,000 additional common shares to cover over-allotments of common
shares.
Prior to this offering, there has been no public market for our common
shares. The initial public offering price is expected to be between $11.00 and
$13.00 per common share. We have applied to list our common shares on The Nasdaq
Stock Market's National Market under the symbol "SVNX" and on The Toronto Stock
Exchange under the symbol "SVN".
Investing in our common shares involves risks. See "Risk Factors" starting
on page 7.
<TABLE>
<CAPTION>
Underwriting
Price to Discounts and Proceeds to
Public Commissions 724 Solutions
--------------- --------------- ---------------
<S> <C> <C> <C>
Per Share..................................... $ $ $
Total......................................... $ $ $
</TABLE>
Delivery of the common shares will be made on or about , 2000.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
Credit Suisse First Boston
Robertson Stephens
Thomas Weisel Partners LLC
The date of this prospectus is , 2000.
<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>
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PAGE
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<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
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
BUSINESS.............................. 32
MANAGEMENT............................ 45
CERTAIN TRANSACTIONS.................. 52
PRINCIPAL SHAREHOLDERS................ 55
DESCRIPTION OF SHARE CAPITAL.......... 56
SHARES ELIGIBLE FOR FUTURE SALE....... 57
INCOME TAX CONSEQUENCES............... 59
UNDERWRITING.......................... 63
LEGAL MATTERS......................... 66
EXPERTS............................... 66
WHERE YOU CAN FIND MORE INFORMATION... 66
INDEX TO CONSOLIDATED FINANCIAL
STATEMENTS.......................... F-1
</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 , 2000 (25 DAYS AFTER THE COMMENCEMENT OF THIS OFFERING),
ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, 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.
--------------
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 and our partner Sonera 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 in the year 2000. 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 revenue was approximately $2.1 million during the nine months ended
September 30, 1999 and we incurred net losses during this period of
approximately $6.3 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...................................... shares
Canadian offering.................................. 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 September 30, 1999 to purchase 2,211,594 common
shares under our stock option plans at a weighted average exercise price
of $0.88 per share;
- common shares issued upon the exercise of stock options after
September 30, 1999;
- 666,668 common shares issuable upon the exercise of a warrant having an
exercise price of $7.50 per share; and
- approximately 67,200 common shares issuable to one of our shareholders at
a purchase price of $7.50 per share upon exercise of a preemptive right if
the warrant described above is exercised.
--------------
All references to "$" 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>
NINE MONTHS
PERIOD FROM 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:
Product................................... $ -- $ 1,678 $1,049 $ 1,314
Services.................................. -- 208 208 788
------ ------- ------ -------
Total revenue........................... -- 1,886 1,257 2,102
Cost of revenue............................. -- 61 61 819
------ ------- ------ -------
Gross profit................................ -- 1,825 1,196 1,283
Total operating expenses.................... 165 6,523 1,598 7,901
------ ------- ------ -------
Income (loss) from operations............... (165) (4,698) (402) (6,618)
Interest income............................. 10 107 69 341
------ ------- ------ -------
Net income (loss)........................... $ (155) $(4,591) $ (333) $(6,277)
====== ======= ====== =======
Basic and diluted net income (loss) per
share..................................... $(0.06) $ (0.79) $(0.07) $ (0.47)
====== ======= ====== =======
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 $134,430
Working capital............................................. 25,097 66,187 131,483
Total assets................................................ 32,444 73,534 138,830
Total shareholders' equity.................................. 26,734 67,824 133,120
</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 estimated initial public offering price of $12.00 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,
$4.6 million for the year ended December 31, 1998 and $6.3 million for the nine
months ended September 30, 1999. As of September 30, 1999, we had an accumulated
deficit of $11.0 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 certain third party software that may not
be available to us in the future on commercially reasonable terms or at all. 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.
Based on the nature of our revenue and our anticipated corporate structure,
we may be treated as a passive foreign investment company (a "PFIC") for U.S.
federal income tax purposes. If at any time we qualify as a PFIC, U.S. persons
holding our common shares may be subject to adverse tax consequences, including
an increased tax liability upon the sale of those common shares or upon the
receipt of specified types of distributions from us. Application of the PFIC
rules to our business is uncertain, and we have not determined whether we are a
PFIC. Moreover, our PFIC status must be determined annually based on tests which
are factual in nature, and we have not determined whether we will become, or are
likely to become, a PFIC in the future. 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 PFIC. See
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"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.
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.
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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 approximately
77.5% 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.
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, 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, and assuming that the relief being sought
which is described under the caption "Shares Eligible for Future Sale--Canadian
Resale Restrictions" is obtained, all common shares outstanding after this
offering will be available for sale in the public market beginning 180 days
after the date of this prospectus. See "Shares Eligible for Future Sale".
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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. Moreover, neither
we nor anyone else assumes responsibility for the accuracy and completeness of
forward-looking statements. 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 $65.3 million in net proceeds from the sale of
6,000,000 common shares in this offering, based on the estimated initial public
offering price of $12.00 per common share. We estimate that the net proceeds
will be about $75.3 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 may change after the date of this prospectus. 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 December 31, 1999, the noon buying rate in New York City for cable
transfers in Canadian dollars was Cdn.$1.00 equals $0.6925. 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 estimated initial public offering price of $12.00
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 $134,430
======= ======= ========
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 78,997 144,293
Deferred stock-based compensation........................... (150) (150) (150)
Accumulated deficit......................................... (11,023) (11,023) (11,023)
------- ------- --------
Total capitalization........................................ $26,734 $67,824 $133,120
======= ======= ========
</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 September 30, 1999 to purchase 2,211,594 common
shares under our stock option plans at a weighted average exercise price
of $0.88 per share;
- common shares issued upon the exercise of stock options after
September 30, 1999;
- 666,668 common shares issuable upon the exercise of a warrant having an
exercise price of $7.50 per share; and
- approximately 67,200 common shares issuable to one of our shareholders at
a purchase price of $7.50 per share upon exercise of a preemptive right if
the warrant described above is exercised.
21
<PAGE>
DILUTION
Our pro forma net tangible book value as of September 30, 1999, was $67.8
million or $2.31 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 estimated initial public offering
price of $12.00 per share and after deducting the estimated 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
$133.1 million, or $3.76 per share. This represents an immediate increase in pro
forma net tangible book value of $1.45 per share to existing shareholders and an
immediate dilution in net tangible book value of $8.24 per share to new
investors of common shares in this offering. The following table illustrates
this dilution on a per share basis:
<TABLE>
<CAPTION>
<S> <C>
Estimated initial public offering price per share........... $12.00
Pro forma net tangible book value per share as of
September 30, 1999..................................... 2.31
Increase attributable to new investors.................. 1.45
------
Pro forma net tangible book value per share after this
offering.................................................. 3.76
------
Dilution per share to new investors......................... $ 8.24
======
</TABLE>
The following table sets forth, as of December 15, 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 assumed initial
public offering price of $12.00 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 51.1% $2.56
New investors............................. 6,000,000 16.9 72,000 48.9% 12.00
---------- ------ -------- ------
Total..................................... 35,402,426 100.0% $147,255 100.0%
========== ====== ======== ======
</TABLE>
To the extent that any shares are issued upon the exercise of options or
warrants that were outstanding as of September 30, 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>
NINE MONTHS
PERIOD FROM 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:
Product................................... $ -- $ 1,678 $1,049 $ 1,314
Services.................................. -- 208 208 788
------ ------- ------ -------
Total revenue........................... -- 1,886 1,257 2,102
Cost of revenue............................. -- 61 61 819
------ ------- ------ -------
Gross profit................................ -- 1,825 1,196 1,283
Operating expenses:
Research and development.................. 44 2,096 980 4,468
Sales and marketing....................... 39 412 209 1,134
General and administrative................ 82 547 255 2,175
Stock-based compensation.................. -- 3,468 154 124
------ ------- ------ -------
Total operating expenses................ 165 6,523 1,598 7,901
------ ------- ------ -------
Income (loss) from operations........... (165) (4,698) (402) (6,618)
Interest income............................. 10 107 69 341
------ ------- ------ -------
Income (loss) before income taxes....... (155) (4,591) (333) (6,277)
Income taxes................................ -- -- -- --
------ ------- ------ -------
Net income (loss)....................... $ (155) $(4,591) $ (333) $(6,277)
====== ======= ====== =======
Basic and diluted net income (loss) per
share..................................... $(0.06) $ (0.79) $(0.07) $ (0.47)
====== ======= ====== =======
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 1,913 25,097
Total assets................................................ 1,321 3,892 32,444
Total shareholders' equity.................................. 1,288 2,773 26,734
</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 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 product revenue consists of license fees. 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
Through September 30, 1999, our product revenue consisted of the licensing
of our software. Until June 1999, substantially all of our revenue was derived
from our contract with Bank of Montreal.
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 and on
each anniversary date 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.
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 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 product revenue 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.
COST OF REVENUE
Our cost of 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.
25
<PAGE>
Our cost of 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.
OPERATING EXPENSES
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 $980,000 for the nine
months ended September 30, 1998 to $4.5 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.
STOCK-BASED COMPENSATION. Stock-based compensation is recorded if on the
date of an option grant, the current fair value of each underlying common share
exceeds the exercise price of the option. Stock-based compensation expense is
recognized over the vesting period of the option. Stock-based compensation
decreased from $154,000 for the nine months ended September 30, 1998 to $124,000
for the nine months ended September 30, 1999. This decrease is primarily
attributable to a higher level of amortization in the nine months ended
September 30, 1998 due to the grant of immediately vested options in this
period.
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.
26
<PAGE>
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 for the year ended December 31, 1998, which
included $1.7 million of product revenue and $208,000 of services revenue. Our
product revenue consisted of license fees under our agreement with Bank of
Montreal, while our services revenue consisted of payments from Bank of Montreal
for our consulting work.
COST OF REVENUE
Cost of revenue was $61,000 for the year ended December 31, 1998 and
consisted of salaries and related expenses for our consulting work.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$44,000 for the period ended December 31, 1997 to $2.1 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.
STOCK-BASED COMPENSATION. Stock-based compensation in the amount of
$3.5 million for the year ended December 31, 1998 consisted of $181,000 of
amortized deferred stock-based compensation related to employee stock options
and $3.3 million related to an option issued to Bank of Montreal. Under our
April 30, 1998 subscription agreement with Bank of Montreal, we agreed to grant
an option to Bank of Montreal to subscribe for 2,428,570 common shares for
Cdn.$1 million if specified conditions were met. These conditions were satisfied
in October 1998. 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.
27
<PAGE>
QUARTERLY RESULTS OF OPERATIONS
The following table sets 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 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:
Product............................. $ -- $ 419 $ 630 $ 629 $ 548 $ 383 $ 383
Services............................ 208 -- -- -- 34 -- 754
------ ------ ------ ------- ------- ------- -------
Total revenue..................... 208 419 630 629 582 383 1,137
Cost of revenue....................... 61 -- -- -- -- 20 799
------ ------ ------ ------- ------- ------- -------
Gross profit...................... 147 419 630 629 582 363 338
------ ------ ------ ------- ------- ------- -------
Operating expenses:
Research and development............ 52 357 571 1,116 1,144 1,375 1,949
Sales and marketing................. 27 81 101 203 207 303 624
General and administrative.......... 41 104 110 292 332 629 1,214
Stock-based compensation............ 72 15 67 3,314 27 27 70
------ ------ ------ ------- ------- ------- -------
Total operating expenses.......... 192 557 849 4,925 1,710 2,334 3,857
------ ------ ------ ------- ------- ------- -------
Income (loss) from operations......... (45) (138) (219) (4,296) (1,128) (1,971) (3,519)
Interest income....................... 18 20 31 38 61 28 252
------ ------ ------ ------- ------- ------- -------
Net income (loss)................. $ (27) $ (118) $ (188) $(4,258) $(1,067) $(1,943) $(3,267)
====== ====== ====== ======= ======= ======= =======
Basic and diluted net income (loss)
per share........................... $ 0.01 $(0.03) $(0.04) $ (0.46) $ (0.09) $ (0.17) $ (0.19)
====== ====== ====== ======= ======= ======= =======
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>
28
<PAGE>
<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 TOTAL REVENUE:
Revenue:
Product............................. 0.0% 100.0% 100.0% 100.0% 94.2% 100.0% 33.7%
Services............................ 100.0 0.0 0.0 0.0 5.8 0.0 66.3
------ ------ ------ ------- ------- ------- -------
Total revenue..................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of revenue....................... 29.3 0.0 0.0 0.0 0.0 5.2 70.3
------ ------ ------ ------- ------- ------- -------
Gross profit...................... 70.7 100.0 100.0 100.0 100.0 94.8 29.7
------ ------ ------ ------- ------- ------- -------
Operating expenses:
Research and development............ 25.0 85.2 90.6 177.4 196.6 359.0 171.4
Sales and marketing................. 13.0 19.3 16.0 32.3 35.6 79.1 54.9
General and administrative.......... 19.7 24.8 17.5 46.4 57.0 164.2 106.8
Stock-based compensation............ 34.6 3.5 10.6 526.9 4.6 7.4 6.2
------ ------ ------ ------- ------- ------- -------
Total operating expenses.......... 92.3 132.9 134.8 783.0 293.8 609.4 339.2
------ ------ ------ ------- ------- ------- -------
Income (loss) from operations......... (21.6) (32.9) (34.8) (683.0) (193.8) (514.6) (309.5)
Interest income....................... 8.7 4.8 4.9 6.0 10.5 7.3 22.2
------ ------ ------ ------- ------- ------- -------
Net income (loss)................. (13.0) (28.2) (29.8) (676.9) (183.3) (507.3) (287.3)
====== ====== ====== ======= ======= ======= =======
</TABLE>
REVENUE
Our quarterly product revenue for the seven quarters ended September 30,
1999 is derived from our 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.
COST OF REVENUE
The cost of revenue for the seven quarters ended September 30, 1999 relates
to costs associated with delivering our services. The significant increase in
the cost of revenue for the quarter ended September 30, 1999 is due to a new
customer contract. To date, all of our costs related to our product revenue have
been research and development expenses.
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.
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 $25.1 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
29
<PAGE>
months ended September 30, 1999. Net cash used in operating activities for the
nine months ended September 30, 1999 reflects the operating loss of
$6.2 million offset by depreciation of $445,000 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.
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.
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.
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
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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 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 and are awaiting final approval of this
change.
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 in the year
2000. 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, through our strategic relationship with
Sonera SmartTrust 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 in the year 2000.
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
with Sonera SmartTrust, a division of Sonera Corporation, 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 20, 1999, our research and development department consisted
of 102 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, $2.1 million for the year ended
December 31, 1998 and $4.5 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 20, 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 in 2000.
CITIGROUP
Citigroup is a leading global financial institution which as of June 30,
1999 had approximately $690 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 us to
license our technology to Citigroup and its affiliates. We expect to enter into
one or more
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additional agreements with Citigroup and a number of its subsidiaries, including
Citibank and Salomon Smith Barney Inc., to deliver our solution to their
customers worldwide.
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 $205 billion in assets and approximately
15 million customers.
In September 1999, Wells Fargo entered into a licensing agreement with us
that would enable it to begin to deliver on-line banking services to its
customers in 2000.
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. 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, Sonera 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 20, 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 20, 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 customers and the network operators and device manufacturers with
whom we work to create marketing programs.
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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 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 20, 1999, we had a total of 184 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.
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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-survey 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, Sequent
Computer Systems, LYNX Photonic Networks, Payment Net, FICS (a Belgian software
company), Evergreen Canada-Israel Investment and Wall Street Access. 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 stock option committee and a compensation committee.
STOCK OPTION COMMITTEE. The Stock Option Committee administers our stock
option plans, determining which individuals will receive grants of awards under
these plans, and the terms of these grants. The members of the Stock Option
Committee are Christopher Erickson and Andre Boysen.
COMPENSATION COMMITTEE. The Compensation Committee reviews and makes
recommendations to our board concerning the terms of the compensation packages
provided to our senior executive officers, including salary, bonus and awards
under our stock option plans and any other compensation plans that
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we may adopt in the future. The members of our Compensation Committee are
Gregory Wolfond, Martin A. Stein and Alan Young.
In addition to the above committees, we plan to establish an audit committee
to oversee the retention, performance and compensation of our independent
auditors, and the establishment and oversight of our systems of internal
accounting and auditing control. We plan to nominate Kerry McLellan, Lloyd F.
Darlington and James D. Dixon as members of our audit committee.
EXECUTIVE COMPENSATION
SUMMARY COMPENSATION
For the year ended December 31, 1998, our aggregate cash compensation
payments to our executive officers and directors was $424,800.
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
Chairman and Chief Executive Officer...... 1998 $179,400 $ -- --
Christopher Erickson 1998 97,500 -- 400,000
President and General Counsel............. 1997 26,700 -- --
Andre Boysen(1)
Chief Technology Officer.................. 1998 81,250 -- 400,000
Kerry McLellan(2)
Chief Operating Officer................... 1998 65,650 13,000 400,000
</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
$2,600 in 1998.
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OPTION GRANTS DURING FISCAL 1998
We granted options under our Canadian stock option plan to the officers
named in the summary compensation table during the year ended December 31, 1998
as follows:
<TABLE>
<CAPTION>
MARKET VALUE OF
COMMON SHARES % OF TOTAL OPTIONS COMMON SHARES
UNDER OPTIONS GRANTED UNDER EXERCISE PRICE UNDERLYING OPTIONS ON
NAME GRANTED (#) PLANS IN 1998 (%) ($/SHARE) DATE OF GRANT(1)($) EXPIRATION DATE
- ---- ------------- ------------------ -------------- --------------------- ---------------
<S> <C> <C> <C> <C> <C>
Andre Boysen......... 400,000 21.4 $0.32 $0.32 March 2008
Kerry McLellan....... 400,000 21.4 0.32 0.32 August 2008
</TABLE>
- ------------------------
(1) There was no public market for our common shares as of December 31, 1998.
Therefore, the amounts set forth in this column represent the fair market
value of each of our common shares as of that date, as determined by our
Board.
OPTIONS EXERCISED IN LAST FISCAL YEAR
The officers named in the summary compensation table did not exercise any
options during the year ended December 31, 1998. The following table sets forth
the estimated value as of December 31, 1998 of the exercisable and unexercisable
options held by these officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT YEAR END (#) YEAR END ($)(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, of $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
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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 60,000 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.
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
6,300,000 common shares for issuance under the plans. However, upon completion
of this offering, we only intend to grant options from the 3,800,000 common
shares reserved for issuance under the new 2000 stock option plan. As of
September 30, 1999, options to purchase 2,211,594 shares at a weighted average
exercise price of $0.88 per share have been granted under the Canadian stock
option plan and no options have been granted under the U.S. stock option 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
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
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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 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. The Stock Option Committee will determine, among other things, the
eligibility of individuals to participate in the plan and the term, vesting
periods and price of options granted under the plan. 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 Ontario 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 subsidiaries' current and former
directors and our and our 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 shareholder
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
intend to increase the coverage provided under our current directors and
officers liability insurance policy.
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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 Citigroup and a
number of its 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 $28,000,
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 15, 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 15, 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.......................... 6,400,000 21.8% 18.1%
P.O. Box 106, Fin-00051
Teollisuuskatu 15
Helsinki, Finland
Citigroup Inc.(2)........................... 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(3)..................... 333,332 * *
Andre Boysen(3)............................. 266,666 * *
Kerry McLellan(3)........................... 233,332 * *
Martin A. Stein(4).......................... 34,000 * *
All directors and executive officers as a
group (12 persons)(5)..................... 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 Citicorp Strategic Technology
Corporation, a subsidiary of Citigroup Inc.
(3) These common shares are issuable upon the exercise of options that are
presently vested or that vest prior to February 28, 2000.
(4) Includes 20,000 common shares issuable upon the exercise of options that are
presently vested or that vest prior to February 28, 2000. Also includes
14,000 shares issuable upon the exercise of options that are presently
vested or that vest prior to February 28, 2000 that have been granted to
Sonoma Mountain Ventures, an entity controlled by Mr. Stein. See "Certain
Transactions."
(5) Includes 867,330 common shares that are issuable upon the exercise of
options that are presently vested or that vest prior to February 28, 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 15, 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 December 15, 1999.
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.
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, 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) generally will be freely
tradable without restriction or further registration under the Securities Act of
1933. As of September 30, 1999, options to purchase 2,211,594 common shares have
been granted under our stock option plan, of which none have been exercised.
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. See "Underwriting."
CANADIAN RESALE RESTRICTIONS
Excluding any common shares purchased in this offering, Canadian residents
hold 11,428,570 common shares and options or warrants to purchase
2,096,594 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 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 in the province in which such shareholder or
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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 and
acquired such shares upon the exercise of stock options after we have been a
reporting issuer for 180 days, provided that a particular employee has held the
common shares or stock options for a combined period of at least one year.
If the discretionary exemption is granted or other steps taken to allow the
sale of such common shares are successful, 1,564,938 common shares issuable upon
the exercise of outstanding and vested options 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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<PAGE>
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
61
<PAGE>
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.
Application of the passive foreign investment company income test to our
business is uncertain, and we have not determined whether we are a passive
foreign investment company. Moreover, our passive foreign investment company
status must be determined annually based on tests which are factual in nature,
and we have not determined whether we will become, or are likely to become, a
passive foreign investment company in the future. 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%.
Canada 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.
62
<PAGE>
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 , 2000.
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
- ----------------- ---------
<S> <C>
Credit Suisse First Boston Corporation......................
FleetBoston Robertson Stephens Inc..........................
Thomas Weisel Partners LLC..................................
---------
Subtotal................................................
---------
</TABLE>
<TABLE>
<CAPTION>
NUMBER OF
CANADIAN UNDERWRITERS SHARES
- --------------------- ---------
<S> <C>
Nesbitt Burns Inc...........................................
RBC Dominion Securities Inc.................................
Credit Suisse First Boston Securities Canada Inc............
---------
Subtotal................................................
---------
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 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 $ per common share. The
underwriters and selling group members may allow a discount of
$ 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.
63
<PAGE>
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.... $ $ $
Expenses payable by us..................................
</TABLE>
At our request, the underwriters have reserved for sale, at the initial
public offering price, up to 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.
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. 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.
We have applied for our common shares to be approved for quotation on The
Nasdaq National Market and for listing on The Toronto Stock Exchange under the
symbol "SVNX" and "SVN", respectively. This quotation or listing is subject to
our meeting the relevant quotation or listing standards.
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
64
<PAGE>
- 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 a policy statement of the Ontario Securities Commission,
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.
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 93 filed public offerings of equity securities, of which 74 have
been completed, and has acted as a syndicate member in an additional 51 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
, 2000.
65
<PAGE>
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.
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 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.
66
<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
October 29, 1999, except as to Note 12 Chartered Accountants
which is as of December 30, 1999
</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.......................................... -- 420 3,855
------ ------- -------
Total current liabilities............................... 33 1,119 5,710
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......................... -- (233) (150)
Accumulated deficit....................................... (155) (4,746) (11,023)
------ ------- -------
Total shareholders' equity................................ 1,288 2,773 26,734
------ ------- -------
Total liabilities and shareholders' equity.................. $1,321 $ 3,892 $32,444
====== ======= =======
</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:
Product.......................................... $ -- $ 1,678 $1,049 $ 1,314
Services......................................... -- 208 208 788
------ ------- ------ -------
Total revenue.................................. -- 1,886 1,257 2,102
Cost of revenue.................................... -- 61 61 819
------ ------- ------ -------
Gross profit....................................... -- 1,825 1,196 1,283
Operating expenses:
Research and development......................... 44 2,096 980 4,468
Sales and marketing.............................. 39 412 209 1,134
General and administrative....................... 82 547 255 2,175
Stock-based compensation (note 4)................ -- 3,468 154 124
------ ------- ------ -------
Total operating expenses....................... 165 6,523 1,598 7,901
------ ------- ------ -------
Income (loss) from operations.................. (165) (4,698) (402) (6,618)
Interest income.................................... 10 107 69 341
------ ------- ------ -------
Income (loss) before income taxes.............. (155) (4,591) (333) (6,277)
Income taxes (note 5).............................. -- -- -- --
------ ------- ------ -------
Net income (loss).............................. $ (155) $(4,591) $ (333) $(6,277)
====== ======= ====== =======
Basic and diluted net income (loss) per share...... $(0.06) $ (0.79) $(0.07) $ (0.47)
====== ======= ====== =======
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>
COMMON SHARES DEFERRED TOTAL
--------------------- STOCK-BASED ACCUMULATED SHAREHOLDERS'
NUMBER AMOUNT COMPENSATION DEFICIT EQUITY
---------- -------- ------------ ----------- -------------
<S> <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)................... -- -- -- (4,591) (4,591)
Deferred stock-based compensation... -- 414 (414) -- --
Amortization of deferred stock-based
compensation...................... -- -- 181 -- 181
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) (4,746) 2,773
Net income (loss)................... -- -- -- (6,277) (6,277)
Deferred stock-based compensation... -- 41 (41) -- --
Amortization of deferred stock-based
compensation...................... -- -- 124 -- 124
Issuance of common shares........... 7,891,790 30,114 -- -- 30,114
---------- ------- ----- -------- -------
Balances, September 30, 1999
(note 12)......................... 19,320,360 $37,907 $(150) $(11,023) $26,734
========== ======= ===== ======== =======
</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) $(4,591) $ (333) $(6,277)
Depreciation................................... -- 88 34 445
Stock-based compensation....................... -- 3,468 154 124
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 is 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 is 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 is 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. Product and services revenue that have been prepaid but do 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.
F-7
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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
F-8
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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>
F-9
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, under
certain circumstances, with an option to subscribe for 2,428,570 additional
common shares for Cdn.$1,000,000. In October 1998, the Company granted and Bank
of Montreal exercised the option to subscribe for 2,428,570 common shares for
Cdn.$1,000,000. On the date of grant, 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 provided Bank of
America, under certain circumstances, with an option to subscribe for
541,790 additional common shares for $2,000,000. The option was exercised in
October 1999 (note 12).
In July 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).
In August 1999, the Company issued 6,400,000 common shares to 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 2,500,000 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.
F-10
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SHAREHOLDERS' EQUITY -- (CONTINUED)
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>
$0.68................................................ 1,577,334 8.5 995,996
$3.41................................................ 473,800 9.3 39,500
$7.50................................................ 160,460 9.9 62,000
--------- ---------
2,211,594 1,097,496
========= =========
</TABLE>
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 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.
F-11
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
PERIOD FROM NINE MONTHS 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) $(2,047) $ (148) $(2,799)
Adjustments resulting from:
Scientific research expenses not
deducted for tax............... -- 333 87 770
Stock-based compensation not
deducted for tax............... -- 1,546 68 55
Other............................ 45 168 (7) 91
---- ------- ------- -------
(24) -- -- (1,883)
Unrecognized benefit of net
operating losses carried
forward.......................... 24 -- -- 1,883
---- ------- ------- -------
Income taxes....................... $ -- $ -- $ -- $ --
==== ======= ======= =======
</TABLE>
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
F-12
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. INCOME TAXES -- (CONTINUED)
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.
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. 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>
Revenue by geographic locations:
U.S................................... $ -- $ -- $ -- $ 754
Canada................................ -- 1,866 1,257 1,348
------ ------ ------ ------
$ -- $1,866 $1,257 $2,102
====== ====== ====== ======
</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.
F-13
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED PARTY TRANSACTIONS
As of September 30, 1999, the Company has entered into technology licensing
agreements with two of its shareholders. The technology license agreements
provide for, among other things, an annual licensing fee for the use of the
Company's technology. In addition, the agreements set out terms for future
maintenance and service fees to be paid by the licensees. The following tables
set out the balances and transactions with the shareholders 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.................... -- 420 2,855
</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:
Revenue.............................. $ -- $1,886 $1,257 $1,348
</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
$28,000, 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 that 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-14
<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-15
<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) $(4,591) $(6,277)
Compensation expense related to the fair
value of stock options.................... (4) (23) (48)
------- ------- -------
Pro forma net income (loss)................. $ (159) $(4,614) $(6,325)
======= ======= =======
Pro forma net income (loss) per share....... $ (0.06) $ (0.80) $ (0.48)
======= ======= =======
</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 months 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. The private
placements will trigger a preemptive right to issue approximately 67,200 common
shares at a purchase price of $7.50 per share if the warrant is exercised.
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
F-16
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS -- (CONTINUED)
be unaffected by the adoption of the new plan. The new plan will provide for the
grant of options to 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. All options granted under this plan will become
fully vested and exercisable upon a change of control of the Company.
F-17
<PAGE>
[LOGO]
<PAGE>
[ALTERNATIVE COVER PAGE FOR CANADIAN PROSPECTUS]
This is a preliminary prospectus relating to these securities, a copy of which
has been filed with the securities commissions or other regulatory authority in
each of the provinces of Canada but which has not yet become final for the
purpose of a distribution or a distribution to the public. Information contained
herein is subject to completion or amendment. These securities may not be sold
to, nor may offers to buy be accepted from residents of such jurisdictions prior
to the time a receipt for the final prospectus is obtained from the appropriate
securities commission or other regulatory authority.
<PAGE>
AMENDED PRELIMINARY PROSPECTUS DATED JANUARY - , 2000
THIS AMENDED PRELIMINARY 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.
THIS AMENDED PRELIMINARY PROSPECTUS HAS BEEN FILED UNDER PROCEDURES IN EACH OF
THE PROVINCES OF CANADA WHICH PERMIT CERTAIN INFORMATION WITH RESPECT TO THESE
SECURITIES TO BE DETERMINED AFTER THE PROSPECTUS HAS BECOME FINAL AND PERMIT THE
OMISSION FROM THIS AMENDED AND RESTATED PRELIMINARY PROSPECTUS OF SUCH
INFORMATION. SUCH PROCEDURES REQUIRE THE DELIVERY TO PURCHASERS OF A PROSPECTUS
OR A PROSPECTUS SUPPLEMENT CONTAINING THIS OMITTED INFORMATION WITHIN A
SPECIFIED PERIOD OF TIME AFTER AGREEING TO PURCHASE ANY OF THESE SECURITIES.
INITIAL PUBLIC OFFERING
[LOGO]
CDN. $ -
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
- common shares in the United States through a syndicate of
U.S. underwriters and - 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, BancBoston 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. An
application has been made to list the common shares for trading on The Toronto
Stock Exchange under the symbol "SVN", subject to the Company meeting the
exchange's listing requirements. 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 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.$ - , representing a dilution factor of - % ( - % 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. $ - 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. $ - Cdn. $ - Cdn. $ -
Total(3)................................................. Cdn. $ - Cdn. $ - Cdn. $ -
</TABLE>
(1) Before deducting expenses of the Offering payable by the Company estimated
at $ - .
(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. $ - equals U.S.$1.00 as of - , 2000. See
"Exchange Rates".
(3) The Company has granted an over-allotment option to the Underwriters
exercisable within 30 days from the completion of the Offering to purchase a
maximum of 900,000 additional common shares on the same terms as set forth
above to cover over-allotments, if any. If the over-allotment option is
exercised in full, the Price to Public, Underwriting Commission and Net
Proceeds to the Company will be Cdn.$ - , Cdn.$ - and Cdn.$ - ,
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 - , 2000 or such other date which may be agreed upon, but not later
than - , 2000. Certificates evidencing the common shares will be available
for delivery at closing.
<PAGE>
[ALTERNATIVE TABLE OF CONTENTS FOR CANADIAN PROSPECTUS]
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.................. 52
</TABLE>
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
PRINCIPAL SHAREHOLDERS................ 55
DESCRIPTION OF SHARE CAPITAL.......... 56
SHARES ELIGIBLE FOR FUTURE SALE....... 57
INCOME TAX CONSEQUENCES............... 59
UNDERWRITING.......................... 63
LEGAL MATTERS......................... 66
EXPERTS............................... 66
WHERE YOU CAN FIND MORE INFORMATION... 66
ELIGIBILITY FOR INVESTMENT............ 67
MATERIAL CONTRACTS.................... 67
PROMOTERS............................. 68
PURCHASERS' STATUTORY RIGHTS.......... 68
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 , 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>
[ALTERNATIVE PAGE F-2 FOR CANADIAN PROSPECTUS]
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
October 29, 1999, except as to Note 12 Chartered Accountants
which is as of December 30, 1999
</TABLE>
F-2
<PAGE>
[ALTERNATIVE PAGE F-3 FOR CANADIAN PROSPECTUS]
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.......................................... -- 420 3,855
------ ------- -------
Total current liabilities............................... 33 1,119 5,710
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......................... -- (233) (150)
Accumulated deficit....................................... (155) (4,746) (11,023)
------ ------- -------
Total shareholders' equity................................ 1,288 2,773 26,734
------ ------- -------
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>
[ADDITIONAL PAGE 40 FOR CANADIAN PROSPECTUS]
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 20, 1999, we had a total of 184 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
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.
44
<PAGE>
[ADDITIONAL PAGE FOR CANADIAN PROSPECTUS]
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
insurers other than mutual associates and insurance funds)
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.
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 Shareholder Agreement dated
October 26, 1999 among the Company and its existing shareholders;
2. the U.S. underwriting agreement dated - , 2000 referred to under
"Underwriting"; and
3. the Canadian underwriting agreement dated - , 2000 referred to under
"Underwriting".
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.
67
<PAGE>
[ADDITIONAL PAGE FOR CANADIAN PROSPECTUS]
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.
68
<PAGE>
[ADDITIONAL PAGE FOR CANADIAN PROSPECTUS]
CERTIFICATE OF THE COMPANY
Dated: January - , 2000
The foregoing, as of the date of the supplemented prospectus providing the
information permitted to be omitted from this prospectus, will constitute 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), will
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>
[ADDITIONAL PAGE FOR CANADIAN PROSPECTUS]
CERTIFICATE OF THE UNDERWRITERS
Dated: January - , 2000
To the best of our knowledge, information and belief, the foregoing, as of
the date of the supplemented prospectus providing the information permitted to
be omitted from this prospectus, will constitute 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, this prospectus will
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.: The Nesbitt Burns Corporation Limited, a 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>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The table below lists the fees and expenses, other than underwriting
discounts and commissions, which the registrant will pay in connection with the
offering described in this registration statement. All the expenses are
estimates, except for the Securities and Exchange Commission registration fee,
the Canadian Securities Regulators Filing Fees, The Nasdaq National Market
listing fee, the NASD filing fee and The Toronto Stock Exchange listing fee.
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Securities and Exchange Commission Registration Fee......... $23,680
NASD Filing Fee............................................. 10,500
Canadian Securities Regulators Filing Fees.................. 8,792
Nasdaq National Market listing fee.......................... 95,000
Toronto Stock Exchange listing fee..........................
Legal fees and expenses.....................................
Accounting fees and expenses................................
Printing and engraving expenses.............................
Transfer agent and registrar fees...........................
Miscellaneous expenses......................................
-------
TOTAL....................................................... $
=======
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
DIRECTORS' AND OFFICERS' INDEMNIFICATION
Under the Business Corporations Act (Ontario), 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 are permitted to indemnify our subsidiaries' current
and former directors and our and our 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
shareholder 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
intend to increase the coverage provided under our current directors and
officers liability insurance policy.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In September 1997, we issued 3,999,800 common shares, together with an
option to purchase an additional 4,000,000 of our common shares, to an entity
controlled by our Chairman and Chief Executive Officer, for an aggregate
purchase price of approximately Cdn.$2.0 million. The option was transferred to
a second entity under his control, and was exercised in October 1998 at an
exercise price of Cdn.$0.50 per share.
In April 1998, we issued 1,000,000 common shares to Bank of Montreal for a
purchase price of Cdn.$1.00 per share, together with an option to purchase an
additional 2,428,570 shares for an aggregate purchase price of
Cdn.$1.0 million. In October 1998, the Company granted and Bank of Montreal
exercised the option to subscribe for 2,428,570 common shares for
Cdn.$1,000,000.
In June 1999, Bank of America Corporation purchased 541,790 of our common
shares for $2.0 million, together with an option to purchase an additional
541,790 common shares at a price of $3.69 per share. In August 1999, the Company
issued to Bank of America an option to purchase 2,116,420 common shares at a
price of $3.90 per common share. The option was exercised in October 1999. The
weighted average price per share of the common shares issued to Bank of America
was $3.83 per share.
In July 1999, Citicorp Strategic Technology Corporation purchased 950,000 of
our common shares for $3.83 per share, and agreed to purchase an additional
5,450,000 common shares at a price of $3.83 per share upon the satisfaction of
certain conditions. The option was exercised in October 1999.
In August 1999, Sonera Corporation subscribed for 6,400,000 shares for $3.83
per share.
Through September 30, 1999, we issued options to our officers, directors,
employees and advisors to purchase an aggregate of 2,211,594 of our common
shares.
In October 1999, we issued 6,757,190 common shares for an aggregate
subscription price of $25.8 million, 2,116,420 common shares at a price per
share of $3.90 and for an aggregate subscription price of $8.2 million,
541,790 common shares at a price per share of $3.69 and for an aggregate
subscription price of $2.0 million, and 666,666 common shares and
666,668 common shares issuable upon the exercise of a warrant at an exercise
price per share of $7.50 for an aggregate subscription price of $5,000,010.
Each of these sales was exempt from the registration requirements of the
Securities Act of 1933 under Section 4(2) thereof or Regulation S thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF DOCUMENT
- --------------------- ----------------
<S> <C>
1.1(1) Form of U.S. Underwriting Agreement.
1.2(1) Form of Canadian Underwriting Agreement.
3.1(1) Articles of Amalgamation of the Registrant.
3.2(1) By-laws of Registrant.
5.1 Opinion of Goodman Phillips & Vineberg, Toronto with respect
to the validity of the shares.
10.1(2) Subscription Agreement between Bank of Montreal, the
Registrant and Blue Sky Capital Corporation, dated
April 30, 1998.
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF DOCUMENT
- --------------------- ----------------
<S> <C>
10.2(1) Amended and Restated Unanimous Shareholders' Agreement among
the Registrant and its Shareholders.
10.3(2)(3) Technology License Agreement, dated April 30, 1998, between
the Registrant and Bank of Montreal.
10.4(2) Mutual Indemnity Agreement, dated April 30, 1998, between
the Registrant and Bank of Montreal.
10.5(2) Letter Agreement, dated November 27, 1998, between Bank of
Montreal and the Registrant.
10.6(2) Letter Agreement, dated November 27, 1998, between Bank of
Montreal and the Registrant.
10.7(2) Letter Agreement, dated July 26, 1999, between Bank of
Montreal and the Registrant.
10.8(3) Technology License Agreement, dated June 1, 1999, between
the Registrant and Bank of America, N.A. (as successor to
Bank of America National Trust & Savings Association).
10.9(2)(3) Software Maintenance and Support Agreement, dated June 1,
1999, between the Registrant and Bank of America, N.A. (as
successor to Bank of America National Trust & Savings
Association).
10.10(2) Letter Agreement, dated July 31, 1998, between Dr. Kerry
McLellan and the Registrant.
10.11(1) Lease, dated April 23, 1998, between Truscan Property
Corporation and the Registrant, as amended.
10.12(1) Master Technology License Agreement, dated December 29,
1999, between Citicorp Strategic Technology Corporation
and the Registrant.
10.13(1) Support Agreement, dated December 29, 1999, among Citicorp
Strategic Technology Corporation, 724 Solutions
International SRL and the Registrant.
11.1(2) List of Subsidiaries.
23.1 Consent of Goodman Phillips & Vineberg, Toronto (contained
in Exhibit 5.1).
23.2 Consent of Morrison & Foerster LLP.
23.3 Consent of KPMG LLP.
24.1(2) Powers of Attorney (included on the signature pages).
27.1(2) Financial Data Schedule.
</TABLE>
(b) FINANCIAL STATEMENT SCHEDULES
None.
- ------------------------
(1) To be filed by amendment.
(2) Previously filed.
(3) Confidential treatment has been requested with respect to certain portions
of the Exhibit. Omitted portions will be filed separately with the
Securities and Exchange Commission.
II-3
<PAGE>
ITEM 17. UNDERTAKINGS.
(1) The undersigned registrant hereby undertakes to provide to the underwriter
at the closing specified in the underwriting agreement, certificates in such
denominations and registered in such names as required by the underwriter to
permit prompt delivery to each purchaser.
(2) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(3) The undersigned registrant hereby undertakes that:
(a) For purposes of determining any liability under the Securities Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be a part of
this registration statement as of the time it was declared effective; and
(b) For the purposes of determining any liability under the Securities Act,
each post-effective amendment that contains a form of prospectus shall be
deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing of this Amendment to Form F-1 and has duly caused
this registration statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the city of Toronto, Ontario on January 7, 2000.
<TABLE>
<S> <C> <C>
724 SOLUTIONS INC.
Per: /s/ GREGORY WOLFOND
-----------------------------------------
Gregory Wolfond
CHAIRMAN AND CEO
</TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amended registration statement has been signed by the following persons in the
capacities on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman and Chief Executive
------------------------------------------- Officer (principal January 7, 2000
Gregory Wolfond executive officer)
*
------------------------------------------- President, General Counsel, January 7, 2000
Chris Erickson Secretary and Director
*
------------------------------------------- Chief Technology Officer and January 7, 2000
Andre Boysen Director
*
------------------------------------------- Chief Operating Officer and January 7, 2000
Kerry McLellan Director
* Chief Financial Officer
------------------------------------------- (principal financial and January 7, 2000
Karen Basian accounting officer)
*
------------------------------------------- Director January 7, 2000
Lloyd F. Darlington
*
------------------------------------------- Director January 7, 2000
Martin A. Stein
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
*
------------------------------------------- Director January 7, 2000
James D. Dixon
*
------------------------------------------- Director January 7, 2000
Harri Vatanen
*
------------------------------------------- Director January 7, 2000
Alan Young
</TABLE>
<TABLE>
<S> <C> <C> <C>
* /s/ GREGORY WOLFOND
- -------------------------------------------
By: Gregory Wolfond, as
ATTORNEY-IN-FACT
</TABLE>
II-6
<PAGE>
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933,
as amended, the undersigned has signed this amended Registration Statement
solely in the capacity of the duly authorized representative of
724 Solutions Inc. in the U.S., on January 7, 2000.
<TABLE>
<S> <C> <C>
724 SOLUTIONS CORP.
Per: /s/ KAREN BASIAN
-----------------------------------------
Name: Karen Basian
Title: Treasurer
</TABLE>
II-7
<PAGE>
724 SOLUTIONS INC.
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. NAME OF DOCUMENT
- --------------------- ------------------------------------------------------------
<S> <C>
1.1(1) Form of U.S. Underwriting Agreement.
1.2(1) Form of Canadian Underwriting Agreement.
3.1(1) Articles of Amalgamation of the Registrant.
3.2(1) By-laws of Registrant.
5.1 Opinion of Goodman Phillips & Vineberg, Toronto with respect
to the validity of the shares.
10.1(2) Subscription Agreement between Bank of Montreal, the
Registrant and Blue Sky Capital Corporation, dated
April 30, 1998.
10.2(1) Amended and Restated Unanimous Shareholders' Agreement among
the Registrant and its Shareholders.
10.3(2)(3) Technology License Agreement, dated April 30, 1998, between
the Registrant and Bank of Montreal.
10.4(2) Mutual Indemnity Agreement, dated April 30, 1998, between
the Registrant and Bank of Montreal.
10.5(2) Letter Agreement, dated November 27, 1998, between Bank of
Montreal and the Registrant.
10.6(2) Letter Agreement, dated November 27, 1998, between Bank of
Montreal and the Registrant.
10.7(2) Letter Agreement, dated July 26, 1999, between Bank of
Montreal and the Registrant.
10.8(3) Technology License Agreement, dated June 1, 1999, between
the Registrant and Bank of America, N.A. (as successor to
Bank of America National Trust & Savings Association).
10.9(2)(3) Software Maintenance and Support Agreement, dated June 1,
1999, between the Registrant and Bank of America, N.A. (as
successor to Bank of America National Trust & Savings
Association).
10.10(2) Letter Agreement, dated July 31, 1998, between Dr. Kerry
McLellan and the Registrant.
10.11(1) Lease, dated April 23, 1998, between Truscan Property
Corporation and the Registrant, as amended.
10.12(1) Master Technology License Agreement, dated December 29,
1999, between Citicorp Strategic Technology Corporation
and the Registrant.
10.13(1) Support Agreement dated December 29, 1999, among Citicorp
Strategic Technology Corporation, 724 Solutions
International SRL and the Registrant.
11.1(2) List of Subsidiaries.
23.1 Consent of Goodman Phillips & Vineberg, Toronto (contained
in Exhibit 5.1).
23.2 Consent of Morrison & Foerster LLP.
23.3 Consent of KPMG LLP.
24.1(2) Powers of Attorney (included on the signature pages).
27.1(2) Financial Data Schedule.
</TABLE>
- ------------------------
(1) To be filed by amendment.
(2) Previously filed.
(3) Confidential treatment has been requested with respect to certain portions
of the Exhibit. Omitted portions will be filed separately with the
Securities and Exchange Commission.
<PAGE>
EXHIBIT 5.1
[Goodman Phillips & Vineberg Letterhead]
January 7, 2000
BY COURIER
724 Solutions Inc.
4101 Yonge Street
Suite 702
Toronto, Ontario
M2P 1N6
Dear Sirs:
At your request, we have examined Amendment No. 2 to the registration
statement on Form F-1 filed pursuant to the United States Securities Act of
1933, as amended (the "Securities Act"), by 724 Solutions Inc., a corporation
incorporated under the laws of the Province of Ontario (the "Company"), with
the United States Securities and Exchange Commission (the "SEC") on January
6, 2000 (the "Registration Statement") relating to the registration under the
Securities Act of up to 6,900,000 common shares of the Company without par
value (the "Shares"), including authorized but unissued Shares being offered
by the Company (including Shares subject to the underwriters' over-allotment
option). The Shares are to be sold to the underwriters named in the
Registration Statement for resale to the public.
EXAMINATIONS
In connection with this opinion letter, we have examined the following:
(i) a certified copy of a resolution of the directors of the Company
dated December 20, 1999 and a certified copy of a resolution of the
shareholders of the Company dated December 20, 1999 (collectively,
the "Resolutions") authorizing the issuance of the Shares; and
(ii) the Company's registration statement on Form F-1 (the "Initial
Registration Statement") filed on November 2, 1999, together with
all amendments thereto and the Registration Statement.
We have also examined such other records and documents provided to us
and such statutes, regulations and other public and corporate records of the
Company and considered such questions of law as we have considered relevant
and necessary for the purposes of the opinions expressed below.
<PAGE>
-2-
RELIANCE AND ASSUMPTIONS
For the purposes of the opinion expressed below, we have relied
upon the Resolutions and have assumed:
(i) the genuineness of all signatures on each document that we have
examined;
(ii) the authenticity of all documents submitted to us as originals,
the conformity with the originals of all documents submitted to
us as copies, whether photostatic, telecopied or otherwise;
(iii) the legal power, capacity and authority of all natural persons
signing in their individual capacity; and
(iv) that the Resolutions continue to be in force and unamended on the
date hereof.
OPINION
Based and relying on the foregoing assumptions and subject to the
following qualification and limitation, we are of the opinion that, upon
completion of the proceedings proposed by the Company, including the adoption
of appropriate resolutions by the pricing committee of the board of directors:
1. The Shares to be offered and sold by the Company pursuant to the
Registration Statement have been duly allotted for issuance and, upon
the receipt of the consideration therefor, will be validly issued and
outstanding as fully paid and non-assessable.
QUALIFICATION
The foregoing opinion is subject to the qualification that we are
solicitors qualified to practice law solely in the Province of Ontario and we
express no opinion as to any laws or any matters governed by any laws other
than the laws of the Province of Ontario and the federal laws of Canada
applicable therein.
<PAGE>
-3-
LIMITATION
This opinion is intended solely for the Company's use in
connection with the filing of the Registration Statement with the SEC and may
not be relied upon by any other person or in connection with any other
transaction, or quoted from or referred to in any other documents without our
prior written consent.
We consent to the use of this opinion as an exhibit to the
Registration Statement and any amendments thereto and further consent to the
reference to our firm set forth under the caption "Legal Matters" in the
prospectus included in the Registration Statement.
Yours very truly,
/s/ Goodman Phillips & Vineberg
<PAGE>
****CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS
AMENDED.
EXHIBIT 10.8
TECHNOLOGY LICENSE AGREEMENT
THIS AGREEMENT is made the 1st day of June, 1999.
B E T W E E N
724 SOLUTIONS INC., a corporation incorporated under the laws of
Ontario, having its principal place of business at 4101 Yonge
Street, Suite 702, Toronto, Ontario, Canada M2P 1N6 ("724")
-AND-
BANK OF AMERICA NATIONAL TRUST & SAVINGS ASSOCIATION, a national
banking association, having an office at 201 Third Street, San
Francisco, CA, U.S.A., 94103 ("BOFA")
BACKGROUND:
1. 724 is in the business of designing, developing and marketing
Internet-based electronic banking applications over a variety of access
platforms.
2. Pursuant to a letter of intent entered into by 724 and BofA, dated as of
December 21, 1998, 724 had agreed to license to BofA certain technology
developed by 724 as at the date of this Agreement and during the period
commencing on the date hereof, until February 1, 2000 (the "First
Anniversary") (such technology being, the "1999 Technology"), in return
for a specified license fee (the "1999 License Fee"). 724 granted a
further option to BofA to license the technology developed by 724 during
the one year period commencing on the First Anniversary (the "2000
Technology") for a further license fee that is equal to the 1999 License
Fee (the "2000 License Fee"). Thereafter, BofA would be entitled to
license certain technology developed by 724 during each subsequent year
for an additional fee per year.
3. 724 and Bank of America Corporation ("BAC"), an affiliate of BofA, have
entered into a subscription agreement, dated as of the date hereof (the
"Subscription Agreement"), pursuant to which BAC has agreed to subscribe
for certain shares of 724 as of the date hereof, and certain additional
shares on the First Anniversary. BofA has agreed to license both the
1999 Technology and the 2000 Technology, and to pay both of the 1999
License Fee and the 2000 License Fee (collectively, the "License Fee"),
all in accordance with the terms and conditions of this Agreement.
IN CONSIDERATION of the premises, the mutual covenants contained herein and
other good and valuable consideration (the receipt and sufficiency of which are
hereby irrevocably acknowledged), the parties hereto agree as follows:
<PAGE>
-2-
ARTICLE I
INTERPRETATION
1.1 DEFINITIONS. In this Agreement, the following expressions shall have the
following meanings:
"1999 DEVELOPMENT PLAN" means the 1999 technology development plan for
724 determined by the Parties and attached hereto as Schedule "B";
"2000 DEVELOPMENT PLAN" means the 2000 technology development plan for
724 to be determined by the Parties in accordance with Section 2.13
hereof, the principal milestones of which are outlined in Schedule "C"
hereof;
"2000 SHARES" means the 270,895 common shares of 724 to be issued to BAC
(or its assignee in accordance with the Subscription Agreement) as at the
First Anniversary;
"AFFILIATE" has the following meaning:
(a) one body corporate shall be considered Affiliated with another
body corporate if, but only if, one of them is the subsidiary of
the other or both are subsidiaries of the same body corporate or
each of them is controlled by the same person;
(b) a body corporate shall be considered to be controlled by a person
or by two or more bodies corporate if, but only if:
(i) voting securities of the first-mentioned body corporate
carrying more than 50% of the votes for the election of
directors are held, other than by way of security only, by
or for the benefit of such other bodies corporate; and
(ii) the votes carried by such securities are sufficient, if
exercised, to elect a majority of the board of directors of
the first-mentioned body corporate;
(c) a body corporate shall be considered a subsidiary of another body
corporate if, but only if:
(i) it is controlled by:
(I) that other body corporate, or
(II) that other body corporate and one or more bodies
corporate each of which is controlled by that other
body corporate, or
(III) two or more bodies corporate each of which is
controlled by that other body corporate; or
(ii) it is a subsidiary of a body corporate that is a subsidiary
of that other body corporate;
"AGREEMENT" means this Agreement, all schedules attached hereto and any
agreement or schedule supplementing or amending this Agreement. The
words "hereto," "herein,"
<PAGE>
-3-
"hereof," "hereby" and "hereunder" and similar expressions refer to
this Agreement and not to any particular section or portion of it.
References to an Article, Section, Subsection or Schedule refer to the
applicable article, section, subsection or schedule of this Agreement;
"ALLIANCE ANNIVERSARY" has the meaning ascribed to it in Section 2.3;
"ASSOCIATE", where used to indicate a relationship with any person,
means,
(a) any body corporate of which the person beneficially owns,
directly or indirectly, voting securities carrying more than 10
per cent of the voting rights attached to all voting securities
of the body corporate for the time being outstanding,
(b) any partner of that person,
(c) any trust or estate in which the person has a substantial
beneficial interest or as to which the person serves as trustee
or in a similar capacity;
(d) any relative of the person, including the person's spouse, where
the relative has the same home as the person; or
(e) any relative of the spouse of the person where the relative has
the same home as the person;
"BOFA FUNDED IMPROVEMENT" has the meaning ascribed to it in Section 2.9;
"BOFA GROUP" has the meaning ascribed to it in Section 4.3.1;
"BUSINESS" means the business of 724, being the business of designing,
developing, marketing, licensing and supporting Internet-based electronic
banking and e-commerce applications over a variety of access platforms,
which is carried on by 724 in North America and may be carried on in
other jurisdictions from time to time;
"BUSINESS DAY" means any day other than a Saturday, Sunday or holiday
observed by Bank of Montreal or BofA;
"CLAIM" means any claim, demand, action, cause of action, damage, loss,
liability, cost or expense (including reasonable professional fees and
disbursements as finally awarded) which may be paid, sustained, suffered
or incurred directly by a Person who asserts a right of compensation,
contribution or indemnity (a "Claimant") or which may be made or brought
against the Claimant by another Person;
"COMPETITOR" means any person or entity which, directly or indirectly
through any Affiliate or Associate of such person or entity: (i) carries
on the Business; and (ii) competes materially with 724 as determined by
the Board of Directors of 724 acting reasonably;
"CONFIDENTIAL INFORMATION" means all information marked as confidential,
or identified as confidential if delivered orally and, in any case,
disclosed by or on behalf of either
<PAGE>
-4-
Party or their respective Affiliates or subsidiaries (the "DISCLOSING
PARTY") to the other (the "RECIPIENT") or coming to the attention of
the Recipient, its Affiliates, subsidiaries or other controlled
entities or their respective employees, officers, directors, agents or
advisors (collectively, the "RECIPIENT GROUP"), together with,
regardless of the manner of disclosure and whether or not it was
marked or identified as confidential, the source code version of the
Licensed Technology (including all physical and electronic
manifestations thereof), the Specified Confidential Information, BofA
Funded Improvements that are Derivative Works, Third Party Materials
and BofA's customer information. Confidential Information does not
include any of the following items: (i) information which at the time
of its disclosure is publicly available otherwise than as a result of
disclosures in breach of a duty or obligation in favour of the
Disclosing Party or its Affiliates and through no fault of the
Recipient Group; (ii) information which, after disclosure hereunder,
is released to the public by the Disclosing Party without restriction
or otherwise properly becomes part of the public domain through no
fault of the Recipient Group or any other Person who, to the knowledge
of the Recipient after exercising due diligence, owed a duty of
confidentiality to the Disclosing Party or its Affiliates (but only
after it is released or otherwise becomes part of the public domain);
(iii) information which the Recipient can demonstrate was in the
possession of a member of the Recipient Group at the time of
disclosure and which was not acquired by such Person directly or
indirectly under any obligation of confidence or from a Person who, to
the knowledge of the Recipient after exercising due diligence, owed an
obligation of confidentiality with regard to such information (for the
purposes of subsections (ii) and (iii) information shall also be
treated as confidential after the Disclosing Party shall have
demonstrated to the Recipient that, notwithstanding its due diligence
at the time of disclosure, the source of the information was in fact
under a duty of confidentiality with respect to such information - the
Recipient Group shall not be liable for having acted in good faith
that such information was not confidential until the Recipient is so
informed); and (iv) information which the Recipient can demonstrate
was independently developed by any member of the Recipient Group
without any use of, or reference to, the Confidential Information of
the Disclosing Party;
"CONTINUING ALLIANCE" has the meaning ascribed to it Subsection 2.3;
"CONTINUING ALLIANCE FEE" means $****;
"CPI" means the Consumer Price Index (All Items) as published by the
United States Department of Commerce Bureau of Labor Statistics, or any
successor index thereto;
"CUSTOMER OF BOFA" means a retail or other "end user" financial services
customer of BofA and/or of one of its Affiliates; for purposes of this
definition, a retail or other "end user" is an individual consumer who
accesses the financial services and other products provided by BofA or of
its Affiliates using the Licensed Technology or an employer which
procures access using the Licensed Technology to such financial services
and other products for its employees for their personal consumption and
for use in their employer's business (provided that such business is an
"end user");
"DELIVERABLES" means the 724 Technology as it exists on the date hereof,
and each additional deliverable listed in the 1999 Development Plan and
the 2000 Development
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-5-
Plan, as they may be revised by the Parties from time to time in
accordance with the provisions of this Agreement;
"DERIVATIVE WORK" means a work which is based on the Licensed Technology,
such as a revision, enhancement, modification, translation, abridgement,
condensation, expansion, or any other form in which the underlying work
may be recast, transformed, or adapted, and which, if prepared without
authorization of the owner of the copyright in the underlying work, would
constitute a copyright infringement. Derivative Works are subject to the
ownership rights and licenses of others in the underlying work;
"ETA" means the EXCISE TAX ACT (Canada);
"IMPROVEMENT" has the meaning ascribed to it in Section 2.9;
"INCLUDING" and "INCLUDES" shall be deemed to be followed by the
statement "without limitation" and neither of such terms shall be
construed to limit any word or statement which it follows to the specific
or similar items or matters immediately following it;
"INTELLECTUAL PROPERTY RIGHTS" includes: (A) any and all proprietary
rights provided under (i) patent law, (ii) copyright law, (iii) design
patent or industrial design law, (iv) semi-conductor chip or mask work
law, or (v) any other statutory provision or common law principle which
may provide a right in either (a) ideas, formulae, algorithms, concepts,
inventions or know-how generally, including trade secret law, or (b) the
expression or use of such ideas, formulae, algorithms, concepts,
inventions or know-how; and (B) any and all applications, registrations,
licenses, sub-licenses, franchises, agreements or any other evidence of a
right in any of the foregoing;
"LICENSE FEE" is $**** million;
"LICENSE FEE HOLDBACK" means ****% of the License Fee;
"LICENSED TECHNOLOGY" means: (i) all of the Deliverables; (ii) all other
724 Technology developed by 724 prior to the Second Anniversary; and
(iii) all other 724 Technology delivered to BofA in accordance with the
provisions of Section 2.3, together with all (a) Updates and Upgrades
delivered to BofA in accordance with this Agreement or the Maintenance
and Support Agreement; (b) Improvements delivered in accordance with this
Agreement which are not BofA Funded Improvements; and (c) BofA Funded
Improvements which are Derivative Works;
"MAINTENANCE AND SUPPORT AGREEMENT" means the software maintenance and
support agreement between the Parties dated as of the date hereof, the
form of which is attached hereto as Schedule "D";
"ORST" means retail sales tax and other amounts payable pursuant to the
ORSTA;
"ORSTA" means the RETAIL SALES TAX ACT (Ontario);
"PARTY" means either 724 or BofA and "PARTIES" means both of them;
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-6-
"PERSON" shall be broadly interpreted and includes an individual,
corporation, partnership, joint venture, trust, association,
unincorporated organization or any other entity recognized by law;
"SECOND ANNIVERSARY" means February 1, 2001;
"724 CHANNEL" means any one of the home banking channels developed or to
be developed by 724 which may include: mobile channels (E.G. WAP wireless
phones, palm pilot, WinCE palm-sized PCs), a PC plug-in, game consoles
and set-top boxes;
"724 TECHNOLOGY" means the Intellectual Property Rights and the Technical
Information relating to the 724 Channels developed by or for 724 that are
provided to or intended to be provided to 724's customers generally and
expressly excludes confidential or proprietary enhancements and
modifications of or for 724's other customers, as determined by 724, but
shall include the Deliverables;
"SPECIFIED CONFIDENTIAL INFORMATION" means all of 724's computer
programs, code, algorithms, user manuals, programmer instructions,
programmer materials, development notes, schematics, architectural
diagrams and drawings, patent applications, 724's product and marketing
plans and strategies, forecasts, financial plans, business models and
business plans, customers, customer lists, financial statements and
projections, tax returns, non-public product pricing, materials presented
to members of the board of directors of 724 or to the shareholders of
724, names and expertise of employees (when such name or expertise is
disclosed by or on behalf of one Party to the other), the terms of this
Agreement and any Technical Information or proprietary business
information disclosed, made available, or otherwise obtained on 724's
premises;
"SUBSCRIPTION AGREEMENT" means the subscription agreement between 724 and
BAC dated as of the date hereof;
"TAX RATE" means, at any given time, the combined Canadian federal and
Ontario provincial corporate tax rate applicable to non-manufacturing and
processing active business income earned by a corporation which is not a
Canadian controlled private corporation, including any applicable
surtaxes;
"TECHNICAL INFORMATION" means all right, title and interest in and to all
technical know-how of 724 including:
(i) all information of a scientific, technical or business nature
whether in oral, written, graphic, machine readable, electronic
or physical form; and
(ii) all patterns, plans, designs, research data, research plans,
trade secrets and other proprietary know-how, processes,
formulas, drawings, technology, computer software and related
manuals, unpatented blue prints, flow sheets, equipment and parts
lists, instructions, manuals, records and procedures;
"THIRD PARTY MATERIALS" means any software, documentation, technology,
Intellectual Property Rights and other materials which are not owned by
724 but delivered to BofA
<PAGE>
-7-
hereunder together with the Licensed Technology or incorporated in the
Licensed Technology;
"UPDATE" means a set of procedures or new program code that 724
implements to correct defects in any Licensed Technology and which may
include modifications to improve performance or a revised version or
release of Licensed Technology which may incidentally improve its
functionality, but expressly excludes Upgrades (the determination of
whether a version or release is an Update or Upgrade in accordance with
this and the following definition shall be made by 724 in good faith);
"UPGRADE" means a new version or release of 724 Technology that 724 makes
generally available to its customers to improve the functionality of, or
add functional capabilities to, the Licensed Technology or to support
additional 724 Channels.
1.2 HEADINGS. The headings in this Agreement are for convenience of
reference only and shall not affect the construction or interpretation
hereof.
1.3 EXTENDED MEANINGS. Words in the singular include the plural and
vice-versa and words in one gender include all genders.
1.4 ENTIRE AGREEMENT. The Parties agree that this Agreement, the Maintenance
and Support Agreement and the Subscription Agreement constitute the
complete and exclusive statement of the terms and conditions between them
covering the performance thereof and cannot be altered, amended or
modified except in writing executed by the Parties to be bound thereby.
Each of the Parties acknowledge that it has not been induced to enter
into this Agreement by any representations and it has not relied on any
representations, warranties or conditions not specifically stated herein
or in the Subscription Agreement or the Maintenance and Support
Agreement.
1.5 INVALIDITY. If any of the provisions contained in this Agreement are
found by a court of competent jurisdiction to be invalid, illegal or
unenforceable in any respect, the validity, legality or enforceability of
the remaining provisions contained herein shall not be in any way
affected or impaired thereby.
1.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California and the federal laws
of the United States applicable therein (excluding any conflict of laws
rule or principles that might refer such construction to the laws of
another jurisdiction) and shall be treated, in all respects, as a
California contract. The Parties submit to the non-exclusive
jurisdiction of the courts of the Province of Ontario or California. If
either Party is permitted to select whether any matter brought before a
court is to be decided by jury or by judge, the Parties agree that they
will not select to have any such matter decided by jury and hereby waive
any such right to a jury trial. The Parties expressly exclude the
application of the United Nations Convention on Contracts for the
International Sale of Goods.
1.7 CURRENCY. Except as otherwise expressly provided in this Agreement, all
dollar amounts referred to in this Agreement are stated in the lawful
currency of the United States of America.
<PAGE>
-8-
1.8 COMPUTATION OF TIME. When calculating the period of time within which or
following which any act is required or permitted to be done, notice given
or step taken pursuant to this Agreement, the date which is the reference
date in calculating such period shall be excluded. If the last day of
such period is a non-Business Day, the period in question shall end on
the next following Business Day.
1.9 SCHEDULES. The following Schedules are incorporated into and form part
of this Agreement:
Schedule "A" Arbitration Rules of Procedure
Schedule "B" 1999 Development Plan
Schedule "C" Principal Milestones of the 2000 Development Plan
Schedule "D" Form of Maintenance and Support Agreement
ARTICLE II
GRANT OF LICENSE
2.1 GRANT OF LICENSE. Subject to the terms and conditions hereof, 724 grants
to BofA a non-exclusive, non-transferable, fully paid-up, royalty-free,
irrevocable, worldwide, perpetual license:
(a) USE OF LICENSED TECHNOLOGY BY BOFA AND ITS AFFILIATES: to use,
modify, enhance, amend and/or change the Licensed Technology
required to modify, enhance, amend, change, maintain, implement,
correct, update and support the 724 Channels and create
Derivative Works thereof for its own internal use and the
internal use of Affiliates of BofA (only for so long as they
remain Affiliates); and
(b) USE BY CUSTOMERS OF BOFA AND ITS AFFILIATES: to sublicense and
distribute only the client executable version of the Licensed
Technology as modified or amended, including any Derivative
Works, to Customers of BofA and Customers of Affiliates of BofA
(with respect to particular Customers, only for so long as the
relevant Affiliate of BofA remains an Affiliate) but only for
their own personal display and use in connection with the banking
business of BofA and its Affiliates.
Provided however, that the license hereby granted shall not extend to any
use by, or disclosure to, Affiliates of BofA or any other Person
contemplated by this Section 2.1 which is, directly or indirectly, (or
who is a director, officer, employee or agent of) a Competitor unless
such company or other entity is wholly-owned, directly or indirectly, by
Bank of America Corporation. Provided, however, that notwithstanding the
immediately preceding sentence, BofA shall be entitled to license
Customers of BofA or of its Affiliates who are Competitors to use the
client-executable version of the Licensed Technology (i.e. manifestations
of the Licensed Technology intended for use by the end-user and not
including the Source Code or those components of Specified Confidential
Information not reasonably necessary for BofA's Customer to use the
Licensed
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Technology in the manner contemplated by this Section 2.1) so long as
BofA obtains for 724's benefit the agreement contemplated in Sections
2.1, 2.2 and 2.6.
Subject to the foregoing, 724 grants BofA the right to authorize other
Persons to carry out any of the foregoing permitted uses in this Section
2.1 on behalf of BofA, provided that BofA shall cause such other Person
to not further disclose or make use (unless such other Person is merely a
Customer of BofA or of its Affiliates, in which case BofA need merely
cause such Customer to agree to not further disclose or make use) of the
Licensed Technology or the Confidential Information of 724 in any manner
whatsoever except for and on behalf of BofA as provided in this Section.
BofA shall cooperate with 724 in enforcing its rights against such
Persons specified above, including: (a) making 724 a third party
beneficiary in any agreement that grants the authority to a third party
in accordance with this Section 2.1; (b) taking such action as is
reasonably necessary to enforce BofA's agreements with such Persons; and
(c) promptly notifying 724 upon becoming aware of any breach by any such
Person of any right of 724 hereunder or otherwise, including any
infringement of 724's Intellectual Property Rights or any unauthorized
disclosure or use of 724's Confidential Information.
BofA hereby covenants and agrees to indemnify and hold harmless 724 in
respect of all losses (including loss of profit or revenue), costs,
damages, liabilities, obligations and expenses incurred or sustained
(together with the amount of all taxes thereon, including as provided in
Section 3.3) in the event that any Person (unless such Person is merely a
Customer) contemplated by this Section 2.1 uses or discloses 724's
Confidential Information contrary to the terms hereof. With respect to
Persons who are merely Customers of BofA or of its Affiliates, BofA shall
similarly indemnify and hold harmless 724 unless it obtained for 724's
benefit the agreements contemplated in Sections 2.1, 2.2 and 2.6 and it
has not made available to such Customer any 724 Technology, Third Party
Materials or BofA Funded Improvements which are Derivative Works contrary
to the terms hereof. For the purposes of Article IV, a claim for any
such indemnity shall be a "Breach of Confidentiality Claim".
2.1.1 CLARIFICATION OF PERMITTED USE. For greater certainty, it is the
intent of the parties that, while BofA may subcontract to third
parties certain permitted functions involving the Licensed
Technology in accordance with the provisions of Section 2.1, the
third parties shall only be entitled to use and/or disclose the
Licensed Technology and 724's Confidential information for the
benefit of BofA or its Affiliates and not for their own internal
use or in their own businesses. BofA acknowledges and agrees
that the parties intend that the practical effect of Section 2.1
shall be that the benefit of use of the Licensed Technology and
724's Confidential Information in accordance with the terms
hereof shall only extend to BofA and its Affiliates. Therefore,
the reference to a prohibition on the operation of a "service
bureau" in Section 2.2 is meant to confirm that BofA and its
Affiliates shall not have a license to use or disclose the
Licensed Technology or 724's Confidential Information for the
benefit of a third party, since that would deny 724 the right and
opportunity to negotiate a separate license fee with the third
party. Therefor, the License hereby granted shall not be
construed so as to permit any third party other than Affiliates
of BofA (and then only to the extent provided above) to receive,
copy, review, use or benefit from the Licensed Technology or
724's Confidential Information. The third party users referred
to
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in Section 2.1 are merely to be performing functions for BofA
that it could have done itself in accordance with the license
terms. Provided, however, that notwithstanding the foregoing,
and for greater certainty, the licenses granted herein include
the right to sublicense a business Customer to use the
client-executable version of the Licensed Technology for its
own internal "end user" business purposes.
2.2 RESTRICTIONS ON USE. BofA shall: (a) not transfer, assign, lease,
export, grant a sublicense of, or otherwise make available, the Licensed
Technology or the license contained herein or 724's Confidential
Information to any Person except as and when authorized to do so herein;
(b) not use the Licensed Technology or 724's Confidential Information
except as authorized herein; (c) not use the Licensed Technology or 724's
Confidential Information to act as a service bureau, in whole or in part,
for any other Person; (d) take such precautions with respect to the
Licensed Technology and 724's Confidential Information as BofA would
otherwise take to protect its own proprietary software or hardware or
information from unauthorized use or disclosure. BofA shall cause each
of its Affiliates, independent contractors, permitted sublicensees of the
Licensed Technology, Customers of BofA and Customers of BofA's Affiliates
who are granted the right to use the Licensed Technology and each of the
other Persons contemplated by Section 3.1 to agree to comply with the
above restrictions (provided that, for Customers, the provisions of
clause (d) above shall refer instead to such precautions as such
Customers would take with respect to their own Intellectual Property, but
not less than a reasonable standard of care).
BofA shall include (and shall cause its Affiliates to include)
counterpart restrictions which are substantially the same as the
restrictions set forth in the preceding clauses (a) through (d), in each
license, services or other agreement of BofA or its Affiliates concerning
the Licensed Technology or concerning services or products using or
incorporating the Licensed Technology. BofA shall cooperate with 724 in
enforcing the above-mentioned restrictions against its Affiliates,
independent contractors, permitted sublicensees of the Licensed
Technology and Customers of BofA who are granted the right to use the
Licensed Technology and the other Persons contemplated by Section 3.1 or
any other person obtaining access through BofA, directly or indirectly,
to the 724 Technology or to 724's Confidential Information, including:
(i) making 724 a third party beneficiary in any agreement that grants the
authority to a third party to use the Licensed Technology or 724's
Confidential Information; (ii) taking such action as is reasonably
necessary to enforce BofA's agreements with such Persons; and
(iii) promptly notifying 724 upon becoming aware of any breach by any
such Person of any right of 724 hereunder or otherwise, including any
infringement of 724's Intellectual Property Rights and any unauthorized
disclosure or use of 724's Confidential Information.
2.3 SCOPE OF LICENSED TECHNOLOGY: In addition to the items specified in the
definition of "LICENSED TECHNOLOGY" appearing in Section 1.1 of this
Agreement, "LICENSED TECHNOLOGY" shall include the following:
2.3.1 CONTINUING ALLIANCE BEYOND SECOND ANNIVERSARY. If BofA pays the
full amount of the License Fee, and BAC (or such other Affiliate
of BAC as shall be permitted by the Subscription Agreement)
subscribes for and pays to 724 the full subscription price for
the 2000 Shares in accordance with the terms and
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conditions of the Subscription Agreement, it may elect prior
to the Second Anniversary, and at each anniversary thereafter,
to continue as a development partner with 724 for an
additional year and thereby to license additional 724
Technology (the "CONTINUING ALLIANCE" and each anniversary
after the Second Anniversary during the Continuing Alliance is
referred to as an "ALLIANCE ANNIVERSARY") in consideration of
the Continuing Alliance Fee, adjusted once annually at 724's
option for increases in the CPI during the prior 12 month
period. No earlier than 90 days prior to the Second
Anniversary and prior to each Alliance Anniversary thereafter,
724 shall invoice BofA for the Continuing Alliance Fee on
terms which are net 60 days. If BofA does not remit payment
within 60 days after receipt of any particular invoice, BofA
shall be deemed to have elected not to enter into or extend
(as the case may be) the Continuing Alliance beyond the Second
Anniversary or beyond the day before the Alliance Anniversary
which is the first day of the Continuing Alliance period in
respect of which such invoice was prepared (as the case may
be). Under the Continuing Alliance, BofA shall license
additional 724 Technology so that the Licensed Technology
shall include, in addition to all 724 Technology previously
licensed hereunder, all 724 Technology developed by 724 up to
the end of the Continuing Alliance.
BofA's right to continue the Continuing Alliance terminates as of
the close of business on the last day of the last 12-month period
that the Continuing Alliance was in effect; provided that BofA
may reinstate the Continuing Alliance at any time during the two
year period after such alliance was terminated, by paying the
Continuing Alliance Fee for all prior periods for which it has
not been paid, with interest calculated in accordance with
Section 4.4. For greater certainty, BofA may reinstate the
Continuing Alliance after it has been terminated only one time.
2.3.2 SECOND ANNIVERSARY. If BofA pays the full amount of the License
Fee, and BAC (or such Affiliate of BAC as shall be permitted by
the Subscription Agreement) subscribes for and pays to 724 the
full subscription price for the 2000 Shares in accordance with
the terms and conditions of the Subscription Agreement, but does
not elect, or is deemed (pursuant to Section 2.3) not to have
elected, to enter into the Continuing Alliance as at the Second
Anniversary, the Licensed Technology shall include, in addition
to all components previously licensed hereunder, all 724
Technology developed up to the Second Anniversary and the first
version of each 724 Channel that is significantly completed as at
the Second Anniversary.
2.3.3 PREFERRED CUSTOMER OPTION BEYOND SECOND ANNIVERSARY. If BofA
pays the full amount of the License Fee, and BAC (or such
Affiliate of BAC as shall be permitted by the Subscription
Agreement) subscribes for and pays to 724 the full subscription
price for the 2000 Shares in accordance with the terms and
conditions of the Subscription Agreement, but BofA either does
not elect, or is deemed (pursuant to Section 2.3) not to have
elected, to enter into or extend the Continuing Alliance, BofA
may, from time to time on or prior to the fourth anniversary of
the end of the Continuing Alliance (or, if the Continuing
Alliance was not entered into, then on or prior to February 1,
2005, obtain a license for additional 724 Technology, and, upon
BofA's payment of all applicable license fees, the Licensed
Technology shall include, in addition to all components
<PAGE>
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previously licensed hereunder such Upgrades and new 724
Technology developed and made generally available to 724's
customers in respect of which such additional license fees have
been paid. 724 shall determine the license fees for said
Upgrades and new 724 Technology based on its list prices (no
discount from standard rates) and the other terms of such license
shall be the same for BofA as apply to 724's customers,
generally, except that BofA shall be entitled to a source-code
(rather than object code, which is expected to be the general
case) license.
2.4 BOFA COMMITMENT. BofA acknowledges and agrees that it has committed to
working with 724 towards achieving the Deliverables, and unconditionally
agrees to pay the non-refundable License Fee in accordance with the terms
of Section 3.1 hereof, unless this Agreement terminates in accordance
with Section 6.1 (Business Termination). Notwithstanding the forgoing,
the License Fee Holdback which is attributed to the acceptance of the
Deliverables shall be subject to the terms and conditions of Section 2.14
(Acceptance).
2.5 MAINTENANCE AND SUPPORT AGREEMENT. 724 will provide maintenance and
support services in respect of the Licensed Technology in accordance with
the Maintenance and Support Agreement, the form of which is attached
hereto as Schedule "D". The Services (as such term is defined in the
Maintenance and Support Agreement) will commence, and 724 may invoice the
Maintenance Fee, only after the first 724 Channel is delivered to (as
contemplated in Section 2.16 hereof) and accepted by BofA in accordance
with the acceptance testing procedure in Section 2.14 hereof.
2.6 CUSTOMER AND AFFILIATES LICENSE AGREEMENTS. Where BofA enters into a
sublicense pursuant to Section 2.1 hereof, BofA shall enter into license
agreements with Customers of BofA and Affiliates of BofA in a form
satisfactory to 724, acting reasonably, that: (i) protects the
Confidential Information of 724; (ii) restricts the use of the Licensed
Technology by the Affiliates, Customers of BofA and Customers of
Affiliates of BofA solely to that set out in Section 2.1(b);
(iii) restricts the number of copies of the relevant Licensed Technology
to that number of copies reasonably required for their own use and for
backup purposes, provided that all copyright notices and any other
proprietary notices are included; (iv) forbids the decompiling,
disassembly and reverse engineering of the Licensed Technology;
(v) requires that the Affiliates, Customers of BofA and Customers of
Affiliates of BofA comply with all export laws in respect of the Licensed
Technology; (vi) disclaims any liability on the part of 724 for damages,
liabilities, costs or expenses incurred or sustained by the Affiliates,
Customers of BofA and Customers of Affiliates of BofA in connection with,
or by virtue of, the use of the Licensed Technology; (vii) makes 724 a
third party beneficiary of such agreements for the purposes of giving 724
the benefit of such waivers and liabilities as well as the right to
protect the Intellectual Property Rights in the Licensed Technology and
the confidentiality and use of its Confidential Information; and (viii)
contains terms and conditions prescribed by third party licensors of
Third Party Materials that are delivered with or incorporated in the
Licensed Technology. BofA will provide the initial form of license
agreement referred to herein and, after 724 provides its approval, only
amendments thereto adverse to the interests of 724 or otherwise material
shall require further approval of 724. Terms and conditions that apply
to Third Party Materials may have to be approved by the third party
licensors of such materials. BofA shall cooperate with 724 and the
licensor of any Third
<PAGE>
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Party Materials in enforcing their rights against the Affiliates,
Customers of BofA and Customers of Affiliates of BofA, including: (a)
taking such action as is reasonably necessary to enforce BofA's and its
Affiliates' agreements with such Persons; and (b) promptly notifying 724
upon becoming aware of any breach by any such Person of any right of 724
(whether provided for herein or otherwise) or of a licensor of Third
Party Materials, including any infringement of any Intellectual Property
Rights and any unauthorized disclosure or use of Confidential
Information.
Notwithstanding any provision of this Agreement to the contrary, the
parties acknowledge and agree that any agreement for 724's benefit that
is required to be obtained by BofA from persons who are merely its
Customers or merely Customers of Affiliates may be obtained in electronic
form (i.e. "click-through", "click-wrap" or "web-wrap") provided that:
(i) the agreements by or on behalf of BofA and/or its Affiliates
with such Customers concerning the products or services
incorporating or using the Licensed Technology are similarly
in electronic format; and
(ii) 724 is given the right to review and approve the form and
content of the portion of such electronic agreements relevant
to the Licensed Technology, such approval not to be
unreasonably withheld or delayed.
2.7 PROVISION OF LICENSED TECHNOLOGY AND BOFA FUNDED IMPROVEMENTS. Upon
request by BofA, 724 shall provide to BofA the following Licensed
Technology and BofA Funded Improvements:
(a) the source code version of any software included in the Licensed
Technology and BofA Funded Improvements, excluding any Third
Party Materials, in machine-readable form on machine-readable
storage. When compiled, such source code version will produce
the object code version of the software; and
(b) all applicable documentation and other explanatory materials in
724's possession, including any programmer's notes, technical or
otherwise, for the Licensed Technology and BofA Funded
Improvements, excluding Third Party Materials, as may be
reasonably required by BofA, that a competent computer programmer
possessing ordinary skills and experience would need to further
develop, maintain and operate the Licensed Technology or BofA
Funded Improvements, as the case may be, without further recourse
to 724 including, but not necessarily limited to, general
flow-charts, input and output layouts, field descriptions,
volumes and sort sequence, data dictionary, file layouts,
processing requirements and calculation formula and the details
of all algorithms.
Unless otherwise agreed between the Parties, 724 agrees to deliver to
BofA the then current version of the Licensed Technology (excluding Third
Party Materials that 724 does not have the right to distribute),
including the source code version of the Licensed Technology (excluding
Third Party Materials that 724 does not have the right to distribute) and
the corresponding object code version, upon BofA's reasonable request but
no less frequently than annually. In addition, 724 agrees to include
with such delivery a list of all Third Party Materials and Intellectual
Property Rights licensed by
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724 which are included in the Licensed Technology, other than general
software development tools.
2.8 OWNERSHIP OF LICENSED TECHNOLOGY AND RELATED INTELLECTUAL PROPERTY
RIGHTS. BofA acknowledges and agrees that the Licensed Technology and
all Intellectual Property Rights therein and 724's Confidential
Information are and shall at all times remain the exclusive property of
724 and its Affiliates and Subsidiaries and that no rights, title or
ownership interest of any kind whatsoever in the Intellectual Property
Rights therein, or any portion of same, except for the right to use as
specifically provided in Section 2.1 hereof, shall pass to BofA, its
Affiliates, Customers of BofA and Customers of Affiliates of BofA or any
other Person. 724 acknowledges and agrees that BofA shall have all
right, title and interest in and to any software or technology that BofA
independently develops to work with the Licensed Technology, provided
such software or technology does not constitute a Derivative Work and
provided that such software or technology does not infringe 724's
Intellectual Property. BofA shall reproduce all copyright and other
Intellectual Property Rights notices of 724, and the licensors of Third
Party Materials, with each copy of the Licensed Technology made by BofA
or products and services incorporating or using or accompanied by the
Licensed Technology and/or Third Party Materials.
2.9 BOFA REQUESTED IMPROVEMENTS. From time to time, BofA may request and/or
fund certain additional functionality (each is referred to as an
"IMPROVEMENT"). If BofA makes such a request, 724 will use commercially
reasonable efforts to accommodate BofA and may, at its option, charge
BofA either on a time and materials or project fee basis for the
development of such Improvements.
If BofA funds any Improvement (a "BOFA FUNDED IMPROVEMENT"), then:
(a) if such BofA Funded Improvement is a Derivative Work, 724 shall
own the Derivative Work, together with all Intellectual Property
Rights therein, and 724 hereby grants BofA a perpetual,
fully-paid, irrevocable, exclusive world-wide license to use,
reproduce, sublicense, market, perform, display and prepare
derivative works therefrom; and
(b) if such BofA Funded Improvement is not a Derivative Work, BofA
shall own the BofA Funded Improvement, and 724 hereby assigns to
BofA all of its right, title and interest therein, together with
all Intellectual Property Rights therein.
If 724 (either at the time of the initial request by BofA for the
Improvement or thereafter) determines that a BofA Funded Improvement
could be exploited by 724 in connection with its business and/or could be
licensed to one or more customers of 724, then 724 and BofA will
negotiate, acting in good faith, an agreement on mutually agreeable,
commercially reasonable terms pursuant to which BofA will:
(a) if the BofA Funded Improvement is a Derivative Work, waive the
exclusivity of the license by 724 to BofA of the BofA Funded
Improvement, or
(b) if the BofA Funded Improvement is not a Derivative Work, grant to
724 the right to exploit the BofA Funded Improvement.
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None of the fees stated in Section 3 of this Agreement or which are
stated in the Maintenance and Support Agreement are "BofA funding" within
the meaning of this Section 2.9.
2.10 WAIVER OF MORAL RIGHTS. 724 agrees to use commercially reasonable
efforts to cause any employee, permitted subcontractor or any other
person under 724's control who was involved in the development of the
Licensed Technology and BofA Funded Improvements, in such form as is
satisfactory to BofA, acting reasonably, to irrevocably waive in favour
of 724 any and all moral rights arising under the COPYRIGHT ACT (Canada)
as amended (or any successor legislation of similar force and effect) or
similar legislation in other applicable jurisdictions or at common law
that such individual, as author, has with respect to any copyrighted
works prepared by such individual that are included in the Licensed
Technology or BofA Funded Improvements.
2.11 THIRD PARTY MATERIALS. BofA acknowledges that certain Third Party
Materials may be required in order to develop, compile, use or operate
the Licensed Technology and BofA Funded Improvements, and agrees as
follows:
(a) BofA agrees that 724 may include Third Party Materials in the
Licensed Technology or BofA Funded Improvements with BofA's
consent (not to be unreasonably withheld or delayed) and at
BofA's expense, on terms agreeable to BofA, acting reasonably, if
required in connection with the development of or use of the
Licensed Technology or BofA Funded Improvements, as the case may
be;
(b) BofA shall cooperate with 724 to obtain the necessary licenses or
rights to use Third Party Materials used with the Licensed
Technology or BofA Funded Improvements, or included therein,
provided however that BofA will release 724 from any performance
or other obligations that 724 is unable to comply with as result
of BofA's election not to directly acquire a license or right to
use any Third Party Materials; and
(c) BofA shall: (i) comply with; (ii) cause its Affiliates, agents,
independent contractors and other Persons given access to the
Licensed Technology to comply with; (iii) use commercially
reasonable efforts to cause the Customers of BofA and the
Customers of its Affiliates, to comply with; and (iv) cooperate
with 724 and third party licensors by including in agreements
with its Affiliates, Customers of BofA and Customers of its
Affiliates and permitted sublicensees of the Licensed Technology
and BofA Funded Improvements and all other Persons given access
to the Licensed Technology, all terms and conditions specified by
each third party licensor relating to its Third Party Materials,
including restrictions on use of the Third Party Materials and
payment of any license, maintenance or other amounts (including
applicable taxes) specified by such third party licensor. BofA
will cooperate with 724 and the relevant third party licensors in
enforcing the rights of such licensors of Third Party Materials.
2.12 COMPLIANCE WITH LAWS. BofA understands that the Licensed Technology,
BofA Funded Improvements and Third Party Materials may include
cryptographic technology and other technology that is subject to
restrictions imposed by export controls and other laws and regulations,
and that the export of the Licensed Technology, BofA Funded Improvements
<PAGE>
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and Third Party Materials outside the United States of America and Canada
may be highly regulated. BofA shall fully comply, and cause its
Affiliates and permitted sublicensees of the Licensed Technology, BofA
Funded Improvements and Third Party Materials and all other Persons
(other than Persons who are merely Customers of BofA or of its
Affiliates) given access to the Licensed Technology to comply (or, in the
case of persons who are merely Customers of BofA or of its Affiliates, to
agree to comply) with all applicable export control and other relevant
laws and regulations of any applicable jurisdiction that apply to the
Licensed Technology and BofA Funded Improvements, including any Third
Party Materials that are used with the Licensed Technology and BofA
Funded Improvements. If any such Affiliate or other Person (other than
Persons who are merely Customers of BofA or of its Affiliates) fails to
comply with such laws, BofA shall fully indemnify and save harmless 724
in connection with any loss (including loss of profits) cost, expense,
damage or liability sustained, suffered or incurred in connection
therewith. Provided, however, that BofA will provide a similar indemnity
to 724 in the event that it fails to obtain for 724 from any particular
Customer restrictions required by this Section 2.12 as part of the type
of agreement contemplated by Sections 2.1, 2.2 and 2.6 or if BofA or its
Affiliates discloses, distributes or makes available to the Customers the
source code or any other component of the Licensed Technology that is
part of 724's Confidential Information. For the purposes of Article IV,
a claim for any such indemnity shall be a "724 Third Party Claim".
2.13 TECHNOLOGY DEVELOPMENT PLANS. Each of the Parties agrees that the 1999
Technology Plan (a copy of which is attached as Schedule "B" hereto)
specifies the initial set of Deliverables and the performance
specifications, delivery dates and the prorata portion of the License Fee
Holdback attributable to each Deliverable. The Parties shall use their
commercially reasonable efforts to work together to develop, by no later
than the First Anniversary, a mutually agreeable 2000 Technology Plan
(including the Deliverables generally described in Schedule "C" hereto),
which will specify the Deliverables to be delivered prior to the Second
Anniversary, including the functional and performance specifications,
delivery dates and the prorata portion of the License Fee Holdback
attributable to each such Deliverable, and which, when settled in final
form and initialled by the parties, shall be attached hereto and made a
part hereof a replacement for Schedule "C". The aggregate of the prorata
amounts of the License Fee Holdback attributable to each of the 1999
Development Plan and the 2000 Development Plan shall be one half of the
total License Fee Holdback. The Parties will develop mutually agreed
detailed functional and performance specifications for each subsequent
Improvement. The specifications shall be the basis for the Acceptance
Tests called for in Section 2.14.
The Parties acknowledge that the Parties' development plans and
performance requirements are subject to change from time to time, and, in
order to accommodate such changes, the Parties shall work together in the
event that the change in their development plans or performance
requirements results in a required change in either the 1999 Technology
Plan or the 2000 Technology Plan. If a Party wishes to change a
Deliverable, or the scheduled delivery date for such Deliverable, it
shall promptly notify the other Party of such change. The Parties shall
then work together, acting reasonably, to make mutually agreeable changes
to the relevant technology plan, and shall reapportion the prorata
License Fee Holdback among the remaining Deliverables in the relevant
technology development plan. If any such change accelerates the delivery
date of a Deliverable or results in a significant change in the scope,
requirements or amount of
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effort required to be expended by 724, 724 will be permitted, upon BofA's
prior written consent, to charge BofA on either a time and materials
basis at 724's then standard current rates (the current rates are
specified in Schedule "A" to the Maintenance and Support Agreement) or a
fixed price project fee.
The Parties further acknowledge that there may be certain factors beyond
the control of 724 that could frustrate the development, delivery or
testing of any Deliverable (a "Dependency"), including interoperability
issues arising in BofA's systems and third party facilities providers'
systems. If a Dependency causes a Deliverable to be delayed, the Parties
will work together in good faith to complete the Deliverable as soon as
practicably possible (subject to any extra charges that may result and be
paid in accordance with the immediately preceding paragraph). The
Parties shall, in the event of any such delay, negotiate in good faith an
amendment to the 1999 Development Plan and/or the 2000 Development Plan
for the purpose of developing new or additional Deliverables against
which to apply the License Fee Holdback amount allocated to the
Deliverable that was frustrated. In the event that no such agreement is
reached by the Parties acting reasonably and in good faith, BofA shall
not be obligated to pay the License Fee Holdback amount in question.
2.14 ACCEPTANCE TESTING.
2.14.1 Each Deliverable and BofA Funded Improvement or any Upgrade or
Update delivered hereunder (for purposes of this Section 2.14
only, collectively referred to as a "Deliverable") will be
subjected to acceptance testing by BofA during an Acceptance Test
Period consisting of not more than 60 days from the date of
delivery of the Deliverable to BofA. "Acceptance Test" means a
test which can reliably and consistently confirm that a
Deliverable substantially meets the functional and performance
specification (a "Specification") prepared in accordance with
Section 2.13. In this regard, BofA shall, in conjunction with
724, establish a "Test Plan" to take place during the particular
Acceptance test Period, which Test Plan involves numerous test
runs or other verification of the Deliverable. BofA covenants
and agrees to use commercially reasonable efforts to notify 724
of Critical or Major defects (as contemplated in Section 2.14.4)
as early as possible throughout the Acceptance Test Period and
shall use commercially reasonable efforts to complete as much of
the Test Plan for the particular Acceptance Test in order that
724 obtain as much information concerning the status of the
Deliverable as possible from the particular Acceptance Test. An
Acceptance Test Period shall be considered to be completed when
the Test Plan for the particular Acceptance Test Period has been
completed or the Test Plan has had to be abandoned as a result of
Critical or Major (as defined below) errors which make further
testing of the Deliverable meaningless or which would yield
unreliable test results.
2.14.2 A Deliverable will be "accepted" if BofA provides written notice
that the Deliverable has passed the Acceptance Test, or will be
deemed to have been "accepted" if:
(a) BofA does not notify 724 within the initial or, if applicable,
any subsequent Acceptance Test Period that it does not accept the
Deliverable;
<PAGE>
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(b) BofA does not notify 724 during the Acceptance Test Period of
defects or problems constituting non-compliance of the
Deliverable with its Specification; or
(c) BofA uses the Deliverable for commercial production purposes or
otherwise uses the Deliverable on other than a "testing" basis
for a period of five Business Days.
2.14.3 Acceptance will be effective on the earliest of: (i) the date
upon which 724 receives notice of acceptance; (ii) the last day
of the Acceptance Test Period (provided that notice of the
failure of the Acceptance Test or of defects or problems has not
been delivered prior to the end of the Acceptance Test Period)
and (iii) the fifth Business Day after the day upon which BofA
first uses the Deliverable for commercial production purposes or
otherwise uses the Deliverable on other than a "testing" basis;
and that day will be deemed to be the "Acceptance Date".
2.14.4 If all or part of the Acceptance Test indicates that the
Deliverable does not comply with its Specification, BofA will
notify 724 of the particular failure and will, acting reasonably,
classify the defects or problems encountered as follows:
(a) CRITICAL - a failure substantially preventing the useful
operation of the Deliverable;
(b) MAJOR - a failure which does not preclude the useful
operation of the Deliverable, but substantially reduces its
effectiveness or which materially and adversely affects the
performance or functionality of the Deliverable from the
perspective of the Customer; or
(c) MINOR - a defect or problem other than a Critical or Major
problem.
2.14.5 Upon receipt of notification of a Critical or Major problem, 724
will use commercially reasonable efforts to correct such Critical
or Major problem (in conjunction with all other Critical or Major
problems identified by the particular Acceptance Test) within the
time period determined jointly by BofA and 724, acting reasonably
and having regard to the nature of such Critical or Major
problem(s). Under no circumstances will such correction period
extend beyond 30 days from the end of the particular Acceptance
Test Period.
When the Critical and Major defects identified by a particular
Acceptance Test have been corrected, (or if the aforesaid 30 day
period has expired and certain of such defects remain to be
corrected, then, in any event), 724 will notify BofA of the state
of the corrections and BofA may conduct another Acceptance Test
with respect to those components of the Deliverable that 724
considers have been sufficiently corrected to justify a further
Acceptance Test at that time for a period of up to 60 days,
provided that BofA shall use its reasonable efforts to complete
the Test Plan for that further Acceptance Test as soon as
possible. BofA covenants and agrees to use commercially
reasonable efforts to notify 724 of Critical or Major defects as
early as possible throughout such further Acceptance Test Period.
<PAGE>
-19-
2.14.6 In the event of a Minor problem, BofA will continue the
Acceptance Test, provided that 724 will use commercially
reasonable efforts to correct such Minor problem promptly upon
receipt of notification of such Minor problem.
2.14.7 If the particular Deliverable has not been accepted or deemed to
be accepted after the conclusion of four Acceptance Test Periods
for that Deliverable (or if 724 has indicated that it cannot
remedy a particular Critical or Major problem identified during
the third Acceptance Test Period for that Deliverable within 30
days of the end of such third Acceptance Test Period), BofA will
notify 724 of that failure (and the nature thereof) and may
exercise one of the following options (which shall constitute its
sole remedy):
(a) OPTION ONE: Repeat the process described in Section
2.14.5; or
(b) OPTION TWO:
(i) except as provided in Section 2.14.7(b)(ii), BofA
shall not be required to pay that part of the
License Fee Holdback, if any, allocated to the
particular Deliverable in accordance with Schedule
"B" and Schedule "C" hereto; and
(ii) in respect of any BofA Funded Improvements or any
Upgrade, to reject the Deliverable, in which case
BofA shall not be required to pay for such
Deliverable and shall receive a refund of all
amounts specifically paid to 724 in respect of the
rejected Deliverable; 724 shall retain all rights in
the rejected Deliverable and no right, title or
interest therein shall transfer to BofA.
2.14.8 724's services for correcting defects or problems in a
Deliverable identified during the Acceptance Test Period shall be
provided free of charge, subject to BofA paying any additional
amount for changes in Deliverables, as specified in Section 2.13.
2.14.9 Notwithstanding anything to the contrary in this Section, 724 is
not responsible for the failure of any BofA or third party
software or system (other than Third Party Materials) to
integrate with any Deliverable or the Deliverable's ability to be
incorporated therein, provided that Deliverable complies in all
material respects with the interface specifications relating
thereto.
2.14.10 Where failure of any underlying communications infrastructure,
Third Party Material, or a third party obligation is impeding the
Acceptance Test, either Party may designate the Acceptance Test
as "on hold" pending corrections thereof; provided, however, that
if such failure could be remedied by one of the Parties using
their commercially reasonable efforts, then such Party shall not
be entitled to put such Acceptance Test procedure "on hold".
2.15 PROJECT MANAGEMENT. Each of the Parties agrees to designate a project
manager from their respective companies who shall have the authority to
bind the Party that he/she represents, with respect to the matters
indicated in the immediately following sentence, and who shall have the
authority to consent to any action on behalf of the Party that
<PAGE>
-20-
he/she represents; with respect to the matters indicated in the
immediately following sentence, provided, however, that the project
manager shall not have the authority to waive any rights of the Parties
herein or at law or to effect any amendment to the terms hereof or to
make any determination or concession as to ownership of Intellectual
Property Rights. These individuals will, in accordance with the spirit
of this Agreement, use reasonable efforts in co-ordinating the continuing
development of objectives, related scheduling and resource allocation in
respect of the development and provision of the Deliverables under the
1999 Development Plan and the 2000 Development Plan and jointly
supervise the Acceptance Testing process. All notices required to be
delivered hereunder shall be copied to the project managers.
2.16 DELIVERY. Any and all supplies of property made pursuant to this
Agreement shall be delivered or made available to BofA and Affiliates of
BofA outside of Canada. Any provision of tangible personal property
pursuant to this Agreement shall be made f.o.b. the premises of BofA, the
United States of America. Any other provision of property made pursuant
to this Agreement shall be upon the transfer to the system of and receipt
by BofA or the Affiliate of BofA, in each case outside of Canada. BofA
shall have the right to require delivery by means of electronic
transmission subject to the following provisions:
(i) BofA shall provide and designate to 724 a secure and FTP site for
the transmission; and
(ii) BofA shall assume full responsibility for any interception,
breach of confidentiality, theft or other unauthorized disclosure
or use of 724's Confidential Information arising or resulting
from such electronic transmission, provided that 724
substantially complies with the reasonable information security
specifications for the transmission that BofA proposes.
ARTICLE III
FEES & PAYMENT TERMS
3.1 FEES AND CHARGES. BofA agrees to pay the following charges as follows:
(a) LICENSE FEE. The License Fee shall be paid as follows:
(i) $***** on execution of this Agreement;
(ii) $***** on February 1, 2000;
(iii) $***** on each of June 1, 1999, July 1, 1999,
October 1, 1999, April 1, 2000, July 1, 2000, and
October 1, 2000; and
the balance of the License fee, being the License Fee Holdback,
shall be paid, at the times and in the amounts specified in the
1999 Development Plan and the 2000 Development Plan, upon
acceptance, or deemed acceptance, of the Deliverables referred to
therein.
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-21-
(b) CONTINUING ALLIANCE FEE. BofA shall pay the Continuing Alliance
Fee in accordance with the terms and conditions specified in
Section 2.3 hereof if it elects to commence or extend the
Continuing Alliance.
(c) PREFERRED CUSTOMER LICENSE FEE. BofA shall pay the license fee
in accordance with the terms and conditions specified in Section
2.3.3 hereof if BofA exercises its right at any time to license
additional technology from 724 as part of the Licensed Technology
in accordance with the terms and conditions of such Section.
(d) THIRD PARTY MATERIALS. BofA shall pay all amounts due to 724
and/or licensors of Third Party Materials that are included in or
used with the Licensed Technology that BofA consents to in
accordance with Section 2.11 hereof.
(e) TRAVEL AND COMMUNICATION EXPENSES. If BofA requests that 724
provide, or if 724 acting reasonably determines it advisable to
provide, services at any location outside of Metropolitan
Toronto, BofA shall reimburse 724 for all reasonable travel
expenses (including all reasonable communications,
transportation, lodging, meal and other out of pocket expenses)
incurred by 724, at 724's cost (including the amount of all
taxes, imposts, levies, duties or similar charges for which 724
is not entitled under the relevant legislation to currently claim
a credit, rebate, refund, set-off or other recovery). All
charges payable under this subparagraph (e) shall be invoiced
monthly for expenses incurred by 724 in the prior one month
period and shall be payable net 30 days from the date of the
invoice.
3.2 INVOICES. Unless otherwise specified under this Agreement, 724 shall
invoice BofA for any amount payable hereunder no earlier than 30 days in
advance of the date that such payment is due. The terms of each such
invoice shall be net 30 days.
3.3 TAXES.
3.3.1 In addition to any and all fees, levies, imposts, reimbursements,
expenses and other charges hereunder, BofA shall pay to 724 all
taxes, duties, levies, imposts and other such assessments or
charges which may be assessed, levied or imposed, payable or
remittable pursuant to the relevant tax legislation in connection
with this license of the Licensed Technology or the sublicenses
contemplated herein and any other fees, levies, imposts and other
charges in connection with any other supply, provision, or other
transfer contemplated by this Agreement (for the purposes of this
Section 3.3, collectively referred to as "TRANSFER TAXES"),
except taxes on 724's income or capital, and any reference to a
payment by BofA, an Affiliate or sublicensee thereof or other
Person to or for the benefit of 724 hereunder shall be read to
include the payment of any and all such Transfer Taxes.
3.3.2 Without limiting the generality of the foregoing, all payments by
BofA under this Agreement (excluding payments of Transfer Taxes)
shall be made free and clear of, and without deduction for, any
and all present or future taxes, levies, imposts, deductions,
charges or withholdings imposed on or with respect to such
payments, and all interest, penalties and other liabilities with
respect thereto (all such taxes,
<PAGE>
-22-
levies, imposts, deductions, charges, withholdings and
liabilities being hereinafter referred to as "Amounts"). If
BofA is required by law to deduct any such Amount from payments
or in respect of any sum payable hereunder, and remit such
Amount to a relevant taxing authority:
(i) the sum payable shall be increased by BofA as may be
necessary so that after making all required deductions
(including deductions applicable to additional sums
payable under this Section 3.3.2(i)), 724 receives an
amount equal to the sum it would have received had no
deduction been made;
(ii) BofA shall make such deductions;
(iii) BofA shall pay and remit the full amount deducted to the
relevant taxation authority in accordance with
applicable law; and
(iv) Within 30 days after the date of payment or remittance of
Amounts referred to in the preceding paragraph to the
relevant taxation authority, BofA will furnish to 724
the original or a certified copy of any receipt furnished
by the relevant taxing authority evidencing payment
thereof.
3.3.3 For greater certainty, no such additional amount shall be payable
by BofA to the extent (but only to the extent) that no deduction,
or withholding from the payment to 724 is required by the
applicable tax legislation. For example, it is the parties'
understanding that where 724 otherwise becomes liable for the
payment of U.S. income taxes on a particular payment pursuant to
this Agreement by reason of it having a sufficient connection to
a U.S. taxing jurisdiction for such U.S. jurisdiction to impose
domestic U.S. tax on such payment (such as by 724 maintaining a
permanent establishment in the U.S. to which the income arising
pursuant to this Agreement is allocated or effectively connected
for U.S. tax purposes) other than a connection based merely on
the entitlement of 724 to the payments to be made under this
Agreement and the Maintenance and Support Agreement, then no
deduction or withholding requirement would be imposed by U.S.
taxation legislation.
3.3.4 In this regard, the parties acknowledge and agree that BofA will
be obligated to withhold from payments to 724 and remit to the
applicable U.S. taxation authorities amounts in respect of U.S.
tax levied on the payments to 724, and therefore would be
obligated to pay the additional amounts contemplated by Section
3.3.2, unless certain certificates, documents or other evidence
are delivered to BofA by 724, as required by the Internal Revenue
Code or Treasury Regulations issued pursuant thereto, including,
without limitation, Internal Revenue Service Form W-8ECI, Form
W-8BEN (see. e.g. Item 10 in Part II) and any other certificate
or statement of exemption required by Treasury Regulation
Sections 1.1441-1(e) and 1.1441-4(a) or Section 1.1441-6(b) or
any subsequent version thereof, property completed and duly
executed by 724 establishing that the payment is: (i) not subject
to withholding under the Internal Revenue Code because such
payment is effectively connected with the conduct by 724 of a
trade or business in the United States; or (ii) totally exempt
from United States tax
<PAGE>
-23-
under a provision of an applicable tax treaty. For greater
certainty, this provision shall not be construed so as to shift
the burden of sales, use, excise, VAT and similar taxes from
BofA to 724, even if 724 carries on business in the United
States or maintains a U.S. permanent establishment.
3.3.5 724 covenants and agrees to act in good faith in connection with
requests by BofA for information and certificates or other
written statements (as contemplated above) reasonably required by
it in order to determine whether it has an obligation with
respect to any payment hereunder to deduct or withhold amounts
for purposes of remitting them to the relevant taxation
authorities and, therefore, an associated obligation to pay the
additional amounts contemplated by Section 3.3.2 above.
Specifically, 724 covenants and agrees that if it is able to
truthfully and in good conscience deliver the required statements
or certificates obviating the need for BofA to deduct or withhold
amounts from the payments contemplated hereunder, it shall do so
upon request by BofA and on a timely basis having regard to
BofA's statutory obligations.
3.3.6 Without duplication of the payments to be made pursuant to
Sections 3.3.7 and 3.3.8, in the event that 724 shall be entitled
to receive from the applicable U.S. taxation authorities a refund
of tax paid or payable by it (a "Tax Refund") with respect to or
calculated with reference to the deduction or withholding giving
rise to the payment of the additional amount as contemplated
above in Section 3.3.2(i), 724 shall use reasonable efforts to
obtain the Tax Refund, to the extent it can do so without
prejudice to the retention of the amount of such Tax Refund, and,
upon receipt of such Tax Refund, pay or cause to be paid to BofA
such amount as 724 shall have concluded, acting reasonably, to be
the after-tax value to it of the Tax Refund which is attributable
to the relevant deduction, withholding or tax payable.
3.3.7 In addition, subject to Section 3.3.8 and without duplication of
the payments to be made pursuant to Section 3.3.6, if 724 shall
obtain the benefit of a tax credit from the applicable Canadian
or United States tax authorities with respect to amounts deducted
or withheld by BofA from payments due hereunder and remitted on
behalf of 724 to the applicable U.S. taxation authority (and in
respect of which 724 shall have received the additional amount
contemplated by Section 3.3.2(i)), then, upon receipt of the
benefit of the tax credit (through offsetting tax liability or
through refund), 724 shall, subject to Section 3.3.8, pay or
cause to be paid to BofA such amount as 724 shall have concluded,
acting reasonably, to be the after-tax value to it of the tax
credit which is attributable to the relevant deduction,
withholding or tax, to reimburse BofA for all or a portion of the
additional amount that had been paid to 724.
3.3.8 In particular, if 724 shall receive the benefit of a foreign tax
credit under its Canadian federal or provincial income tax
returns in respect of an amount withheld or deducted at source by
BofA and remitted to the applicable U.S. taxation authority, the
procedure outlined in Section 3.3.7 shall be applicable provided,
however, that the amount of the tax credit shall first be
applied:
<PAGE>
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(i) to reimburse 724 for the additional Canadian (including
federal and provincial) income and other taxes (or loss
of tax shelter - such as the reduction of non-capital
tax loss carryforwards or utilization of tax credits
otherwise available to shelter other current or future
income) that it incurred in respect of the taxation of
additional amounts paid pursuant to Section 3.3.2(i) as
part of 724's world-wide income. For these purposes, the
amount of additional tax burden incurred by 724 shall be
deemed to be that amount equal to the product obtained
when the Tax Rate is multiplied by the aggregate sum of
such additional amounts received or receivable by 724 for
all taxation periods (or parts thereof) during the term
of this Agreement up to the day on which the calculation
is being made; and
(ii) the balance of any such tax credit shall be applied as a
refund to BofA in accordance with the provisions of
Section 3.3.7 MUTATIS MUTANDIS. For greater certainty,
however, tax credits and tax refunds shall be allocated
solely to the particular deduction/withholding by BofA
and the additional amounts paid by BofA pursuant to
Section 3.3.2(i) to which they relate.
3.3.9 Both parties covenant and agree to file or re-file, as
applicable, all relevant tax returns and information returns
necessary to reflect such payment by 724 to BofA as a full or
partial refund, as the case may be, of the additional Amount
previously received by 724.
3.3.10 In the event that a particular taxation authority having
jurisdiction shall object, assess, reassess or appeal a position
taken by the parties and should such position be upheld or
appeals by the relevant party abandoned, the parties undertake to
readjust the payments between them, acting reasonably and in good
faith.
3.3.11 If BofA reasonably believes that 724 is entitled to a Tax Refund
as described in Section 3.3.6 or a tax credit as described in
Section 3.3.7 in respect of which 724 has not applied, claimed or
deducted in computing its income, or if 724 has so applied for,
claimed or deducted, such application, claim or deduction has
been denied by the relevant taxing authority, then 724 agrees to
(upon receipt of written notice from BofA as to its reasonable
belief): (A) apply for, claim or deduct such amount not yet
applied for, claimed or deducted, if applicable; or (B) object
and, if necessary, appeal such denial (where permitted under the
relevant tax legislation) and pursue such objection and appeal in
good faith provided: (i) that neither applying for, claiming or
deducting the Tax Refund or tax credit, or objecting or appealing
the denial of the Tax Refund or tax credit shall in 724's view,
materially prejudice 724's past, present or future tax position;
and (ii) BofA agrees that such objection and appeals shall be at
its sole cost and expense, including all legal and accounting
fees and disbursements and other out-of-pocket costs arising as a
result of objecting or appealing the denial of the Tax Refund or
tax credit.
3.3.12 Provided however, that notwithstanding anything contained herein
to the contrary, 724 shall be entitled to arrange its tax affairs
in whatever manner it thinks fit and shall not be required to
disclose to BofA any information regarding its tax affairs or tax
calculations (except that BofA shall be entitled to review 724's
tax returns
<PAGE>
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for purposes of verifying the parties' respective rights and
obligations pursuant to this Section 3.3).
3.4 LATE FEES. If BofA fails to make payment of the amounts payable to
724 in accordance with Section 3.1 and Section 3.3 above or any other
amount payable pursuant to this Agreement or any of the sublicenses
contemplated herein, or any portion or portions thereof, BofA shall
pay interest to 724 on such overdue amount in the same currency as
such overdue payment is payable both before and after demand, default,
and judgment until actual payment in full at a rate per annum equal to
***** percent (****%) calculated on a three hundred and sixty-five (365)
day year and payable daily in arrears with interest on overdue
interest at the same said rate.
3.5 REPRESENTATIONS AND WARRANTIES OF BOFA. Both now and on a continuing
basis, BofA represents and warrants to 724 and acknowledges that 724 is
relying upon the following representations and warranties:
(a) BofA is a non-resident of Canada as that term is defined in the
ETA and the INCOME TAX ACT (Canada);
(b) BofA is not registered pursuant to subdivision d of Part IX of
the ETA;
(c) BAC is a non-resident of Canada as that term is defined in the
ETA and the INCOME TAX ACT (Canada); and
(d) BAC is not registered pursuant to subdivision d of Part IX of the
ETA.
BofA covenants and agrees to forthwith provide 724 notice of any change
that may affect these representations and warranties.
ARTICLE IV
REPRESENTATIONS, WARRANTIES AND INDEMNITIES
4.1 REPRESENTATIONS AND WARRANTIES OF 724. 724 represents and warrants to
BofA as set out in the following Subsections of this Section, both as at
the date hereof and on a continuing basis, and acknowledges that BofA is
relying upon such representations and warranties in entering into this
Agreement. 724 shall, as soon as practicable following it becoming aware
of any fact, matter or event arising after the date hereof which results
in any of the following representations becoming incorrect in a material
respect, provide notice of same to BofA.
4.1.1 OWNERSHIP. Except in respect of the Third Party Materials, 724
is the owner or licensor of the Intellectual Property Rights in
the Licensed Technology and has the right to grant the licenses
in Section 2.1 hereof.
4.1.2 THIRD PARTY MATERIALS. Unless 724 notifies BofA that it must
obtain a separate license to use Third Party Materials and/or pay
a license fee or otherwise comply with specified requirements
imposed on 724 by the third party owner or licensor of the Third
Party Materials, 724 has obtained all licenses, clearances,
assignments and waivers in respect of any and all the Third Party
Materials and
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
-26-
associated Intellectual Property Rights (other than patent
rights) constituting part of or distributed by 724 with the
Licensed Technology necessary (other than patent rights) to
permit BofA to use the Licensed Technology in the manner
contemplated by this Agreement.
4.1.3 INFRINGEMENTS BY 724. Except in respect of any Third Party
Materials,
(i) the Licensed Technology does not infringe on any
Intellectual Property Rights, other than patent rights,
of any third party;
(ii) there is no pending or, to 724's knowledge, threatened
suit, proceeding, claim, demand, action or investigation
of any nature or kind against 724 relating to the
Licensed Technology or the manner it is used in respect
of its business; and
(iii) there is no claim of which 724 has received notice
(formal or informal) or is otherwise aware that any
products, software or services manufactured, produced,
used or sold by 724 in connection with the Licensed
Technology, or any process, method, packaging,
advertising, or material that 724 employs in the
manufacture, marketing, licensing or sale of any such
product, software or service in connection with the
Licensed Technology, or the use of any of the Licensed
Technology in the manner contemplated by this Agreement
breaches, violates, infringes or interferes with any
rights of any Person or requires payment for the use of
any copyright, trade mark or trade secret, know-how or
technology of another Person or any other Intellectual
Property Right of any Person.
4.1.4 NO CONFLICTING AGREEMENTS. 724 is not under and will not assume
any contractual obligation that conflicts with its obligations or
the rights granted in this Agreement.
4.1.5 VIRUS WARRANTY. Except in respect of Third Party Materials, 724
warrants that it will use all commercially reasonable efforts to
ensure that all Licensed Technology and BofA Funded Improvements
delivered to BofA are, at the time of shipment, free of any known
computer software viruses.
4.1.6 DISABLING DEVICES. Except in respect of Third Party Materials,
neither the Licensed Technology nor the BofA Funded Improvements
contain any back door, time bomb, worm, Trojan horse, software
lock, drop-dead device or other software routine designed to
disable the Licensed Technology or any BofA Funded Improvement
or damage, alter, erase or harm BofA's data, systems or software.
724 will use commercially reasonable efforts to have included a similar
provision in each custom license agreement with any provider of Third
Party Materials.
<PAGE>
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4.2 YEAR 2000 COMPLIANCE.
(i) 724 represents and warrants that the Licensed Technology
and BofA Funded Improvements will be in Year 2000
Compliance, provided that all Third Party Materials are
also in Year 2000 Compliance.
(ii) "YEAR 2000 COMPLIANCE" means before, during and after
January 1, 2000:
(a) all dates receivable by the Licensed Technology and BofA Funded
Improvements (input data) will require a century indicator, all
dates produced by the Licensed Technology and BofA Funded
Improvements (output or results) will include a century
indicator;
(b) date calculations involving either a single century or multiple
centuries will neither cause an abnormal ending nor generate
incorrect results;
(c) when sorting by date, all records will be sorted in accurate
sequence; and when the date is used as a key, records will be
read and written in accurate sequence;
(d) leap years will be determined by the following standard:
(I) if the year is evenly divisible by 4, it is a leap year,
except for years ending in 00; and
(II) a year ending in 00 is a leap year if it is evenly
divisible by 400; and
(e) in the case of hardware/equipment, the clock and calendar will
advance correctly to year 2000 and beyond without intervention.
(iii) Before delivery of the Licensed Technology and BofA Funded
Improvements to BofA, 724 will:
(a) work with the group within BofA that is responsible
for testing Year 2000 Compliance to test whether the
Licensed Technology and BofA Funded Improvements are
in Year 2000 Compliance in accordance with BofA's
standards and procedures relating to such tests; and
(b) provide BofA with a copy of any compliance testing
results promptly upon the request of BofA.
(iv) 724 shall, upon receipt of notice from BofA referenced in
paragraph (v) in this Section 4.2 or when 724 otherwise
becomes aware of a condition or event that would evidence a
breach of the representation and warranty given by 724 in
paragraph (i) of this Section 4.2, use its best efforts to
promptly repair and correct the Licensed Technology and
BofA Funded Improvements, and deliver such repair or
correction to BofA, in order to make the Licensed
Technology and BofA Funded Improvements be in Year 2000
Compliance, except that 724's obligation to repair and
correct
<PAGE>
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any Third Party Materials included in the Licensed
Technology and BofA Funded Improvements that is not in
Year 2000 Compliance is limited to 724 using commercially
reasonable efforts to work with the supplier of the Third
Party Material to cause such supplier to make such Third
Party Material be in Year 2000 Compliance. If 724 is
unable to cause a third party to make its Third Party
Material in Year 2000 Compliance, 724 will have the option
to replace such Third Party Material.
(v) BofA shall promptly notify 724 of any conditions or events
that would evidence a breach of the representation and
warranty given by 724 in paragraph (i) of this Section 4.2
and provide its reasonable assistance to 724 in order to
permit 724 to meet its obligation under paragraph (iv) of
this Section 4.2.
(vi) Time shall be of the essence for the performance of each
Party's obligations under this Section 4.2.
(vii) The obligations of repair and correction contained in this
Section 4.2 shall be the sole remedies of BofA or its
Affiliates in connection with 724's obligations contained
in this Section 4.2.
4.3 CONTRACTUAL RESPONSIBILITY AND INDEMNIFICATION OBLIGATIONS OF 724 IN
FAVOUR OF BOFA.
4.3.1 DIRECT DAMAGES. 724 covenants and agrees to pay, be liable for,
compensate and save harmless each of BofA, its Affiliates and
their respective directors, officers, employees and agents
(except for Persons who are merely Customers of BofA or of an
Affiliate of BofA, unless an indemnification obligation is
specifically provided for herein) (collectively, the "BOFA
GROUP") from and against any Claim in respect of, as a result of,
or arising out of, the following matters (a "DIRECT CLAIM"):
(i) any non-fulfillment or non-performance of any covenant or
agreement by 724 (or those for whom it is responsible
herein or at law) contained in this Agreement or in any
other agreement, certificate, document or instrument given
pursuant to this Agreement (collectively, the "ANCILLARY
DOCUMENTS"); and
(ii) any inaccuracy in or breach of any representation or
warranty of 724 contained in this Agreement or in any
Ancillary Document.
Provided, however, that the Direct Claims which may be asserted
by the BofA Group pursuant to this Section 4.3.1 shall not
include any Claim which originates from any Person who is not
itself a member of the BofA Group (a "BOFA THIRD PARTY CLAIM"),
which BofA Third Party Claims are the subject matter of
Section 4.3.2 hereof; and provided further that the Direct Claims
contemplated by this Section 4.3.1 shall also not include any
Claims which constitute an IP Infringement Claim (as defined in
and which are the subject matter of Section 4.3.3 hereof).
<PAGE>
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For greater certainty, the provisions of this Section 4.3.1 are
not to be construed as in any way limiting the remedies available
to BofA in the event of a breach of this Agreement on the part of
724, but rather a restatement of 724's responsibility in this
regard and a confirmation of non-parties entitled to the benefit
of 724's covenants and representations.
With respect to any Claim pursuant to this Section 4.3.1, 724
shall have a right to mitigate its damage and cure any such Claim
in accordance with the provisions of Section 4.6.4 MUTATIS
MUTANDIS and no Claim may be advanced by BofA in connection with
the subject matter of this Section until 724 shall have had a
reasonable opportunity to so mitigate its damages or cure the
subject matter of the Claim.
4.3.2 INDIRECT DAMAGES. 724 covenants and agrees to be liable for,
compensate, indemnify and save harmless each member of the BofA
Group from and against the following BofA Third Party Claims
(except to the extent that the substance of any such BofA Third
Party Claim is an IP Infringement Claim, in which event the Claim
shall be governed by the provisions of Section 4.3.3 hereof):
(i) Claims made by Affiliates of BofA, Customers of BofA and
Customers of BofA's Affiliates against BofA or a member
of the BofA Group, provided that the direct and
proximate cause of the Claim (as established in a final
and non-appealable judgement of a court having
jurisdiction in the matter) is the Gross Negligence
(which the parties deem to mean, "the want of even scant
care or an extreme departure from the ordinary standard
of conduct"), recklessness or willful misconduct of 724
or its directors, officers, employees and independent
contractors in the performance of 724's obligations
herein. For greater certainty and as provided below,
the maximum aggregate liability of 724 pursuant to
Sections 4.3.1 and 4.3.2 during the entire term of this
Agreement (and whether made in one or more Claims) shall
be the lesser of: (I) $****; and (II) the aggregate
amount of license fees previously received by 724 from
BofA pursuant to the terms of this Agreement.
4.3.3 IP INFRINGEMENT CLAIMS. 724 covenants and agrees to be liable
for, compensate, indemnify and save harmless the BofA Group from
and against any Claim in respect of, as a result of, or arising
out of, the Licensed Technology or any of the BofA Funded
Improvements infringing, or being alleged to infringe, any
Intellectual Property Right of any Person (an "IP Infringement
Claim").
With respect to any Claim pursuant to this Section 4.3.3, 724
shall have a right to mitigate its damage and cure any such Claim
in accordance with the provisions of Section 4.6.4, MUTATIS
MUTANDIS, and no Claim may be advanced by BofA in connection with
the subject matter of this Section until 724 shall have had a
reasonable opportunity to so mitigate its damages or cure the
subject matter of the Claim.
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
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4.4 CONTRACTUAL RESPONSIBILITY AND INDEMNIFICATION OBLIGATIONS OF BOFA TO 724
4.4.1 DIRECT DAMAGES. BofA covenants and agrees to pay, be liable for,
compensate and save harmless 724, its Affiliates and their
respective directors, officers, employees and agents
(collectively, the "724 Group") from and against any Claim which
they may pay, sustain, suffer or incur in respect of, as a result
of or arising out of the following matters:
(i) any non-fulfillment or non-performance of any covenant or
agreement by BofA (or those for whom it is responsible
herein or at law) contained in this Agreement or in any
Ancillary Document; and
(ii) any inaccuracy or breach of any representation or warranty
of BofA contained in this Agreement or in any Ancillary
Document.
Provided, however, that the Direct Claims which may be asserted
by the 724 Group pursuant to this Section 4.4.1 shall not include
any Claim which originates from any Person who is not itself a
member of the 724 Group (a "724 THIRD PARTY CLAIM"), which 724
Third Party Claims are the subject matter of Section 4.4.2
hereof; and provided further that the Direct Claims contemplated
by this Section 4.4.1 shall also not include any Claims which
constitute a Breach of Confidentiality Claim (as defined in and
which are the subject matter of Section 4.4.3 hereof).
For greater certainty, the provisions of this Section 4.4.1 are
not to be construed as in any way limiting the remedies available
to 724 in the event of a breach of this Agreement on the part of
BofA, but rather constitutes a restatement of BofA's
responsibility in this regard and a confirmation of non-parties
entitled to the benefit of BofA's covenants and representations.
4.4.2 INDIRECT DAMAGES. BofA covenants and agrees to be liable for,
compensate, indemnify and save harmless each member of the 724
Group from and against any Claim in respect of, as a result of,
or arising out of the following 724 Third Party Claims (except to
the extent that the substance of any such 724 Third Party Claim
is a Breach of Confidentiality Claim, in which event the Claim
shall be governed by the provisions of Section 4.4.3 hereof):
(i) Claims made by Affiliates of BofA, Customers of BofA,
Customers of BofA's Affiliates (together with their
respective directors, officers, employees, agents and
independent contractors) and any other Person given access
to or otherwise obtaining or using the Licensed Technology
or the BofA Funded Improvements by or through BofA, its
Affiliates or those Persons contemplated by Section 2.1 or
otherwise by or through Persons for whom BofA or its
Affiliates are responsible pursuant to this Agreement or at
law (collectively with BofA and its directors, officers,
employees, agents and independent contractors, the "BOFA
LICENSEES") which relate in any way to this Agreement, the
Licensed Technology, the BofA Funded Improvements, the 724
Confidential Information and specifically including those
BofA Third Party Claims referred to in
<PAGE>
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Section 4.3.2 above to the extent that the amount
thereof exceeds the liability of 724 in respect thereof,
if any, as provided herein;
(ii) Claims made by third party licensors of the Third Party
Materials in connection with the BofA Licensees' use,
sublicensing, copying, infringement, disclosure or other
involvement with the Third Party Materials, to the extent
that such Claims relate to a breach of the Intellectual
Property Rights of such third party licensors or a failure
to comply with the provisions of (or the agreements
contemplated by) Sections 2.6, 2.11 or 3.1(d) of this
Agreement;
(iii) Claims made by or on behalf of a governmental authority or
entity in connection with the obligation to pay the taxes
and other charges contemplated by Section 3.3; and
(iv) Claims involving the failure by a BofA Licensee to comply
with the provisions of Section 2.12 hereof or Claims
involving a failure by BofA or its Affiliates or a BofA
Licensee to comply with the provisions of Section 3.5 and
Section 7.6 hereof, with the effect that 724 shall have
failed or be alleged to have failed to collect and remit
applicable sales, use, excise, commodity or other taxes
(including goods and services tax and ORST).
4.4.3 BREACH OF CONFIDENTIALITY CLAIMS. BofA covenants and agrees to
be liable for, compensate, indemnify and save harmless the 724
Group from and against any Claim in respect of, as a result of,
or arising out of any of the following matters (collectively, the
"BREACH OF CONFIDENTIALITY CLAIMS"):
(i) any failure by a BofA Licensee (except for Persons who are
merely Customers of BofA or of an Affiliate of BofA, unless
an indemnification obligation is specifically provided for
herein) or a member of the BofA Group to comply with, or
other breach of the provisions of, this Agreement or any
Ancillary Document concerning or in connection with the
permitted/prohibited use or prohibited copying, disclosure
or dissemination or other use or involvement with 724's
Confidential Information, the Licensed Technology, the BofA
Funded Improvements or 724's Intellectual Property Rights;
(ii) any infringement by a BofA Licensee (except for Persons who
are merely Customers of BofA or of an Affiliate of BofA,
unless an indemnification obligation is specifically
provided for herein) or a member of the BofA Group of 724's
Intellectual Property Rights or any failure by such Persons
to take the positive step of notifying 724 promptly after
their becoming aware of an infringement of 724's
Intellectual Property Rights, as provided in this
Agreement; and
(iii) any failure by a member of the BofA Group to obtain for the
benefit of 724 the contractual rights as against Persons
not a party to this Agreement that are contemplated by
Sections 2.1, 2.2 and 2.6 hereof or any failure by
<PAGE>
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BofA or its Affiliates to assist 724 in the enforcement
of such rights as contemplated in such provisions.
For greater certainty, notwithstanding any provision of this
Agreement to the contrary, this Agreement shall not be construed
so as to limit in any way the remedies available to 724 at law or
pursuant to statute in connection with the subject matter of a
Breach of Confidentiality Claim.
4.5 LIMITATION OF LIABILITY FOR THE BENEFIT OF BOFA
The provisions of this Section 4.5 shall be construed to apply generally
to all Claims under or in respect of this Agreement by or on behalf of
the 724 Group and not only pursuant to the provisions of Article IV. For
greater certainty, no Claim for breach of the representations, warranties
or covenants herein may be brought by any member of the 724 Group at law
generally if such claim would be prohibited by this Agreement and, in
particular, by this Section 4.5.
4.5.1 LIMITATION ON DIRECT DAMAGE CLAIMS. The aggregate liability of
BofA (whether in one or more Claims and inclusive of all Claims
made or reserved for throughout the entire term of this
Agreement) pursuant to this Agreement for actual and direct
damages incurred by members of the 724 Group as provided in
Section 4.4.1 shall not exceed the sum of: (I) $****; plus
(II) the portion of the License Fee Holdback paid or payable
hereunder prior to, at the time of, or after the Claim is made,
with the exception of the following obligations, which shall
apply without limit and shall not be counted against such
monetary limit:
(i) the obligation to pay the fees and expenses contemplated by
Sections 2.3 and 3.1;
(ii) the obligation to pay the taxes and similar charges
contemplated by Section 3.3;
(iii) the obligation to pay the late fees contemplated by Section
3.4;
(iv) the obligation to pay the attorneys fees contemplated by
Section 5.4;
(v) 724 Third Party Claims; and
(vi) Breach of Confidentiality Claims.
4.5.2 LIMITATION ON CONSEQUENTIAL DAMAGES. Notwithstanding any other
provision of this Agreement, with the exception of 724 Third
Party Claims and Breach of Confidentiality Claims (for each of
which BofA shall, subject to Section 4.3.2, be responsible
without limitation), in no circumstances shall BofA be liable to
724 for loss of profits, loss of revenue, failure to realize
expected savings, loss of use or lack of availability of
facilities (including computer resources and any stored data), or
other commercial or economic loss of any kind whatsoever; nor
shall BofA be liable to 724 for any indirect, special,
consequential, punitive, exemplary or aggravated damages whether
or not arising out of or in connection with the use
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
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(or inability to use) or performance of the Licensed
Technology, BofA Funded Improvements, documentation, services
or products that are the subject matter of this Agreement,
even if advised of the possibility of same.
4.6 LIMITATIONS FOR THE BENEFIT OF 724
The provisions of this Section 4.6 shall be construed to apply generally
to all Claims under or in respect of this Agreement by or on behalf of
the BofA Group and not only pursuant to the provisions of Article 4. For
greater certainty, no claim for breach of the representations, warranties
or covenants herein may be brought by any member of the BofA Group at law
generally if such Claim would be prohibited by this Agreement and, in
particular, by this Section 4.6.
4.6.1 LIMITATION ON DIRECT DAMAGE CLAIMS. The aggregate liability of
724 pursuant to this Agreement (whether in one or more Claims and
inclusive of all Claims made or reserved for throughout the
entire term of this Agreement) for actual and direct damages
incurred by members of the BofA Group as provided in Sections
4.3.1 and 4.3.2 shall not exceed the amount by which: (I) the
lesser of $**** and the aggregate amount of license fees
previously received by 724 pursuant to the terms hereof; exceeds
(II) the aggregate amount of Claims previously paid or reserved
for pursuant to Sections 4.3.1 and 4.3.2 (whether in one or more
Claims and inclusive of all Claims made or reserved for
throughout the entire term of this Agreement), with the exception
of the following obligations, which shall apply without limit and
which shall not be counted against the aforementioned monetary
limit:
(i) IP Infringement Claims; and
(ii) the right to retain all or part of the License Fee Holdback
or to claim a refund for certain fees, all as provided in
Section 2.14.7.
4.6.2 LIMITATION ON INDIRECT AND CONSEQUENTIAL DAMAGES.
Notwithstanding any other provision of this Agreement, with
the exception of: (I) BofA Third Party Claims (which, together
with Claims by members of the BofA Group pursuant to Section
4.3.1 are limited to an aggregate amount not to exceed the
lesser of $**** and the aggregate amount of license fees
received by 724 herein); and (II) IP Infringement Claims (for
which 724 shall be responsible without limitation), in no
circumstances shall 724 be liable to any member of the BofA
Group or any BofA Licensee for loss of profits, loss of
revenue, failure to realize expected savings, loss of use or
lack of availability of facilities (including computer
resources and any stored data), or other commercial or
economic loss of any kind whatsoever; nor shall 724 be liable
to any member of the BofA Group or BofA Licensee for any
indirect, special, consequential, punitive, exemplary or
aggravated damages whether or not arising out of or in
connection with use (or inability to use) or performance of
the Licensed Technology, BofA Funded Improvements,
documentation, services or products that are the subject
matter of this Agreement, even if advised of the possibility
of same.
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
<PAGE>
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4.6.3 PRODUCT WARRANTIES/ACCEPTANCE TESTING. BofA expressly
acknowledges and agrees that the use and operation of any
Licensed Technology, BofA Funded Improvements, documentation,
services or products that are the subject matter of this
agreement, and the results obtained from such use and operation,
are at the sole and exclusive risk of BofA, its Affiliates and
its Customers and that, notwithstanding anything herein to the
contrary (but subject to the provisions of Section 4.3.2, in the
case of Gross Negligence, recklessness and willful misconduct,
and then only to the extent of the specific limitation of
liability contained herein), 724 assumes no liability or
responsibility with respect to any reliance upon the results
obtained, by BofA, its Affiliates and its Customers or any third
party. BofA acknowledges that, although 724 will use
commercially reasonable efforts in its software development
business to avoid programming errors, 724 does not represent and
warrant that the operation of the Licensed Technology or BofA
Funded Improvements will be error free or that the operation of
the Licensed Technology will not be interrupted by reason of
defect therein. BofA acknowledges and agrees that the Acceptance
Testing process (and the related License Fee Holdbacks)
constitute its sole remedy in this regard and, further, that any
programming errors not caught by the Acceptance Testing process
are solely the risk of BofA, except as provided in Section 4.3.2.
However, 724 has covenanted and agreed, pursuant to, and in
accordance with, the Maintenance and Support Agreement, to
(during the term of such Agreement) correct any defects and make
any modifications which are necessary to cause the Licensed
Technology to conform in all material respects to the
Specifications.)
4.6.4 MITIGATION OF DAMAGES/ABILITY TO CURE RE IP INFRINGEMENT CLAIMS.
If any Licensed Technology, BofA Funded Improvement or other
Deliverable of 724 becomes, or in 724's reasonable opinion is
likely to become, the subject of an IP Infringement Claim, 724
may, at its option and expense: (i) obtain the right for the BofA
Group to continue using the Licensed Technology, BofA Funded
Improvement or other Deliverable in accordance with this
Agreement; or (ii) replace or modify the Licensed Technology,
BofA Funded Improvement or other Deliverable so that it becomes
non-infringing, provided that any such replacement or modified
Licensed Technology, BofA Funded Improvement or other Deliverable
offers the functions that are required by this Agreement to be
provided by the Licensed Technology, BofA Funded Improvement or
other Deliverable being replaced.
BofA covenants and agrees to use commercially reasonable efforts
to work with and assist 724 in obtaining, replacing or modifying
the Licensed Technology so as to have a fully compliant version
thereof on the market as soon as possible and having regard to
724's need to minimize liability to the third party claimant.
4.7 GENERAL ACKNOWLEDGEMENTS FOR THE BENEFIT OF BOTH BOFA AND 724. 724 and
BofA expressly acknowledge and agree that the limitation of liability
provisions of this Agreement reflect an informed voluntary allocation of
the risks (known and unknown) that may exist in connection with the
provision of the goods and services hereunder by 724, including the
performance of the development and delivery of the Licensed Technology
and the BofA Funded Improvements as provided herein, and that such
voluntary risk allocation represents a material part of the Agreement
reached between
<PAGE>
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724 and BofA. Except for Breach of Confidentiality Claims, if a
matter is dealt with in this Agreement, no Party shall be obligated or
liable beyond the limits set forth in this Agreement regardless of the
legal basis (contract, tort, or otherwise) for the claim.
4.8 EXCLUSION OF OTHER WARRANTIES. EXCEPT AS OTHERWISE EXPRESSLY STATED
HEREIN, THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OR CONDITIONS IN
RELATION TO ANY LICENSED TECHNOLOGY, BofA FUNDED IMPROVEMENTS,
DOCUMENTATION, SERVICES OR PRODUCTS THAT ARE THE SUBJECT MATTER OF THIS
AGREEMENT, INCLUDING ANY IMPLIED WARRANTIES OR CONDITIONS OF
MERCHANTABILITY, MERCHANTABLE QUALITY OR FITNESS FOR A PARTICULAR PURPOSE
AND THOSE OTHERWISE ARISING BY STATUTE (INCLUDING PURSUANT TO THE SALE OF
GOODS ACT (ONTARIO) OR THE CALIFORNIA UNIFORM COMMERCIAL CODE OR
OTHERWISE IN LAW, OR FROM A COURSE OF DEALING OR USAGE OF TRADE.
4.9 MATTERS RELATING TO THIRD PARTY MATERIALS AND THE LICENSORS THEREOF.
Notwithstanding anything to the contrary herein contained, 724 shall not
be responsible or liable for any loss, liability, damage, cost or expense
incurred by BofA, its Affiliates or any BofA Licensee as a result of or
in connection with, the use, disclosure, publication or other involvement
with the Third Party Materials (with the exception of the required
integration, as described in Section 2.14.9).
If BofA, or any Affiliate thereof or any BofA Licensee becomes subject to
a claim that the use of the Third Party Materials which have been
sublicensed from 724 infringe any Intellectual Property Right of any
Person, 724 shall exercise any contractual rights of indemnification that
may have been given to it by the third party licensor of the Third Party
Materials for its own benefit and the benefit of BofA, its Affiliates and
the other BofA Licensees, as the case may be, to the extent allowable at
law and/or pursuant to the provisions of the indemnification covenant.
The cost associated with such action (including professional fees and
disbursements, together with applicable taxes, shall be shared PRO RATA
by the Persons (including 724) which shall receive the proceeds from such
indemnification.
4.10 PROCEDURE FOR INDEMNIFICATION FOR DIRECT CLAIMS. In the event of the
assertion of a Claim pursuant to Sections 4.3.1 or 4.4.1, the dispute
resolution procedures of Sections 7.1 and 7.2 shall be applicable.
4.11 PROCEDURE FOR INDEMNIFICATION FOR OTHER CLAIMS. In the event of a BofA
Third party claim or a 724 Third Party Claim, the dispute resolution
procedures of Sections 7.1 and 7.2 shall be applicable. As regards the
third party claimants, the following additional procedures shall be
applicable. The Indemnified Party shall notify the Indemnifying Party in
writing as soon as is reasonably practicable after being informed in
writing that facts exist which may result in a Third Party Claim and in
respect of which a right of indemnification given pursuant to Sections
4.3.2, 4.3.3, 4.4.2 or 4.4.3 may apply. The Indemnifying Party shall
have the right to elect, by written notice delivered to the Indemnified
Party within 10 days of receipt by the Indemnifying Party of the notice
from the Indemnified Party in respect of the Third Party Claim (30 days
in respect of a Claim in respect of taxes or similar charges), at the
sole expense of the Indemnifying Party, to
<PAGE>
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participate in or assume control of the negotiation, settlement or
defence of the Third Party Claim, provided that:
(i) such will be done at all times in a diligent and bona fide
matter;
(ii) the Indemnifying Party acknowledges in writing its
obligation to indemnify the Indemnified Party in accordance
with the terms of this Agreement in respect of that Third
Party Claim; and
(iii) the Indemnifying Party shall pay all reasonable
out-of-pocket expenses incurred by the Indemnified Party as
a result of such participation or assumption.
If the Indemnifying Party elects to assume such control, the Indemnified
Party shall cooperate with the Indemnifying Party and its counsel and
shall have the right to participate in the negotiation, settlement or
defence of such Third Party Claim at its own expense. If the Indemnifying
Party does not elect to assume control of the defence of the Third Party
Claim for any reason or, having elected to assume such control,
thereafter fails to proceed with the settlement or defence of any such
Third Party Claim, the Indemnified Party shall be entitled to assume such
control and its reasonable expenses incurred in defending the Claim shall
be reimbursed by the Indemnifying Party. The Indemnifying Party shall
cooperate where necessary with the Indemnified Party and its counsel in
connection with any Third Party Claim where control of the negotiation,
settlement or defence of the Third Party Claim has been assumed by the
Indemnified Party and the Indemnifying Party shall be bound by the
results obtained by the Indemnified Party with respect to such Third
Party Claim. If the Indemnifying Party does not elect to assume control
because it declines to grant the acknowledgement described in
sub-paragraph (ii) above, in good faith, on the basis that it disputes
its obligation, the basis for indemnification or the extent of its
liability, the Indemnifying Party shall nonetheless have the right to
participate in the negotiation, settlement or defence of such Third Party
Claim at its sole expense.
4.12 ADDITIONAL RULES AND PROCEDURES CONCERNING INDEMNIFICATION CLAIMS. The
obligation of the parties to indemnify each other pursuant to this
Article IV shall also be subject to the following:
4.12.1 If any Third Party Claim is of a nature such that the Indemnified
Party is required by applicable law to make a payment to any
Person (a "Third Party") with respect to such Third Party Claim
before the completion of settlement negotiations or related legal
proceedings, the Indemnified Party may make such payment and the
Indemnifying Party shall, forthwith after demand by the
Indemnified Party, reimburse the Indemnified Party for any such
payment. If the amount of any liability under the Third Party
Claim in respect of which such a payment was made, as finally
determined, is less than the amount which was paid by the
Indemnifying Party to the Indemnified Party, the Indemnified
Party shall, forthwith after receipt of the difference from the
Third Party, pay such difference to the Indemnifying Party
(together with any interest that may have been received by the
Indemnified Party from the Third Party in connection with such
refund);
<PAGE>
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4.12.2 Except in the circumstances contemplated by Section 4.12.1 above,
and whether or not the Indemnifying Party assumes control of the
negotiation, settlement or defence of any Third Party Claim, the
Indemnified Party shall not settle or compromise any Third Party
Claim except with the prior written consent of the Indemnifying
Party (which consent shall not be unreasonably withheld). A
failure by the Indemnifying Party to respond in writing to a
written request by the Indemnified Party for consent for a period
of five Business Days or more, shall be deemed a consent by the
Indemnifying Party to such request;
4.12.3 The Indemnifying Party and the Indemnified Party shall, in
connection with any Third Party Claim, provide each other on an
ongoing basis with all information which may be relevant to the
other's liability hereunder and shall supply copies of all
relevant documentation promptly as they become available (and the
reasonable expenses of the Indemnified Party related to the
compilation of such information and provision of copies of
documentation shall be forthwith reimbursed by the Indemnifying
Party);
4.12.4 Notwithstanding Section 4.12.1, the Indemnifying Party shall not
settle any Third Party Claim or conduct any related legal or
administrative proceeding in a manner which would, in the opinion
of the Indemnified Party, acting reasonably, have a material
adverse impact on the Indemnified Party;
4.12.5 The right of an Indemnified Party to indemnification hereunder
shall not be prejudiced by the failure of the Indemnified Party
to meet the notice requirements provided for in this Article IV
except to the extent that the delay in notification is the direct
cause of an increase of cost or expense incurred by the
Indemnifying Party or the direct cause of a loss of an effective
defence available to the Indemnifying Party and then only to the
extent of such increased cost or expense or the provable damages
caused by the loss of such available defence;
4.12.6 The Indemnified Party agrees to treat any indemnification payment
made pursuant to this Agreement (including, in particular,
Article IV) in the most tax effective manner available to the
Indemnifying Party, which the Indemnifying Party may specify,
provided that the Indemnified Party will not be prejudiced (as
determined in the sole discretion of the Indemnified Party,
acting in good faith and after consulting with its professional
advisors) by any such treatment; and
4.12.7 BofA acknowledges and agrees that any indemnification payment to
be made pursuant to this Agreement (including, in particular,
Article IV) shall constitute an adjustment to the license fees
payable pursuant to Section 3.1 of this Agreement and the parties
shall, within a reasonable time of the payment or settlement by
set-off of the indemnification payment in question, file all
amendments to their current or past income tax returns as may be
necessary to reflect the adjustment.
4.13 TRANSFER TAXES. If the parties acting reasonably determine that any
payment (the "Payment") made pursuant to this Article IV is subject to
goods and services tax ("GST") or harmonized sales tax ("HST") pursuant
to the ETA or is deemed by the ETA to be inclusive of GST, HST or Ontario
retail sales tax ("ORST") pursuant to the ORSTA or is deemed by the ORSTA
to be inclusive of ORST (or if any sales, excise or other similar
<PAGE>
-38-
tax or statutory charge is applicable under the relevant tax
legislation(including pursuant to the laws of Canada or the United
States or any political subdivision thereof) to such Payment), the
amount of the Payment shall be increased by the amount of all such
applicable taxes to the extent necessary to compensate the Indemnified
Party for any net GST, HST, ORST or similar tax cost not recoverable
as input tax credit, refund, rebate, offset or similar tax recoveries.
4.14 OTHER PARTIES TO BE INDEMNIFIED. To the extent that any member of the
BofA Group or the 724 Group not a party hereto is stated as the
beneficiary of the representations, warranties, covenants and indemnities
herein, the parties acknowledge and agree that BofA (in the case of the
BofA Group) and 724 (in the case of the 724 Group) is contracting for
such representations, warranties, covenants and indemnities on behalf of
and as agent and trustee for such other persons.
4.15 INTEREST. The provisions of Section 3.4 shall apply MUTATIS MUTANDIS to
any payments to be made pursuant to this Article IV.
ARTICLE V
CONFIDENTIALITY AND NON-SOLICITATION
5.1 CONFIDENTIAL INFORMATION. Each Party who receives Confidential
Information (referred to in this section as the "Receiving Party") of the
other Party or its Affiliates (referred to in this Section as the
"Disclosing Party") shall hold such Confidential Information in trust and
confidence for and on behalf of the Disclosing Party and shall not,
except as expressly authorized hereunder or in writing by the Disclosing
Party, use, copy or disclose to any third party any Confidential
Information so received. Each Receiving Party shall take appropriate
action using commercially reasonable efforts (and, in any event, that are
no less than the efforts used to protect its own Confidential
Information) by instruction, agreement or otherwise to ensure that the
Receiving Party, its Affiliates and shareholders, and each of their
directors, officers, employees, consultants, agents and customers are
required to keep confidential all Confidential Information of the
Disclosing Party which is disclosed to or comes into the possession of
any of them. The Receiving Party agrees to obtain from any independent
contractor or other Person to whom disclosure of the Disclosing Party's
Confidential Information is made in carrying out such purposes, a
covenant not to further disclose or make use of any of the Disclosing
Party's Confidential Information in any manner whatsoever. For greater
certainty, the provisions of this Section shall survive any termination
of this Agreement for any reason whatsoever.
5.2 ELECTRONIC DISTRIBUTION. 724 acknowledges that BofA may distribute the
Licensed Technology through the Internet or related communications
systems. Given the open nature and public accessibility of these
systems, BofA's obligations with respect to confidentiality of the
Licensed Technology are to take commercially reasonable precautions to
protect the confidentiality of the Licensed Technology distributed
through these systems. The Parties agree to work together to address the
issue of confidentiality of the Licensed Technology which is provided
over the Internet.
<PAGE>
-39-
5.3 NON-SOLICITATION OF EMPLOYEES. During the term of this Agreement and the
one year period thereafter, or such shorter period ending one year after
BofA shall no longer be in the Continuing Alliance and shall not be
further exercising the Preferred Customer Option (as provided in Section
2.3) neither 724 nor any business group within BofA that works directly
with 724 (referred to as "OBLIGEE" for the purposes of this Section)
shall either individually or in partnership or in conjunction in any way
with any person or persons, whether as principal, agent, consultant,
shareholder, guarantor, creditor or in any other manner whatsoever
actively solicit or endeavour to entice away from the other Obligee or
its Affiliates, any person employed or retained as a full time consultant
by the other Obligee or its Affiliates at the date that this Agreement is
terminated for any reason, or who was so employed or retained at any time
during the previous one year period or interfere in any way with the
employment or other relationship between any such person and the other
Obligee and its Affiliates. The provisions of this Section 5.3 shall not
apply if any one of the events listed in Section 6.1 (Business
Termination) occurs, and shall not apply to newspaper and any other
generally available recruiting activities conducted by an Obligee
provided that the Obligee does not expressly address any such recruiting
activities at an employee of the other Obligee.
5.4 ATTORNEYS FEES. If a legal action or arbitration proceeding is commenced
in connection with any dispute under this Agreement, the prevailing
party, as determined by the court or arbitrators, shall be entitled to
attorneys' fees actually incurred, costs and necessary disbursements
incurred in connection with such action or proceeding, including any
applicable taxes thereon.
ARTICLE VI
TERMINATION
6.1 BUSINESS TERMINATION. In addition to any other rights or remedies
hereunder, either Party may terminate this Agreement immediately by
giving written notice to the other Party where the other Party: (i) makes
any general assignment for the benefit of creditors; (ii) has a receiver
and/or manager appointed over its assets (unless such appointment is
being contested in good faith by appropriate proceedings); (iii) becomes
bankrupt or insolvent or commits an act of bankruptcy or takes or
attempts to take advantage of any law or statute for the relief of
bankrupt or insolvent debtors; (iv) has a court order made for its
winding-up (unless such order is being appealed in good faith by
effective proceedings which result in at least a temporary stay of such
order); or (v) ceases to carry on business.
6.2 SURVIVAL OF LICENSE. If a voluntary petition is commenced by 724 under
the United States Bankruptcy Code (Title 11, U.S. Code, referred to
hereafter as the "Code") or a similar statute of another jurisdiction,
724 becomes bankrupt, any substantial part of 724's property becomes
subject to any levy, seizure, assignment, application or sale for or by
any creditor or governmental agency or a receiver should be appointed for
724 (in each case provided that 724 is not contesting such proceedings in
good faith), 724 shall deliver to BofA, promptly after Bank's request, a
copy of the most recent version of the Licensed Technology, including the
source code for such version, and all compilers and assemblers that 724
has the right to deliver, along with the names, addresses and telephone
numbers of the licensors of all Third Party Materials. The parties agree
that all
<PAGE>
-40-
software delivered pursuant to this Agreement and the documentation
therefor constitute "intellectual property" under Section 101 of the
Code (11 U.S.C. Section 101). 724 agrees that if it, as a
debtor-in-possession, or if a trustee in bankruptcy for 724, in a case
under the Code, rejects this Agreement, BofA may elect to retain its
rights under this Agreement as provided in Section 365(n) of the Code.
BofA, and any intellectual property rights, licenses or assignments from
724 of which BofA may have the benefit, shall receive the full
protection granted to BofA by applicable bankruptcy or receivership law,
regardless of the jurisdiction in which 724 files a petition or goes
into receivership.
ARTICLE VII
GENERAL
7.1 DISPUTE RESOLUTION. The following procedure will be adhered to in all
disputes arising under this Agreement which the Parties cannot resolve
informally. The aggrieved Party shall notify the other Party in writing
of the nature of the dispute, with as much detail as possible about the
deficient performance of the other Party. The project managers shall
meet (in person or by telephone), within seven days after the date of the
written notification, to attempt to reach an agreement about the nature
of the deficiency and the corrective action to be taken by the respective
Parties. The project managers shall each produce a report about the
nature of the dispute in detail to their respective managements. If the
project managers are unable to agree on corrective action, senior
managers of the Parties having authority to resolve the dispute without
the further consent of any other person ("Management") shall meet or
otherwise act to facilitate an agreement within 14 days of the date of
the written notification. If Management cannot resolve the dispute or
agree upon a written plan of corrective action to do so within seven days
after their initial meeting or other action, or if the agreed-upon
completion dates in the written plan of corrective action are exceeded,
either party may request arbitration as provided for in this Agreement.
Except as otherwise specifically provided, neither Party shall initiate
arbitration unless and until this dispute resolution procedure has been
employed or waived.
7.2 ARBITRATION. Either Party shall submit any dispute between the Parties
arising from or relating to this Agreement, including any failure to
agree on a matter requiring agreement, (but not any dispute relating to
the ownership of Intellectual Property or the improper disclosure or use
of the source code version of the Licensed Technology) to arbitration in
accordance with the provisions of Schedule "A" hereto.
7.3 EXCUSABLE DELAYS. Dates and times by which 724 or BofA is required to
render performance hereunder shall be postponed automatically to the
extent and for the period of time that 724 or BofA, as the case may be,
is prevented from meeting them by reason of any causes beyond its
reasonable control, provided the Party prevented from rendering
performance notifies the other Party immediately and in detail of the
commencement and nature of such a cause, and provided further than such
Party uses its reasonable efforts to render performance in a timely
manner utilizing to such end all resources reasonably required in the
circumstances, including obtaining supplies or services from other
sources if same are reasonably available.
7.4 TIME. Time is of the essence of each provision of this Agreement.
<PAGE>
-41-
7.5 NOTICES. Any notice, consent, determination or other communication
(herein a "NOTICE") required or permitted to be given or made hereunder
shall be in writing and shall be well and sufficiently given or made if:
(a) delivered in person or by commercial courier during normal
business hours on a Business Day and left with the addressee at
the address set forth below; or
(b) sent by any electronic means of sending messages, including
facsimile transmission, which produces a paper record
("Electronic Transmission") during normal business hours on a
Business Day, charges prepaid and confirmed by prepaid first
class mail:
TO 724, AT:
4101 Yonge Street, Suite 702
Toronto, Ontario
M2P 1N6
Facsimile: (416) 226-4456
Attention: Christopher Erickson
WITH A COPY TO:
4101 Yonge Street, Suite 702
Toronto, Ontario
M2P 1N6
Facsimile: (416) 226-4456
Attention: Mina Wallace, BankAmerica Project Manager
TO BOFA, AT:
Bank of America NT&SA
Interactive Banking Division Administration #10308
425 First Street
San Francisco, CA 94105-2603
Facsimile: (415) 278-7888
Attention: Michael A. Devico, Executive Vice-President
<PAGE>
-42-
WITH A COPY TO:
Bank of America
Office of the General Counsel
Bank of America Corporate Center
100 North Tryon Street
NC1-007-56-11
Charlotte, NC 28255
Facsimile: (704) 386-6453
Attention: Gerald P. Hurst, Associate General Counsel
AND WITH A COPY TO:
Bank of America NT&SA
Interactive Banking Division
425 First Street, 3rd Floor
San Francisco, California
94105-2603
Facsimile: (415) 278-7979
Attention: Robert W. Newton, Vice-President, Interactive
Banking Product Development 3690, 724 Solutions Project
Manager
or to such other address or telecopier number to the attention of such
other individuals as any Party may from time to time notify the others in
accordance with this section. Any Notice so given or made shall be
deemed to have been given or made on the day of delivery if delivered as
aforesaid or on the Business Day immediately following the day of
Electronic Transmission.
7.6 ASSIGNMENT AND ENUREMENT. No Party may assign any rights or benefits
under this Agreement to any Person without the prior written consent of
the other Party. Notwithstanding the foregoing, a Party may assign this
Agreement to an Affiliate provided that such Affiliate remains an
Affiliate of the assigning Party and the original parties hereto remain
liable as principal covenantor and provided, further, that no assignment
may be made to an Affiliate which is a Competitor unless such Affiliate
is wholly-owned, directly or indirectly, by Bank of America Corporation.
Provided, further, that BofA may not assign this Agreement to any Person
that: (a) is not a non-resident of Canada as that term is defined in the
ETA; or (b) is registered pursuant to subdivision d of Part IX of the
ETA. In the event that an Affiliate of BofA has been assigned this
Agreement and such Affiliate ceases to be an Affiliate of BofA, such
Affiliate shall, and BofA shall cause such Affiliate to, immediately
reassign this Agreement to an Affiliate of BofA. Subject to the
foregoing, this Agreement shall enure to the benefit of and be binding
upon the Parties and their respective heirs, personal representatives,
successors (including any successor by reason of amalgamation or
statutory arrangement of any Party) and permitted assigns. In all such
circumstances, the assignor shall remain liable hereunder as principal
debtor notwithstanding such assignment.
<PAGE>
-43-
7.7 FURTHER ASSURANCES. Each Party shall do such acts and shall execute such
further documents, conveyances, deeds, assignments, transfers and the
like, and will cause the doing of such acts and will cause the execution
of such further documents as are within its power as any other Party may
in writing at any time and from time to time reasonably request be done
and or executed, in order to give full effect to the provisions of this
Agreement.
7.8 EXPENSES. Except as provided in Section 5.4, each Party shall pay all
expenses it incurs in authorizing, preparing, executing and performing
this Agreement and the transactions contemplated hereunder, including all
fees and expenses of its legal counsel, bankers, investment bankers,
brokers, accountants or other representatives or consultants.
7.9 REMEDIES CUMULATIVE. Subject to Section 4.7, the rights and remedies of
the Parties under this Agreement are cumulative and in addition to and
not in substitution for any rights or remedies provided by law.
7.10 COUNTERPARTS. This Agreement may be executed and delivered in several
counterparts and by each of the Parties on the same or separate
counterparts, each of which when so executed and delivered shall be
deemed to be an original and such counterparts together shall constitute
one and the same instrument and shall be effective as of the date hereof.
7.11 WAIVER OF RIGHTS. Any waiver of, or consent to depart from, the
requirements of any provision of this Agreement shall be effective only
if it is in writing and signed by the Party giving it, and only in the
specific instance and for the specific purpose for which it has been
given. No failure on the part of any Party to exercise, and no delay in
exercising, any right under this Agreement shall operate as a waiver of
such right. No single or partial exercise of any such right shall
preclude any other or further exercise of such right or the exercise of
any other right.
7.12 RELATIONSHIP OF PARTIES. This is an agreement between separate legal
entities and neither is the agent or employee of the other for any
purpose whatsoever. The Parties do not intend to create a partnership or
joint venture between themselves. Neither Party shall have the right to
bind the other to any agreement with a Person or to incur any obligation
or liability on behalf of the other Party.
<PAGE>
TO WITNESS their agreement, the Parties have duly executed this Agreement on
the date first written above.
724 SOLUTIONS INC. BANK OF AMERICA NATIONAL TRUST &
SAVINGS ASSOCIATION
PER: /s/ Christopher Erickson PER: /s/ Michael DeVico
------------------------------ ----------------------------
NAME: CHRISTOPHER E. ERICKSON NAME: MICHAEL DEVICO
TITLE: PRESIDENT TITLE: EXECUTIVE VICE PRESIDENT
DATE: June 1, 1999
PER: /s/ Robert Newton
-----------------------------
NAME: ROBERT NEWTON
TITLE: VICE PRESIDENT
DATE: June 1, 1999
<PAGE>
EXECUTION COPY
SCHEDULE "A"
ARBITRATION RULES OF PROCEDURE
1.0 DISPUTES COVERED BY THESE RULES. The disputes to be covered by the
provisions of these Rules of Procedures (the "Rules") are those disputes
referred to in section 7.1 of the Agreement to which this Schedule "A" is
attached and which arise out of or relate to or are in connection with any of
the formation, interpretation, application, operation, and enforcement of the
Agreement.
1.1 EXCLUSIVE JURISDICTION. Subject to the provisions of Article 1.6
(Governing Law), it shall be a condition precedent to the bringing of any legal
proceedings with respect to the disputes referred to in Section 7.2
(Arbitration), that the settlement procedure provided for in these Rules shall
have been followed and completed.
1.2 APPOINTMENT OF ARBITRATION BOARD
(a) If any Party wishes to have any matter under this Agreement
arbitrated in accordance with the provisions of this Agreement,
it shall give notice ("Arbitration Notice") to the other Party
specifying particulars of the matter or matters in dispute and
proposing the name of its nominee.
(b) Arbitration shall be carried out by an Arbitration Board of three
persons. If the Parties agree in writing, the Arbitration Board
may be composed of a single arbitrator.
(c) The Parties will attempt in good faith to agree to a mutually
acceptable qualified Arbitration Board, that is willing to act,
but if the Parties are unable to do so within 15 days of the
giving of the Arbitration Notice, either Party may request the
applicable courts of the Province of Ontario to do so. Either
Party may request that such courts, before making such
appointment, consult with the President of the Computer Law
Association as to the identity of suitable nominees as
Arbitration Board.
(d) No member of the Arbitration Board may be a director, officer, an
employee or shareholder of either Party or of any affiliate or
associate of that Party or any associate of any such director,
officer, employee or shareholder or any other person who has a
direct financial interest in such Party or in any associate or
affiliate of such Party or of a director, officer, employee, or
shareholder of such Party or who has a direct financial interest
in the matter in dispute. The terms "associate" and "affiliate"
shall have the respective meanings ascribed to such terms by the
BUSINESS CORPORATIONS ACT (Ontario) on the date hereof.
(e) The expenses of the Arbitration Board shall be borne equally by
the Parties.
1.3 QUALIFICATIONS OF ARBITRATION BOARD. The Arbitration Board shall consist
of three individuals, one of which shall have not less than 10 years experience
as a licensed practicing lawyer, and one of which shall have not less than 10
years experience in or with the computer software industry. If the Arbitration
Board consists of only one person, as agreed by the Parties, then the sole
arbitrator shall have not less than 10 years experience in or with the computer
<PAGE>
-2-
software industry and must have acted as an arbitrator or mediator within the
previous 5 years. Without limiting the generality of the foregoing, the
Arbitration Board shall be at arm's length from both Parties and no member of
the Arbitration Board shall be a member of the audit or legal firm or firms
who advise either Party, nor shall he/she be a person who is otherwise
regularly retained by such Parties.
1.4 SUBMISSION OF WRITTEN STATEMENTS
(a) Within 20 days of the appointment of the Arbitration Board, the
Party initiating the arbitration (the "Claimant") shall send the
other Party (the "Respondent") a Statement of Claim setting out
in sufficient detail the facts and any contentions of law on
which it relies, and the relief that it claims.
(b) Within 20 days of the receipt of the Statement of Claim, the
Respondent shall send the Claimant a Statement of Defence stating
in sufficient detail which of the facts and contentions of law in
the Statement of Claim it admits or denies, on what grounds, and
on what other facts and contentions of law he relies.
(c) Within 20 days of receipt of the Statement of Defence, the
Claimant may send the Respondent a Statement of Reply.
(d) All Statements of Claim, Defence and Reply shall be accompanied
by copies (or, if they are especially voluminous, lists) of all
essential documents on which the Party concerned relies and which
have not previously been submitted by any Party, and (where
practicable) by any relevant samples.
(e) After submission of all the Statements, the Arbitration Board
will give directions for the further conduct of the arbitration.
1.5 MEETINGS AND HEARINGS
(a) The arbitration shall take place in the Municipality of
Metropolitan Toronto, Ontario or in such other place as the
Claimant and the Respondent shall agree upon in writing. The
arbitration shall be conducted in English unless otherwise agreed
by such Parties and the Arbitration Board. Subject to any
adjournments which the Arbitration Board allows, the final
hearing will be continued on successive working days until it is
concluded.
(b) All meetings and hearings will be in private unless the Parties
otherwise agree.
(c) Any Party may be represented at any meetings or hearings by legal
counsel.
(d) Each Party may examine, cross-examine and re-examine all
witnesses at the arbitration.
1.6 POWERS OF ARBITRATOR. By submitting a dispute to settlement under these
Rules, the Parties shall be taken to have conferred on the Arbitration Board the
following jurisdiction and powers, to be exercised by the Arbitration Board so
far as the relevant law allows, and in its absolute and unfettered discretion,
if the Arbitration Board shall judge it to be expedient for the
<PAGE>
-3-
purpose of ensuring the just, expeditious, economical and final determination
of the dispute. The Arbitration Board shall have jurisdiction to:
(a) determine any question of fact and law (including, in particular,
responsibility for the direct claims and the indemnification
claims provided for in the Agreement, as well as the quantum and
nature of the damages, loss, liability, expense or other subject
matter of the claim);
(b) determine any question as to its own jurisdiction;
(c) determine any question of good faith, dishonesty or fraud arising
in the dispute;
(d) order any Party to furnish such further details of the Party's
case, in fact or in law, as it may require;
(e) proceed notwithstanding the failure or refusal of any Party to
comply with these Rules or with its orders or directions, or to
attend any meeting or hearing, but only after giving that Party
written notice that it intends to do so;
(f) order the Parties to produce to the Arbitration Board, and to
each other for inspection, and to supply copies of, any documents
in their possession or power which it determines to be relevant.
Notwithstanding the foregoing, the Arbitration Board shall allow
discovery only to the extent of a single request for production
of documents; oral depositions or other discovery requests shall
not be permitted unless the Arbitration Board finds and informs
the Parties that denial of such requests would be manifestly
unjust;
(g) receive and take into account such written or oral evidence as it
shall determine to be relevant, whether or not strictly
admissible in law;
(h) hold meetings and hearings (at which the Parties may be
represented by legal counsel) and consider written and oral
evidence and make his/her award (including any interim award
considered necessary by the Arbitration Board, and the final
award) in Ontario, and, with the concurrence of the Parties
thereto, elsewhere; and
(i) make any other interim or final orders which it considers to be
appropriate in all the circumstances for any of the above
purposes.
In addition, the Arbitration Board shall have such further jurisdiction
and powers as may be allowed to it by the INTERNATIONAL COMMERCIAL
ARBITRATIONS ACT (Ontario), the Agreement, the specific submission
referred to herein, the Rules of the Institute and the arbitral laws of
any place in which it holds hearings or in which witnesses attend, and of
any place in which it gives any directions or makes any orders or any
award.
1.7 THE AWARD. The Arbitration Board shall include in its award an order as
to the payment of the costs of the proceedings and reasonable counsel fees
(including all applicable taxes under the relevant tax legislation), and,
subject to the discretion of the Arbitration Board, costs will follow success
unless, in the opinion of the Arbitration Board, there is a compelling reason to
depart from such result. Any Party ordered to pay costs may avail itself of any
procedure for the
<PAGE>
-4-
taxing of costs, provided, however, that the Parties specifically agreed that
the officer taxing such costs need not be bound by any statutory scale of
costs.
The Arbitration Board will make its decision in writing and, unless the Parties
otherwise agree, the Arbitration Board's reasons will be set out in the award.
The Arbitration Board will send such award to the Parties as soon as practicable
after the conclusion of the proceedings. The award shall be final and binding
on the Parties and shall not be subject to any appeal or review procedure
whatsoever, provided that the Arbitration Board followed the Rules in good
faith. The Arbitration Board shall reconsider its findings once at the request
and expense of a Party, but in such event shall limit the Parties to a single
memorandum stating any relevant new evidence, points and authorities, unless
doing so would be manifestly unjust.
1.8 ACCESS TO COURTS FOR ENFORCEMENT AND INTERIM REMEDIES. The Parties
consent to the award of the Arbitration Board being entered in any Court having
jurisdiction for the purposes of enforcement. In addition, if it appears to any
Party that the Arbitration Board lacks the power to give effective interim
relief, either Party may apply to any appropriate Court for such relief.
1.9 CONFIDENTIALITY. All meetings and hearings of or by the Arbitration
Board shall be in private. All matters in dispute, all claims, submissions,
evidence and findings, and the award itself (collectively, the "Information")
shall be kept confidential by the Arbitration Board, and no information
regarding any of the foregoing will be released to any third Party or otherwise
made public without the written consent of both Parties, except as otherwise
contemplated herein and except for information which is not Confidential
Information.
<PAGE>
CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY WITH
THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL
TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED.
SCHEDULE B
BANK OF AMERICA -- TECHNOLOGY LICENSE AGREEMENT
BANK OF AMERICA INITIAL LAUNCH
Bank of America intends to leverage the existing 724 Solutions
functionality to provide online banking services on the channels noted below.
As the functionality and channels are expanded by 724 Solutions, BofA expects
to implement these improvements, as they become available later in 1999.
DELIVERABLES (1)
The implementation approach for the first deliverable is to reuse
existing 724 Solutions functionality and limit the scope of changes to
presentation and data differences. The scope of changes will be identified by
724 Solutions, working in conjunction with BofA, and delivered to BofA as
indicated below.
<TABLE>
<CAPTION>
DELIVERABLE RESPONSIBLE PARTY DUE DATE
- --------------------------------------- ---------------------------------- --------
<S> <C> <C>
Detailed Functional Specification 724 Solutions with input from BofA ****
Detailed Customer Service Specification 724 Solutions with input from BofA ****
724 Solutions Project Team 724 Solutions ****
Interface Specification 724 Solutions with input from BofA ****
Client and Mid-Tier Software with 724 Solutions ****
Supporting Documentation
</TABLE>
CHANNELS (1)
In support of the initial 1999 launch of 724 Solutions' technology for
Bank of America, 724 Solutions will deliver supported functionality to the
following channels/devices:
- ****
- ****
- ****
- ****
One-way notification will also be supported to a range of devices,
including (but not necessarily limited to) ****.
SUPPORTED FUNCTIONALITY (1)
The scope of functionality is based on the Bank of Montreal function set
for their initial launch. Additional functionality may be implemented as
indicated below.
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
B-1
<PAGE>
**** CERTAIN PORTIONS OF THIS EXHIBIT HAVE BEEN OMITTED AND FILED SEPARATELY
WITH THE SECURITIES AND EXCHANGE COMMISSION PURSUANT TO A REQUEST FOR
CONFIDENTIAL TREATMENT UNDER RULE 406 OF THE SECURITIES ACT OF 1933, AS AMENDED.
724 SOLUTIONS 1999 DEVELOPMENT SCHEDULE
The functionality agreed to with the Bank of America for their initial
launch is described in the following table(1):
<TABLE>
<CAPTION>
FUNCTIONAL AREA FUNCTION EXCLUSIONS
- --------------- -------- ----------
<S> <C> <C> <C>
Sign-up and **** ****
Sign-on
Banking ****
**** ****
**** **** ****
</TABLE>
- ------------------------------
(1) Functionality implemented on a particular device or channel is subject to
the capabilities of the device or channel. Note that not all function is
available on all channels because of their restricted form factors and/or
usability concerns (a "--" in the table indicates that the function is
supported in all channels).
****
[****] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH THE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
B-2
<PAGE>
<TABLE>
<CAPTION>
FUNCTIONAL AREA FUNCTION EXCLUSIONS
- --------------- -------- ----------
<S> <C> <C> <C>
**** ****
**** **** ****
**** **** ****
****
****
Profile and **** ****
Persona
**** ****
**** --
****
Alerts **** ****
**** ****
Call Center **** ****
Support
**** ****
**** ****
</TABLE>
- ------------------------------
****
[****] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH THE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
B-3
<PAGE>
DELIVERABLES (2)
724 Solutions is planning a second release in 1999 (Bonus Pack) of
additional functions and enhancements based on feedback from the Bank of
Montreal and Bank of America product launches. The Bonus Pack scope will be
identified by 724 Solutions, working in conjunction with BofA and BMO, and
delivered to BofA as indicated below.
<TABLE>
<CAPTION>
DELIVERABLE RESPONSIBLE PARTY DUE DATE
- ----------- ----------------- --------
<S> <C> <C>
Detailed Functional Specification........................... 724 Solutions ****
Client and Mid-Tier Software with Supporting 724 Solutions ****
Documentation.............................................
</TABLE>
WEIGHTING OF DELIVERABLES FOR ACCEPTANCE TESTING HOLDBACK
Deliverable (1) Weighting: ****
Deliverable (2) Weighting: ****
SUMMARY
Other opportunities may be identified to leverage existing Bank of America
content and tools.
The content and timing of DELIVERABLES (1) + (2) are subject to change as
agreed by Bank of America and 724 Solutions.
[****] REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH THE
COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO RULE 406
UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
B-4
<PAGE>
SCHEDULE "C"
PRINCIPAL MILESTONES OF THE 2000 DEVELOPMENT PLAN
724 SOLUTIONS 2000 DEVELOPMENT AND R&D SCHEDULE
BANK OF AMERICA POST LAUNCH AND R&D
724 Solutions will extend the functionality implemented in the first
launch of 1999 in conjunction with conducting joint R&D with the Bank of
America, with the expectation that some of these efforts will result in new
releases commencing in the year 2000.
The priority assigned to the content of these releases, the direction
expected of R&D efforts, and the timing of both will be agreed to jointly by
724 Solutions and the Bank of America. Many of the items scoped by these
deliverables are forward-looking and are subject to:
- Market readiness (installed base and deployed infrastructure)
- Technology readiness; technologies on which the deliverables are
dependent must be sufficiently mature and generally available
The next two sections describe areas which 724 Solutions considers to be
important both from its own analyses as well as from feedback received during
introductory meetings already held between 724 Solutions and the Bank of
America.
DELIVERABLES (1)
This section describes the scope of the first deliverables of 724
Solutions' technology for the Bank of America in the year 2000. The date for
publication of - and agreement to - a functional specification addressing
these deliverables is TBD. The date of final delivery of the deliverables by
724 Solutions to the Bank of America is also TBD.
CHANNELS (1)
This first set of year 2000 deliverables will be targeted to support
functionality for the following channels/devices:
- ****
- ****
- ****
MODEL BANK ALIGNMENT
724 Solutions, under the direction of Bank of America, will develop a
product integration strategy to support the efforts of the Bank of America in
the area of its Model Bank. This strategy will require effort from both Bank
of America and the 724 Solutions implementation team. This will include:
- Interface with GCIF and Customer Profile as appropriate
- Interface with Contact History
- Access ID directory integration (PKI and PMI implications)
- Process integration (how will our solution support the re-engineered
Model Bank processes, and the people that constitute them)
FUNCTIONALITY (1)
The Bank of America has indicated that the scope of these deliverables
should include the following areas:
<TABLE>
<CAPTION>
FUNCTIONAL AREA FUNCTION
- --------------- --------
<S> <C>
Sign-up and Sign-on Inter-FI authentication
General FI aggregation
Enhanced Network-based PFM capability
Banking Bank account statment closing
****
Lifestyle The suite of lifestyle content supported by 724
Solutions' technology will be expanded.
Candidates may include (and are not necessarily
limited to)
****
Profile and Persona Persona and profile maintenance
****
Alerts ****
Call Center Support Enrollment
</TABLE>
The functionality will be delivered on CD in the form of object code
with supporting documentation.
DELIVERABLES (2)
This section describes the scope of the deliverables of 724 Solutions'
technology in the year 2000 subsequent to delivery of the first 2000
deliverables.
CHANNELS (2)
This second drop of 724 Solutions' technology deliverables will be
targeted to support functionality for the following channels/devices:
- *****
Further investigation of technology(s) required to support **** may also
be undertaken.
Strategy for providing support for legacy channels will be developed.
FUNCTIONALITY (1)
Each of the following areas is a candidate for the second release of
functionality in the year 2000 of the Bank of America:
<TABLE>
<CAPTION>
FUNCTIONAL AREA FUNCTION
- --------------- --------
<S> <C>
Sign-up and Sign-on ****
General ****
Brokerage ****
Brokerage - Extended ****
Lifestyle The suite of lifestyle content supported by 724
Solutions' technology will continue to be expanded
Profile and Persona ****
Alerts ****
</TABLE>
The functionality will be delivered on CD in the form of object code
with supporting documentation.
WEIGHTING OF DELIVERABLES FOR ACCEPTANCE TESTING HOLDBACK
Deliverable (1) Weighting: 50%
Deliverable (2) Weighting: 50%
The content and timing of DELIVERABLES(1) + (2) are
subject to change as agreed by Bank America and 724 Solutions.
[****]REPRESENTS MATERIAL WHICH HAS BEEN REDACTED AND SEPARATELY FILED WITH
THE COMMISSION PURSUANT TO A REQUEST FOR CONFIDENTIAL TREATMENT PURSUANT TO
RULE 406 UNDER THE SECURITIES ACT OF 1933, AS AMENDED.
C-1
<PAGE>
SUPPORT AGREEMENT
THIS AGREEMENT is made as of the 29th day of December, 1999,
AMONG:
724 SOLUTIONS INC., a corporation incorporated under
the laws of the Province of Ontario ("724 Solutions")
AND
724 SOLUTIONS INTERNATIONAL SRL, a corporation
incorporated under the laws of the Island of
Barbados, West Indies ("724SRL")
AND
CITICORP STRATEGIC TECHNOLOGY CORPORATION,
a corporation established under the laws of
Delaware ("Citicorp")
BACKGROUND:
1. 724 Solutions Corp. (the "Licensor"), an indirectly wholly-owned
subsidiary of 724 Solutions, and Citicorp have entered into a master
technology license agreement ("Master Agreement") of even date herewith.
2. 724 Solutions or its wholly-owned subsidiary 724 SRL own the 724
Technology. 724 SRL as owner or licensee (from 724 Solutions) of the 724
Technology, has granted the rights to the Licensor to enter into license
arrangements concerning the 724 Technology.
3. As an inducement to Citicorp to enter into, and in consideration of
Citicorp's agreement to enter into, the Master Agreement, 724 Solutions
and 724 SRL, have agreed to support the representations, warranties and
covenants of the Licensor as set forth in the Master Agreement, subject
to the restrictions and limitations therein set forth.
4. All capitalized terms used herein and not otherwise defined have the
meanings ascribed thereto in the Master Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants contained
herein and other good and valuable consideration (the receipt and sufficiency
which are hereby acknowledged), the parties hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES. 724 Solutions and 724 SRL hereby jointly
and severally represent and warrant to the Citicorp, subject to the
limitations, restrictions according to
<PAGE>
Sections 6.2, 6.3 and 6.4 of the Master Agreement, that the
representations of the Licensor as set forth in Section 6.1 of the
Master Agreement are accurate and complete.
2. OBLIGATIONS. Subject to the limitations and restrictions expressly set
forth in the Master Agreement, 724 Solutions and 724 SRL hereby (jointly
and severally) irrevocably and unconditionally guarantee the full and
timely performance by the Licensor of its obligations and covenants
under the Master Agreement, and 724 Solutions and 724 SRL shall each be
jointly and severally bound with the Licensor for the fulfillment of
such obligations and covenants.
3. INDEMNITY. 724 Solutions and 724 SRL hereby jointly and severally
indemnify Citicorp from and against all losses, costs (including,
without limitation, reasonable legal fees) and damages in respect of the
Master Agreement caused by actions or omissions of the Licensor. 724
Solutions and 724 SRL hereby waive any rights to require Citicorp to
proceed against the Licensor or to pursue any other remedy whatsoever
which may be available to Citicorp before proceeding against 724
Solutions or 724 SRL. 724 Solutions and 724 SRL shall not be discharged
or released from this guarantee or indemnity by any arrangement made
between the Licensor and Citicorp or by any alteration or waiver of the
obligations of the Licensor, whether or not the consent of 724 Solutions
and/or 724 SRL to such arrangement, alteration or waiver is obtained.
4. CORPORATE AUTHORITY. 724 Solutions and 724 SRL each represent and
warrants to Citicorp that it has corporate authority and that all
proceedings have been taken by it to make the above commitments and
execution and delivery of this Support Agreement by it legal and valid
and to constitute this agreement a binding obligation of 724 Solutions
or 724 SRL (as the case may be) enforceable against it against its terms.
5. GENERAL.
(a) No party may assign its rights under this Agreement without the
prior written consent of the others.
(b) This Agreement may be executed and delivered to several
counterparts.
(c) This Agreement shall be governed by the laws of the province of
Ontario, and the parties hereby attorn to the jurisdiction of
the courts of the province of Ontario.
IN WITNESS WHEREOF the persons below have executed this
agreement on the date first written above.
724 SOLUTIONS INC.
Per: /s/ Christopher Erickson
-----------------------------------
Name: Christopher Erickson
Title: President
<PAGE>
724 SOLUTIONS INTERNATIONAL SRL
Per: /s/ Christopher Erickson
-----------------------------------
Name: Christopher Erickson
Title: President
CITICORP STRATEGIC TECHNOLOGY
CORPORATION
Per: /s/ Gordon D. Treco
-----------------------------------
Name: Gordon D. Treco
Title: Vice President
<PAGE>
EXHIBIT 23.2
[MORRISON & FOERSTER LLP LETTERHEAD]
January 3, 2000
724 Solutions Inc.
4101 Yonge Street, Suite 702
Toronto, Ontario M2P 1N6
Re: REGISTRATION STATEMENT ON FORM F-1 (FILE NO. 333-90143)
Dear Ladies and Gentlemen:
Reference is made to the Registration Statement on Form F-1 filed by 724
Solutions Inc., an Ontario corporation (the "Company"), with the Securities
and Exchange Commission on November 2, 1999 (Registration No. 333-90143),
Amendment No. 1 thereto filed on December 15, 1999, and Amendment No. 2
thereto filed on the date hereof (collectively, the "Registration
Statement"), relating to the registration under the Securities Act of 1933,
as amended, of the Company's ordinary shares.
We consent to all references to us that appear in the Registration
Statement, the prospectus constituting a part thereof and any amendments or
supplements thereto.
Best regards,
/s/ Morrison & Foerster LLP
