<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
FORM 6-K
REPORT OF FOREIGN ISSUER
PURSUANT TO RULE 13a-16 OR 15d-16 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the month of May, 2000
724 SOLUTIONS INC.
4101 Yonge Street, Suite 702
Toronto, Ontario, Canada M2P 1N6
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual
reports under cover Form 20-F or Form 40-F
Form 20-F X Form 40-F
----------------- -----------------
Indicate by check mark whether the registrant by furnishing the
information contained in this Form is also thereby furnishing the
information to the Commission pursuant to Rule 12g3-2(b) under the
Securities Exchange Act of 1934
Yes No X
----------------- -----------------
If "Yes" is marked, indicate below the file number assigned to the
registrant in connection with Rule 12g3-2(b):
82- N.A.
-----------------
<PAGE>
724 SOLUTIONS INC.
Form 6-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Signatures 2
724 Solutions Inc. Annual Information Form for the Year Ended Exhibit 99.1
December 31, 1999
</TABLE>
1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
724 SOLUTIONS INC.
By: /s/ Karen Basian
------------------------------
Name: Karen Basian
Title: Chief Financial Officer
Date: May 23, 2000
------------
2
<PAGE>
724 SOLUTIONS INC.
ANNUAL INFORMATION FORM
FOR THE YEAR ENDED
DECEMBER 31, 1999
MAY 19, 2000
<PAGE>
TABLE OF CONTENTS
CORPORATE ORGANIZATION . . . . . . . . . . . . . . . . . . . . . . .1
SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . .1
BUSINESS OF THE CORPORATION. . . . . . . . . . . . . . . . . . . . .2
GENERAL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
RECENT DEVELOPMENTS . . . . . . . . . . . . . . . . . . . . . . . .3
INDUSTRY OVERVIEW . . . . . . . . . . . . . . . . . . . . . . . . .4
GROWTH OF THE INTERNET . . . . . . . . . . . . . . . . . . . . .4
GROWTH OF DIGITAL WIRELESS COMMUNICATIONS. . . . . . . . . . . .4
CONVERGENCE OF WIRELESS COMMUNICATIONS AND THE INTERNET. . . . .5
GROWTH OF E-COMMERCE . . . . . . . . . . . . . . . . . . . . . .5
GROWTH OF ON-LINE FINANCIAL SERVICES . . . . . . . . . . . . . .5
THE 724 SOLUTION. . . . . . . . . . . . . . . . . . . . . . . . . .6
BUSINESS STRATEGY . . . . . . . . . . . . . . . . . . . . . . . . .8
THE 724 SOLUTIONS FINANCIAL SERVICES PLATFORM . . . . . . . . . . 10
NETWORK AND DEVICE GATEWAY . . . . . . . . . . . . . . . . . . 10
SERVICES INFRASTRUCTURE. . . . . . . . . . . . . . . . . . . . 11
ADMINISTRATION . . . . . . . . . . . . . . . . . . . . . . . . 12
TRANSACTION AND CONTENT GATEWAY. . . . . . . . . . . . . . . . 12
SECURITY . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
APPLICATION SERVICE PROVIDER (ASP)/CONTACT CENTER SERVICES (CCS). 13
TECHNOLOGY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
THIRD PARTY REVENUES AND SALES. . . . . . . . . . . . . . . . . . 14
FINANCIAL INFORMATION RELATING TO PRODUCTS AND SERVICES . . . . . 14
SALES TO THIRD PARTY CUSTOMERS . . . . . . . . . . . . . . . . 15
GEOGRAPHIC INFORMATION . . . . . . . . . . . . . . . . . . . . 15
RESEARCH AND DEVELOPMENT. . . . . . . . . . . . . . . . . . . . . 16
SALES, MARKETING AND CUSTOMER SUPPORT . . . . . . . . . . . . . . 16
CUSTOMERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
BANK OF MONTREAL . . . . . . . . . . . . . . . . . . . . . . . 17
BANK OF AMERICA. . . . . . . . . . . . . . . . . . . . . . . . 17
CITIGROUP. . . . . . . . . . . . . . . . . . . . . . . . . . . 18
WELLS FARGO. . . . . . . . . . . . . . . . . . . . . . . . . . 18
CLARITYBANK.COM. . . . . . . . . . . . . . . . . . . . . . . . 18
STRATEGIC RELATIONSHIPS . . . . . . . . . . . . . . . . . . . . . 18
COMPETITION . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
INTELLECTUAL PROPERTY . . . . . . . . . . . . . . . . . . . . . . 20
EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
RISK FACTORS RELATED TO THE CORPORATION'S BUSINESS. . . . . . . . 21
HISTORY OF LOSSES AND EXPECTED LOSSES IN THE FUTURE. . . . . . 21
LIMITED OPERATING HISTORY. . . . . . . . . . . . . . . . . . . 21
RAPID GROWTH . . . . . . . . . . . . . . . . . . . . . . . . . 22
IMPLEMENTATION OF APPLICATION HOSTING SERVICE. . . . . . . . . 22
CUSTOMERS ACQUIRING AN EQUITY INTEREST IN THE CORPORATION. . . 22
LENGTHY AND COMPLEX SALES CYCLE. . . . . . . . . . . . . . . . 23
THE INTERNET AS A VIABLE COMMERCIAL MEDIUM . . . . . . . . . . 23
FAILURE TO ACHIEVE MARKET ACCEPTANCE . . . . . . . . . . . . . 23
CONSUMER USE OF SERVICES BASED ON THE CORPORATION'S SOLUTION . 23
DEPENDENCE ON THE SALE OF A SINGLE PRODUCT . . . . . . . . . . 24
RELIANCE ON SALES TO FINANCIAL INSTITUTIONS. . . . . . . . . . 24
<PAGE>
SHORT TERM LICENSE AGREEMENTS. . . . . . . . . . . . . . . . . 24
DIGITAL WIRELESS AND OTHER NETWORK SERVICE PROVIDERS . . . . . 25
TECHNOLOGY STANDARDS . . . . . . . . . . . . . . . . . . . . . 25
SECURITY BREACHES. . . . . . . . . . . . . . . . . . . . . . . 26
FUTURE ACQUISITIONS. . . . . . . . . . . . . . . . . . . . . . 26
COMPETITION. . . . . . . . . . . . . . . . . . . . . . . . . . 27
INTERNATIONAL OPERATIONS . . . . . . . . . . . . . . . . . . . 27
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES. . . . . . . . 28
MANAGEMENT AND OTHER QUALIFIED PERSONNEL . . . . . . . . . . . 28
DEFECTS OR ERRORS IN SOFTWARE. . . . . . . . . . . . . . . . . 28
PRODUCT LIABILITY CLAIMS . . . . . . . . . . . . . . . . . . . 28
PUBLIC KEY INFRASTRUCTURE. . . . . . . . . . . . . . . . . . . 29
ENCRYPTION TECHNOLOGY. . . . . . . . . . . . . . . . . . . . . 29
RELIANCE ON THIRD PARTY SOFTWARE, TECHNOLOGY AND CONTENT . . . 29
INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . 30
YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . 31
AVAILABILITY OF CAPITAL. . . . . . . . . . . . . . . . . . . . 31
TAX LIABILITY FOR SHAREHOLDERS . . . . . . . . . . . . . . . . 32
ABILITY TO ISSUE PREFERRED SHARES. . . . . . . . . . . . . . . 32
RISK FACTORS RELATED TO THE CORPORATION'S INDUSTRY. . . . . . . . 33
GROWTH OF THE INTERNET . . . . . . . . . . . . . . . . . . . . 33
GROWTH OF WIRELESS DATA SERVICES . . . . . . . . . . . . . . . 33
CONSUMER CONFIDENCE IN THE SECURITY OF ON-LINE FINANCIAL
TRANSACTIONS . . . . . . . . . . . . . . . . . . . . . . . . 33
GOVERNMENT REGULATIONS . . . . . . . . . . . . . . . . . . . . 34
RISK FACTORS RELATED TO OWNERSHIP AND TRADING MARKET. . . . . . . 34
CONCENTRATION OF SHARE OWNERSHIP . . . . . . . . . . . . . . . 34
VOLATILITY OF STOCK PRICE. . . . . . . . . . . . . . . . . . . 34
FUTURE SALES OF COMMON SHARES. . . . . . . . . . . . . . . . . 34
DESCRIPTION OF PROPERTY. . . . . . . . . . . . . . . . . . . . . . 35
LEGAL PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . . . . 35
CONTROL OF THE CORPORATION . . . . . . . . . . . . . . . . . . . . 36
NATURE OF THE TRADING MARKET . . . . . . . . . . . . . . . . . . . 37
GOVERNMENT REGULATION. . . . . . . . . . . . . . . . . . . . . . . 37
TAXATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
CERTAIN INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . 37
U.S. FEDERAL INCOME TAX CONSIDERATIONS. . . . . . . . . . . . . . 39
PASSIVE FOREIGN INVESTMENT COMPANIES . . . . . . . . . . . . . 40
CANADIAN FEDERAL INCOME TAX CONSIDERATIONS. . . . . . . . . . . . 42
SELECTED CONSOLIDATED FINANCIAL INFORMATION. . . . . . . . . . . . 43
SUMMARIZED FINANCIAL INFORMATION DATA . . . . . . . . . . . . . . 44
QUARTERLY SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . 44
DIVIDEND POLICY . . . . . . . . . . . . . . . . . . . . . . . . . 45
EXCHANGE RATES. . . . . . . . . . . . . . . . . . . . . . . . . . 45
MANAGEMENT'S DISCUSSION AND ANALYSIS . . . . . . . . . . . . . . . 45
DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . 45
COMPENSATION OF DIRECTORS AND OFFICERS . . . . . . . . . . . . . . 49
<PAGE>
OPTIONS TO PURCHASE SECURITIES FROM THE CORPORATION. . . . . . . . 49
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS . . . . . . . . . . 49
DESCRIPTION OF CAPITAL STOCK . . . . . . . . . . . . . . . . . . . 50
AUTHORIZED AND ISSUED SHARE CAPITAL . . . . . . . . . . . . . . . 50
COMMON SHARES . . . . . . . . . . . . . . . . . . . . . . . . . . 50
PREFERRED SHARES. . . . . . . . . . . . . . . . . . . . . . . . . 50
REGISTRAR AND TRANSFER AGENTS . . . . . . . . . . . . . . . . . . 50
CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS . . . . . . . . . . . . . . . . . 50
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . 51
ALL DOLLAR AMOUNTS REFERRED TO IN THIS DOCUMENT ARE REFERENCES TO U.S.
DOLLARS UNLESS OTHERWISE STATED.
STATEMENTS UNDER "BUSINESS OF THE CORPORATION", "RISK FACTORS",
"MANAGEMENT'S DISCUSSION AND ANALYSIS" AND ELSEWHERE IN THIS DOCUMENT
(INCLUDING STATEMENTS INCORPORATED BY REFERENCE) ABOUT THE CORPORATION'S
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
THE CORPORATION'S FORWARD-LOOKING STATEMENTS. THESE FACTORS INCLUDE, AMONG
OTHERS, THOSE LISTED UNDER "RISK FACTORS" OR DESCRIBED ELSEWHERE IN THIS FORM.
IN SOME CASES, FORWARD-LOOKING STATEMENTS CAN BE IDENTIFIED BY THE 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 THE CORPORATION BELIEVES THAT THE EXPECTATIONS REFLECTED IN
ITS FORWARD-LOOKING STATEMENTS ARE REASONABLE, THE CORPORATION CANNOT
GUARANTEE FUTURE RESULTS, LEVELS OF ACTIVITY, PERFORMANCE OR ACHIEVEMENTS OR
OTHER FUTURE EVENTS. THE CORPORATION IS UNDER NO DUTY TO UPDATE ANY OF ITS
FORWARD-LOOKING STATEMENTS AFTER THE DATE OF THIS DOCUMENT, OTHER THAN AS
REQUIRED BY LAW. UNDUE RELIANCE SHOULD NOT BE PLACED ON FORWARD-LOOKING
STATEMENTS.
<PAGE>
ANNUAL INFORMATION FORM
(Information as at December 31, 1999, unless otherwise indicated)
724 SOLUTIONS INC.
CORPORATE ORGANIZATION
724 Solutions Inc. (the "Corporation") was incorporated under the
BUSINESS CORPORATIONS ACT (Ontario) on July 28, 1997. Pursuant to Articles
of Amalgamation dated July 7, 1999, the Corporation 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 Corporation effected a 2 for 1 split of its common shares. Pursuant to
Articles of Amendment dated January 27, 2000, the Corporation removed the
private company restrictions and revised the rights, privileges, and
conditions attaching to the preference shares.
The registered and principal office of the Corporation is located at
4101 Yonge Street, Suite 702, Toronto, Ontario, M2P 1N6.
In this document, unless the context otherwise requires, references to
the "Corporation" include 724 Solutions Inc., together with its wholly-owned
subsidiaries.
IN THIS DOCUMENT, UNLESS OTHERWISE SPECIFICALLY STATED, ALL
INFORMATION IS AS AT DECEMBER 31, 1999 AND ALL DOLLAR AMOUNTS ARE REFERENCES
TO U.S. DOLLARS.
SUBSIDIARIES
The Corporation also carries on its business through six wholly-owned
subsidiaries.
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION,
CONTINUANCE OR PERCENTAGE OF VOTING SHARES PERCENTAGE OF NON-VOTING
CORPORATION ORGANIZATION HELD OR CONTROLLED SHARES HELD
-------------------------------------- --------------------- --------------------------- ------------------------
<S> <C> <C> <C>
724 Solutions International SRL Barbados 100% N/A
724 Solutions Corp. Delaware 100% N/A
724 Solutions (UK) Limited United Kingdom 100% N/A
724 Solutions SRL Holdco Inc. Ontario 100% N/A
YRless Internet Corporation (as of Canada 100% N/A
March 2000)
Sapphire Merger Sub, Inc. (as of March California 100% N/A
2000)
</TABLE>
<PAGE>
-2-
BUSINESS OF THE CORPORATION
GENERAL
The Corporation 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 Corporation currently provides such
an Internet infrastructure solution to financial institutions, which 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. The Corporation's 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. The Corporation's customers are now
in the initial phases of offering e-commerce services based upon the 724
Solutions Financial Services Platform (the "724 Solutions FSP"). With
critical security features built in, the Corporation's solution can be
quickly implemented and integrated with existing systems, and scaled or
expanded to accommodate future growth. As an example, on April 5, 2000,
Indigo Books and Music, Inc. (a books, music and gifts retail company) became
the first Canadian retailer to offer wireless e-commerce in collaboration
with Bank of Montreal and Bell Mobility. Customers can access Indigo.ca
wireless through "Veev", the wireless service offered by Bank of Montreal
using the Corporation's software. Using the 724 Solutions FSP, financial
institutions may build on their customers' trust and provide new levels of
service in an easy to use, personalized manner. The Corporation's 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, the Corporation was in a
development phase, conducting research and developing its product. In May
1999, the Corporation launched its 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 from May through
December 1999, the Corporation filled key management positions in its sales
and marketing departments, attracted Bank of America, Citigroup Inc. and
Sonera Corporation as additional investors, entered into license agreements
with Bank of America, Wells Fargo and Citigroup and continued to develop its
product. Since December 31, 1999, the Corporation has entered into a license
agreement with a Citigroup affiliate to provide services in Asia pursuant to
its license agreement with Citicorp Strategic Technology Corporation and has
entered into a license agreement with Claritybank.com.
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
the 724 Solutions FSP, financial institutions can differentiate their
services to retain and strengthen their existing customer relationships and
attract new customers.
<PAGE>
-3-
The Corporation's objective is to become the leading provider of
Internet infrastructure solutions for the secure delivery of transaction and
information services to consumers. The Corporation's target market includes
the largest financial institutions worldwide. Bank of America, Citigroup,
Bank of Montreal, Wells Fargo and Claritybank.com are in various stages of
implementing the Corporation's software.
RECENT DEVELOPMENTS
The Corporation completed an initial public offering of 6,000,000 common
shares at a price of Cdn. $37.31 per share (U.S. $26.00 per share) pursuant
to a prospectus dated January 27, 2000, which closed on February 2, 2000.
The Corporation granted an over-allotment to its underwriters to purchase a
maximum of 900,000 additional common shares on the same terms, which was
exercised in full on February 2, 2000. The aggregate proceeds raised by the
Corporation amounted to Cdn. $259.2 million (Cdn. $241.0 million net of
underwriters' fees). For further information regarding the underwriters and
their fees, see "Interest of Insiders in Material Transactions" on page 29 of
the Corporation's Management Information Circular dated April 25, 2000 and
filed in connection with the annual and special meeting of shareholders to be
held on May 31, 2000, and which is incorporated by reference herein. This
circular was also filed as an exhibit to the Corporation's Report on Form
6-K, which was filed with the Securities and Exchange Commission on May 3,
2000, and is also incorporated by reference herein.
In February and March 2000, the Corporation announced a number of key
commercial relationships, including those described below.
Motorola is working with the Corporation to develop wireless financial
solutions to help meet the growing demand for secure financial transactions.
The Corporation expects that Motorola will help enable the Corporation to
deploy its financial software applications in a variety of Internet-enabled
Motorola wireless devices, expanding the customer reach of financial
institutions working with the Corporation. The Corporation also plans to
work with Motorola to identify and create solutions that meet the ongoing
needs of financial institutions and network operators.
Ericsson is working with the Corporation to create a mobile e-commerce
solution based on the 724 Solutions FSP. The Corporation expects to
collaborate with Ericsson on devices, wireless infrastructure and standards,
and secure payments between financial institutions, merchants and consumers.
The Corporation expects that this relationship will enable it to provide
speed to market and a complete solution for financial institutions' mobile
e-commerce needs.
Baltimore Technologies, a leader in wireless e-security solutions,
announced the unveiling of a new partner program to extend e-security to
mobile transactions. The Corporation has joined the Telepathy initiative
that Baltimore has established to provide its partners and customers with
wireless e-security solutions, accelerating the adoption of mobile commerce
worldwide. This relationship reinforces the Corporation's goal of working
with advanced software security providers to ensure the integrity of the 724
Solutions FSP.
<PAGE>
-4-
The Corporation is in the process of establishing its application
hosting services, and has chosen Exodus Communications, a leader in complex
Internet hosting and managed services, to host the Corporation's Internet
operations. By working with Exodus, the Corporation will be able to offer
customers the advantage of a speedier time-to-market and increased
cost-effectiveness by reducing or eliminating the complexity of setting up
the host environment for the 724 Solutions FSP.
The Corporation has entered into an agreement with MasterCard
International to develop and deliver global infrastructure software solutions
for conducting payment transactions using mobile phones, personal digital
assistants (PDAs) and other Internet-enabled devices. With the development
of these technologies, MasterCard's member financial institutions worldwide
will be able to use the Corporation's technology to extend highly secure
payment capabilities to customers who can make purchases or pay bills using
wireless devices.
The Corporation has entered into an agreement to acquire ezlogin.com,
Inc., a leading provider of internet infrastructure tools for user-driven
personalization. The acquisition is subject to customary closing conditions,
and if those conditions are satisfied, the acquisition is likely to be
completed by the end of the second quarter of 2000. On closing, the
Corporation will acquire ezlogin.com in exchange for approximately 888,934 of
the Corporation's common shares (or stock options to acquire such shares).
In March 2000, the Corporation acquired Internet messaging gateway
developer YRless Internet Corporation of Oakville, Ontario. The Corporation
expects that YRless' software will help speed-up development of the 724
Solutions FSP. The aggregate purchase consideration is approximately
U.S.$5.8 million, payable over three years. YRless developed the YMG-2000 -
a fully scalable, platform-independent short messaging service (SMS) gateway
for wireless carriers. The YMG-2000 product is licensed by Bell Mobility,
Telus Mobility, and U.S. satellite network provider ORBCOMM Global.
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. The
Corporation believes 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
<PAGE>
-5-
digital assistants such as PalmPilot connected organizers, Handspring Visor,
"Pocket PC" organizers and mobile phones such as the Neopoint 1000, Qualcomm
2700, Ericsson R320, Nokia 7110 and Motorola Timeport, as well as two-way
pagers, such as those developed by Research In Motion and Motorola.
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.
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. The Corporation expects 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 the Corporation believes
will help 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. The Corporation expects 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. The Corporation expects 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 $11.1 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
<PAGE>
-6-
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. The Corporation believes that the increasing
popularity of new Internet-enabled devices will help 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 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
The Corporation provides 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, two-way paging devices and personal digital assistants.
The Corporation's initial focus is on providing a 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. The Corporation's
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.
The 724 Solutions FSP 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.
<PAGE>
-7-
724 SOLUTIONS FINANCIAL SERVICES PLATFORM
- - -------- ---------- ---------------------------------------- ------------
|| || | | || MERCHANTS |
|| || NETWORK | |TRANSACTION | ------------
CONSUMER|| ACCESS || AND | SERVICES | AND | ------------
DEVICES ||PROVIDERS || DEVICE | INFRASTRUCTURE | CONTENT || FINANCIAL |
|| || GATEWAY | | GATEWAY ||INSTITUTIONS|
|| || | | | ------------
|| ||----------------------------------------| ------------
|| || ADMINISTRATION || CONTENT |
- - -------- ---------- ---------------------------------------- ------------
|
-----------
| DATA |
| WAREHOUSE |
-----------
------------------------------------------------------
SECURITY
------------------------------------------------------
The 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. The 724 Solutions FSP 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.
- 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. The Corporation's solution is compatible with
existing security technology used by financial institutions and
wireless and other network service providers.
The Corporation believes that its solution will enable financial
institutions to maintain and deepen consumer relationships and accelerate the
adoption of Internet-based financial
<PAGE>
-8-
services. The Corporation's 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 the
Corporation's solution include:
- SPEED TO MARKET: Launched in May 1999, the Corporation's solution
can be rapidly installed, branded and offered to consumers.
- EASE OF INTEGRATION WITH EXISTING SYSTEMS: The 724 Solutions FSP
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 the 724 Solutions FSP
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: The 724 Solutions FSP is designed
to add users efficiently and effectively. The Corporation
believes that the 724 Solutions FSP 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: The 724 Solutions FSP 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: The Corporation's
solution allows financial institutions to connect directly with
consumers wherever they can obtain wired or wireless Internet
access. The 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 the Corporation's customers with a competitive
advantage in building consumer loyalty through the delivery of
value-added services.
The Corporation believes that its solution benefits its customers and
the companies with which it has 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.
BUSINESS STRATEGY
The Corporation's 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. Its strategy is to:
<PAGE>
-9-
FOCUS ON LARGE FINANCIAL INSTITUTIONS: The Corporation's initial
focus is on providing its solution to large financial institutions worldwide,
particularly banks and brokerage firms. The Corporation believes that large
financial institutions have both the scale and global consumer base to
maximize the adoption of services based on its product. Bank of Montreal,
Bank of America, Citigroup, Wells Fargo and Claritybank.com are in various
stages of implementing the Corporation's solution. The Corporation believes
that the trust relationship these institutions have with consumers, combined
with its secure payment infrastructure, will accelerate consumer adoption of
on-line financial services and e-commerce transactions.
ACCELERATE WORLDWIDE ADOPTION OF SOLUTION: In an effort to encourage
rapid deployment of the Corporation's solution by financial institutions, the
Corporation is:
- 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 Service Provider hosting service
for the Corporation's customers, which will allow for quick
delivery of services to their customers, as well as a managed
contact center service, which will help ensure a rich initial
consumer experience; and
- Reducing its customers' initial cost of using its solution by
charging a variable license fee based on the number of users per
month, subject to specific minimum fees.
EXPAND PLATFORM: The Corporation's architecture is designed to be
extendable, enabling its customers to continue to offer additional on-line
services across a variety of protocols, operating systems, networks and
devices to maximize consumer reach. The Corporation expects to further
expand its reach by supporting additional devices and broadening its
functionality by introducing new applications, content and services. For
example, the Corporation plans to integrate into its 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. The Corporation believes that this security
feature is essential for the widespread adoption of e-commerce transactions.
Additionally, the Corporation has established its Advanced Technology Center
(ATC) to, among other things, gain early access to device, wireless and
network technologies.
PURSUE SELECTIVE ACQUISITIONS TO EXPAND CAPABILITIES: The Corporation
intends to pursue acquisitions of companies and technologies that it believes
will allow it to quickly increase the scale and scope of its operations, such
as expanding its research and development team, expanding into new
geographical markets or industry sectors and providing new services.
DEVELOP APPLICATIONS FOR OTHER SECTORS: Once the Corporation has
established a significant presence in the financial services sector, it
expects to use many of the components of its architecture in other industries
such as insurance, sales force management and logistics.
<PAGE>
-10-
THE 724 SOLUTIONS FINANCIAL SERVICES PLATFORM
The 724 Solutions FSP 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. The 724
Solutions FSP 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.
The 724 Solutions FSP architecture is illustrated below:
---------------------------------------------------------------------------
| | SERVICES INFRASTRUCTURE | |
| | | |
| | CONSUMER APPLICATIONS | TRANSACTION |
| NETWORK AND | | AND |
| DEVICE | BANKING, BROKERAGE, E-COMMERCE | CONTENT |
| GATEWAY |------------------------------------| GATEWAY |
| | PERSONALIZATION | |
| |------------------------------------| |
| | NOTIFICATION AND ALERTS | |
| |------------------------------------| |
| | TARGETED MARKETING SERVICES | |
| |------------------------------------| |
| | SESSION MANAGEMENT | |
---------------------------------------------------------------------------
| |
| ADMINISTRATION |
| |
- - ----------------------------------------------------------------------------
|
-----------------
| DATA |
| WAREHOUSE |
-----------------
------------------------------------------------------
SECURITY
------------------------------------------------------
NETWORK AND DEVICE GATEWAY
The network gateway transforms data from the 724 Solutions FSP 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 the Corporation's
customers to quickly deploy their services through multiple network service
providers and allows for new protocols to be supported without changes to the
architecture.
<PAGE>
-11-
The device gateway supports the presentation of the Corporation's
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. The Corporation's 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 the Corporation's customers to deliver services over many types of
access devices, and allows new devices to be supported without changes to the
Corporation's architecture. The network and device gateway ensures consumers
receive a consistent and user-friendly experience regardless of the device
used.
SERVICES INFRASTRUCTURE
CONSUMER APPLICATIONS. The 724 Solutions FSP enables the delivery of
applications that include the following:
BANKING BROKERAGE
- account information and statements - investment statements
- credit card statements - holdings and activities
- intra-bank transfers - balances and open orders
- bill payment - order placement and
- bill presentment* confirmation*
SECURITY ANALYSIS INFORMATIONAL
- trading data and charting - news
- detailed stock quotes - weather
- watchlists - horoscopes
- alerts - lottery results
E-COMMERCE
- direct purchase and payment
- travel services*
- - ---------------
* EXPECTED TO BE OFFERED BY THE CORPORATION'S CUSTOMERS DURING 2000.
These applications are designed to be easy to use by consumers and
provide functions that can be quickly delivered to market.
PERSONALIZATION. The Corporation's 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
<PAGE>
-12-
consumer on one device will automatically be reflected on all other devices
used by that consumer.
NOTIFICATION AND ALERTS. The 724 Solutions FSP allows consumers to be
notified immediately of specific events such as stock price movements or
releases of relevant research. In the future, the Corporation expects that
its 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. The Corporation's
targeted marketing service allows the distribution of information directly to
their consumers with personalized messages or services based on their
preferences.
SESSION MANAGEMENT. The 724 Solutions FSP'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 login process or previous entries.
ADMINISTRATION
The administration function allows the 724 Solutions FSP 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 the 724 Solutions FSP to be monitored as part of a financial
institution's overall computing environment. The Corporation provides a feed
into a data warehouse of all transactions recorded by the system.
TRANSACTION AND CONTENT GATEWAY
The 724 Solutions FSP 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 the Corporation's
system through an XML interface. This gateway allows customers to quickly and
easily connect to the 724 Solutions FSP and to extend the value of their
existing systems.
SECURITY
The Corporation's 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
<PAGE>
-13-
user identification and authentication. The Corporation's 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. The corporation is currently
working to incorporate Public Key Infrastructure (PKI) technology into its
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.
APPLICATION SERVICE PROVIDER (ASP)/CONTACT CENTER SERVICES (CCS)
The Corporation is establishing an application hosting service to host
and manage the server infrastructure and software platform for its customers
and plans to offer Contact Center Services for customers and consumer users
of the application.
The application hosting facilities will support the scalability of the
724 Solutions FSP. The Corporation expects to provide these services
worldwide, with facilities based in Europe, Asia and North America. The
Corporation may acquire or partner with third parties to provide this
service. The Corporation may also provide this service by establishing
application hosting facilities of its own or through a combination of
application hosting facilities requested by its customers or potential
customers. The Corporation has recently chosen Exodus Communications Inc., a
leader in complex Internet hosting and managed services, to host its Internet
operations. By working with Exodus, the Corporation will accelerate the
time-to-market for customers who choose to outsource the task of hosting and
managing its solution. The first customer to be hosted by 724 Solutions' ASP
is expected to be online in June of 2000. The Corporation expects that the
services provided by Exodus will be used to host additional customers before
August 2000.
The CCS will provide a starter service for its customers' contact
centers and a managed contact center service. Through each of these
services, the Corporation will provide the customer access to the 724
Solutions FSP and the training required to support and use the 724 Solutions
FSP. The purpose of the CCS will be to ensure a consistent and satisfactory
consumer experience when using the services based on the 724 Solutions FSP,
particularly during the early phases of these services.
TECHNOLOGY
The Corporation's open-architecture platform communicates with its
customers' systems via an industry standard called Open Financial Exchange
(OFX) gateway. The 724 Solutions FSP supports connectivity with Windows NT,
the Internet, and database servers compliant with Open Database Connectivity
(ODBC), a standard protocol for accessing database servers. The
<PAGE>
-14-
Corporation is enhancing the 724 Solutions FSP 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. The Corporation's open architecture allows it to
rapidly integrate a wide range of new technologies, in order to enhance the
functionality and reliability of its solution.
The Corporation's architecture complies with Common Object Request
Broker Architecture (CORBA), a standard for application software design used
widely in the software industry. The Corporation also uses other widely
accepted standards in developing its 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 primary data protocol used
for Internet communications; and
- Simple Mail Transport Protocol (SMTP), a standard protocol for
e-mail transmissions among different types of systems.
The Corporation is a 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.
The Corporation's programs are written in C++ and Java, widely
accepted standard programming languages for developing object-oriented
applications. The Corporation also makes extensive use in its software
applications of Extensible Markup Language (XML), which was completed by the
World Wide Web consortium in 1998.
THIRD PARTY REVENUES AND SALES
Total revenues from third party customers was $491,000 (representing
software development revenue of $1,678,000, net of stock-based compensation
related to software revenue of $1,395,000, plus services revenue of $208,000)
for the year ended December 31, 1998 and $1,222,000 (representing software
development revenue of $1,697,000, net of stock-based compensation related to
software revenue of $1,644,000, plus services revenue of $1,169,000) for the
year ended December 31, 1999.
FINANCIAL INFORMATION RELATING TO PRODUCTS AND SERVICES
The Corporation's primary focus is to 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. The
<PAGE>
-15-
following table sets forth, for each category of product or service, the
amount of revenues received by the Corporation from third parties during the
three previous fiscal years:
SALES TO THIRD PARTY CUSTOMERS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
PRODUCT OR SERVICE DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
- - ------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C>
Product License Fees NIL $283,000(1) $53,000(3)
Services NIL $208,000(2) $1,169,000(4)
</TABLE>
Notes:
1. This sum represents software development revenue of $1,678,000, net of
stock-based compensation related to software revenue of $1,395,000. This
sum also represents 58% of the Corporation's total consolidated revenues
for all segments for the applicable fiscal year.
2. This sum represents 42% of the Corporation's total consolidated revenues
for all segments for the applicable fiscal year.
3. This sum represents software development revenue of $1,697,000, net of
stock-based compensation related to software revenue of $1,644,000.
4. This sum represents 96% of the Corporation's total consolidated revenues
for all segments for the applicable fiscal year.
For the year ended December 31, 1998, 100% of all sales made by the
Corporation were made in Canada and 100% of the Corporation's revenues were
derived from sales to one customer. For the year ended December 31, 1999,
after adjusting for stock-based compensation relating to software
development, 93% of all sales made by the Corporation were made in the United
States and 100% of the Corporation's revenues were derived from sales to
three customers.
The following table breaks down the total sales by category of product
or service, and into geographic markets.
GEOGRAPHIC INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
PRODUCT OR SERVICE GEOGRAPHIC MARKET DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
- - ------------------ ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Product License Fees Canada NIL $283,000(1) $53,000(2)
United States NIL NIL NIL
Services Canada NIL $208,000 $34,000
United States NIL NIL $1,135,000
</TABLE>
Notes:
1. This sum represents software development revenue of $1,678,000, net of
stock-based compensation related to software revenue of $1,395,000.
2. This sum represents software development revenue of $1,697,000, net of
stock-based compensation related to software revenue of $1,644,000.
<PAGE>
-16-
RESEARCH AND DEVELOPMENT
As of December 31, 1999, the Corporation's Research and Development
Department consisted of 103 people in four business units: Program
Management, Product Definition, Architecture and Product Development. These
units are responsible for assessing new technologies, new release schedules,
product architecture, security, performance engineering, product
requirements, quality assurance and product support.
The Corporation's research and development expenditures were $44,000
in the period from July 28, 1997 (inception) to December 31, 1997, $2.3
million for the year ended December 31, 1998 and $7.5 million for the year
ended December 31, 1999.
In August 1999, the Corporation established the Advanced Technology
Center (ATC) as part of its architecture group. The ATC is primarily a
research center focussed 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 the Corporation's
products and services, expedite deployment to the Corporation's customers and
create mutually beneficial relationships with customers, network service
providers and device manufacturers. As of December 31, 1999, the ATC
employed 11 individuals with expertise in specialized areas such as carrier,
database and encryption technologies. To reflect the importance of the ATC
in its research and development process, the Corporation plans to increase
the size of this group.
In July 1999, the Corporation established the Performance Engineering
Group (PEG), a group within its architecture group. The objective of PEG is
to establish benchmarks for the Corporation's technology, to recommend and
validate reference architectures and to provide feedback to the architecture
and product groups. The Corporation invests heavily in performance
engineering to ensure that its solution will be scalable for large numbers of
users and transaction volumes.
SALES, MARKETING AND CUSTOMER SUPPORT
As of December 31, 1999, the Corporation employed 20 people in sales
in North America, Europe and Asia Pacific. In addition, as of December 31,
1999, the Corporation employed eight people in its marketing department. The
Corporation intends to hire additional people as it expands its Toronto sales
team and establishes teams in New York, San Francisco, the U.K., continental
Europe and the Asia Pacific region. The Corporation's sales employees
receive incentive compensation based on individual sales volume. Deloitte &
Touche, through a strategic relationship, assists the Corporation in selling
and in implementing its solution directly to large financial institutions
worldwide.
The Corporation offers its customers consulting services regarding the
installation and deployment of its platform, as well as ongoing product
support. Services offered during installation include training,
configuration, and connectivity to existing systems. The Corporation
believes that its 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 its product.
<PAGE>
-17-
Customers have the option of implementing the Corporation's solution
using the customers' in-house personnel or using personnel provided by one of
the Corporation's designated third party service providers. The Corporation
brings together and coordinates the technology and resources needed to deliver a
single solution to customers who do not wish to use their in-house resources to
implement its solution.
CUSTOMERS
The Corporation currently markets its product and services to large
financial institutions such as banks and brokerages. Bank of Montreal, Bank of
America, Citigroup, Wells Fargo and Claritybank.com are in various stages of
implementing the Corporation's 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, the 724 Solutions FSP 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. The
Veev service is now generally available to customers in Ontario and Bank of
Montreal is currently in the process of rolling out the Veev service throughout
Canada. In November 1999, Bank of Montreal commenced a trial of on-line
securities trading using the Veev service for customers of Investorline, its
discount brokerage service.
In December 1999, Harris Bank, a U.S. subsidiary of Bank of Montreal,
commenced a trial of the Veev service with internal users and announced its
plans to commence a market trial of an on-line service based upon the
Corporation's solution to customers in the Chicago, Illinois area. Harris Bank
commenced this market trial by way of a controlled launch of the Veev service to
a limited number of its customers in March 2000.
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 two 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 the Corporation's solution
during 2000.
<PAGE>
-18-
CITIGROUP
Citigroup is a diversified holding company whose businesses provide a
broad range of financial services to consumer and corporate customers
worldwide. As of September 30, 1999, Citigroup had approximately $687.5
billion in total assets and 100 million customer relationships with consumer
operations in more than 50 countries.
In August 1999, Citigroup announced its intention to implement the
Corporation's solution worldwide under the leadership of its e-Citi division.
In December 1999, the Corporation entered into a master technology license
agreement with Citicorp Strategic Technology Corporation, a subsidiary of
Citigroup, which will enable the Corporation to license its technology to
Citigroup's subsidiaries. To date, the Corporation has entered into an
agreement under the master technology license agreement with a Citigroup
affiliate in Asia. The Corporation also expects to enter into one or more
additional agreements with a number of Citigroup's other subsidiaries
worldwide, including Citibank and Salomon Smith Barney Inc., to deliver its
solution to their customers.
WELLS FARGO
Wells Fargo is a diversified financial services company providing
banking, insurance, investments, mortgage and consumer products and services.
As of September 30, 1999, Wells Fargo had $203 billion in assets and
approximately 15 million customers.
In September 1999, Wells Fargo entered into a licensing agreement with
the Corporation that will enable it to begin to deliver on-line banking
services to its customers during 2000.
CLARITYBANK.COM
Claritybank.com, a subsidiary of Clarity Holdings, Inc., is an
exclusively online bank established in 2000 to provide real-time,
next-generation financial services to businesses and consumers.
Claritybank.com is one of the first national banks planning to offer wireless
service to its entire customer base. In March 2000, the Corporation entered
into an agreement to license its solution to Claritybank.com.
STRATEGIC RELATIONSHIPS
The Corporation is establishing worldwide relationships with wireless and
other network service providers, device manufacturers, technology companies and
content providers to facilitate the adoption of its customers' on-line products
and services. The Corporation anticipates that some of these relationships will
lead to formal arrangements in which the Corporation will incorporate new
technologies into the 724 Solutions FSP, or in which the Corporation will adapt
its solution to support new types of devices. Through strategic relationships,
the Corporation is able to gain technological leadership, worldwide access and
positioning and an early awareness of emerging Internet technologies. The
Corporation's participation in the development of these technologies at an early
stage gives it a competitive advantage to bring new products and services to its
customers. The Corporation is working with network service providers such as
Bell Mobility and Sprint; device manufacturers such as 3Com,
<PAGE>
-19-
Ericsson, Motorola, Neopoint, Nokia, Qualcomm and Research In Motion;
software and technology companies such as Baltimore Technologies, Certicom
and Sun Microsystems; financial services firms, such as MasterCard;
channel/distribution partners such as Corillian Corporation and CrossMar,
Inc. and system integrators such as Deloitte & Touche. The Corporation
believes that its 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.
COMPETITION
The market for the Corporation's 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 those of the Corporation. The Corporation believes that it
will compete primarily on the basis of the quality, functionality and ease of
integration of its product, as well as the price of its services. As a provider
of a comprehensive Internet solution to financial institutions, the Corporation
assesses potential competitors based primarily on their management,
functionality and range of services, the security and scalability of their
architecture, their client base and geographic focus and their capitalization
and other resources.
The Corporation's 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
<PAGE>
-20-
IDO in Japan, SingTel, MobileOne and StarHub 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, 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.
INTELLECTUAL PROPERTY
The Corporation protects its proprietary technology through a combination
of contractual confidentiality provisions, trade secrets, and patent, copyright
and trademark laws. The Corporation has applied for patents and for
registration of several trademarks, including "724 Solutions", "724 Solutions &
Arrows Design", "724 Solutions Financial Services Platform", "Tellmewhen",
"Tellmewhen.com", "Secureofx", "Poet", and "E-Anywhere" in Canada and "724
Solutions", "724 Solutions & Design", "Dimecuando" and "Dimecuando.com" in the
United States. The Corporation has also applied for registration of the
trademark "724 Solutions" in the United Kingdom, Japan and Australia. To date,
none of these patents have been issued and none of these trademarks have been
registered. There can be no assurance that the confidentiality provisions in
the Corporation's contracts will be adequate to prevent the infringement or
misappropriation of the Corporation's copyrights, pending patents, trademarks
and other proprietary rights. There can be no assurance that independent third
parties will not develop competing technologies, or reverse engineer the
Corporation's trade secrets, software or other technology. Moreover, the laws
of some foreign countries may not protect the Corporation's proprietary rights
to the same extent as do the laws of Canada and the United States. Therefore,
the measures taken by the Corporation may not adequately protect its proprietary
rights.
The Corporation relies heavily on technology and other intellectual
property licensed to it by third parties. For example, the Corporation has
entered into license agreements with Certicom and Consensus for use of their
encryption technology. In addition, the Corporation uses certain third party
software that may not be available to the Corporation on commercially
<PAGE>
-21-
reasonable terms or prices or at all in the future. Moreover, some of the
Corporation's license agreements are non-exclusive and, therefore, the
Corporation's competitors may have access to the same technology.
To date, the Corporation has not been notified that its product
infringes on the proprietary rights of third parties, but third parties could
claim infringement by the Corporation with respect to its 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 the Corporation to enter into royalty or licensing
agreements on terms that may not be acceptable to it.
EMPLOYEES
As of December 31, 1999, the Corporation had a total of 183 employees.
None of the Corporation's employees is covered by any collective bargaining
agreements.
RISK FACTORS
RISK FACTORS RELATED TO THE CORPORATION'S BUSINESS
HISTORY OF LOSSES AND EXPECTED LOSSES IN THE FUTURE
The Corporation has not been profitable since its inception. The
Corporation incurred losses of $155,000 for the period between July 28, 1997
and December 31, 1997, $2.7 million for the year ended December 31, 1998 and
$13.8 million for the year ended December 31, 1999. As of December 31, 1999,
the Corporation had an accumulated deficit of $16.7 million. The Corporation
recorded a loss of $6.9 million for the three months ended March 31, 2000.
The Corporation expects to continue to incur losses in the near future and
possibly longer. The Corporation anticipates that its expenses will increase
substantially in the foreseeable future as it establishes an application
hosting service, increases its research and development, sales and marketing
and general and administrative expenses, and integrates the operations of
ezlogin.com and YRless into its business. These efforts may prove more
expensive than the Corporation currently anticipates. The Corporation cannot
predict if it will ever achieve profitability and if it does, the Corporation
may not be able to sustain or increase its profitability.
LIMITED OPERATING HISTORY
The evaluation of its business is difficult because of the Corporation's
limited operating history. The Corporation was founded in July 1997 and
services based on its platform were first launched on a trial basis in May 1999
with its initial licensee, Bank of Montreal. Because the Corporation is in an
early stage of development, its prospects are difficult to predict and may
change rapidly. The Corporation may encounter difficulties as a young company
in a new and rapidly evolving market, including its substantial dependence on a
single product with only limited market acceptance to date and the need to
manage expanding operations. The
<PAGE>
-22-
Corporation's business strategy may not be successful, and it may not
successfully address these risks.
RAPID GROWTH
The Corporation's historical growth has placed, and any further growth is
likely to continue to place, a significant strain on its resources. The
Corporation's ability to achieve and maintain profitability will depend on its
ability to manage its growth effectively, to implement and expand operational
and customer support systems and to hire personnel worldwide. The Corporation
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 the Corporation's management
personnel, which may limit their ability to effectively manage its business.
IMPLEMENTATION OF APPLICATION HOSTING SERVICE
Some of the Corporation's existing customers require, and some potential
customers will require, that it host and manage the server infrastructure and
software platform as part of the implementation of its solution. The
Corporation may acquire or partner with third parties to provide this service.
The Corporation may also provide this service by establishing application
hosting facilities of its own, or through a combination of these strategies.
Regardless of the implementation strategy the Corporation pursues, providing the
service will require significant capital expenditures and other resources, and
the Corporation cannot assure that it will be able to implement these services
on an effective, cost-efficient or timely basis. The Company has initially
entered into a relationship with Exodus Communications to provide this service
and, as a result, the Company may be dependant upon Exodus to provide these
services in an effective manner. Because the Corporation's experience is
primarily in the areas of developing and implementing its software solution, it
does not know what other difficulties it may encounter or risks it may be
exposed to in the establishment and operation of these facilities. If the
Corporation cannot effectively implement these services, it may lose existing
customers and may not attract new customers.
CUSTOMERS ACQUIRING AN EQUITY INTEREST IN THE CORPORATION
As of December 31, 1999, all of the Corporation's revenue has been
attributable to the sale of its solution to customers who have also purchased an
equity interest in the Corporation. The opportunity to invest in the
Corporation provided these customers with an additional incentive to purchase
its solution. The Company has only recently licensed its solution for the first
time to a customer, Claritybank.com, that did not invest in the Company's
securities. The Corporation does not expect to offer this opportunity to
prospective customers, which may hurt the Corporation's ability to sell its
product.
Most of the Corporation's current customers, or their affiliates, are
shareholders in the Corporation. If any customer ceases to license the
Corporation's technology, its credibility in the market may suffer, which may
impede its ability to attract new customers. In addition, if a customer that
switches to a competing technology also sells its shares in the Corporation, its
credibility may further suffer and the market price of the Corporation's shares
will likely decline.
<PAGE>
-23-
LENGTHY AND COMPLEX SALES CYCLE
The Corporation's sales efforts target large financial institutions
worldwide, which requires it to expend significant resources educating
prospective customers about the uses and benefits of its product. Because the
purchase of the Corporation's solution is a significant decision for these
institutions, prospective customers generally take a long time to evaluate the
product. The Corporation's sales cycle typically ranges from four to six
months, although these cycles can be longer due to significant delays over which
it has little or no control. The 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 the long sales cycle, it may take the Corporation a substantial amount of
time to generate revenue from its sales efforts. In addition, any delay in
selling the 724 Solutions FSP could lead prospective customers to find
alternatives to the Corporation's solution from a competitor or to develop an
in-house solution.
THE INTERNET AS A VIABLE COMMERCIAL MEDIUM
The Corporation's 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 the Corporation from growing.
FAILURE TO ACHIEVE MARKET ACCEPTANCE
The Corporation's solution is one of a number of competing solutions that
are available in a new and rapidly evolving market. Financial institutions may
not prefer the Corporation's solution to competing technologies. If financial
institutions do not accept the Corporation's product as the preferred solution,
it may not attract new customers and its business will not grow.
CONSUMER USE OF SERVICES BASED ON THE CORPORATION'S SOLUTION
The Corporation's future revenue depends on consumers using the services
that are based on its solution, and if its customers do not successfully market
these services, the Corporation's revenue will not grow.
The Corporation expects that revenue under most of its license agreements
will depend on the number of monthly subscribers to these services. To stimulate
consumer adoption of these services, the Corporation's customers must implement
its solution quickly. However, the Corporation's customers may delay
implementation because of factors that are not within the Corporation's control,
including budgetary constraints, limited resources committed to the
implementation process and limited internal technical support.
<PAGE>
-24-
Consumer adoption of these services also requires its customers to market
these services. However, the Corporation's 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, the Corporation
cannot assure that a large number of consumers will use these services in the
future.
DEPENDENCE ON THE SALE OF A SINGLE PRODUCT
The Corporation expects sales of its product and related services to
constitute most of its revenue for the foreseeable future. If customers do not
purchase this product, the Corporation does not currently offer any other
products or services that would enable it to become profitable.
RELIANCE ON SALES TO FINANCIAL INSTITUTIONS
The Corporation derives a significant portion of its revenue from the
sale of its solution to a limited number of financial institutions. Between the
Corporation's inception and March 31, 2000, sales to one financial institution
have accounted for more than 31% of its total revenue. The Corporation expects
that a small number of customers will continue to account for a significant
portion of its revenue for the foreseeable future. If any of the Corporation's
customers discontinue their relationship for any reason, do not renew their
agreements, or seek to reduce or renegotiate their purchase and payment
obligations, the Corporation's revenue may be substantially reduced. In
addition, there are a limited number of large financial institutions in its
target market, and the Corporation believes this number may decline in the
future as a result of consolidation in the financial services industry
worldwide. If the Corporation's sales efforts to these potential customers are
not successful, its solution may not achieve market acceptance and its revenue
will not grow.
SHORT TERM LICENSE AGREEMENTS
A significant portion of the Corporation's revenue is derived from the
licensing of its technology to its customers. The Corporation has entered into
agreements with the customers set forth in the table below. Unless renewed, the
license agreement with each current customer will expire as set forth in the
table below.
<TABLE>
<CAPTION>
CUSTOMER EXPIRY DATE
-------------------------- --------------------
<S> <C>
Bank of Montreal February 2001
Bank of America February 2001
Wells Fargo(1) September 2003
Citigroup(2) December 2004
Claritybank.com(3) February 2004
</TABLE>
Notes:
1. May be terminated earlier by Wells Fargo upon payment of a termination
fee.
2. No revenue generated during the year ended December 31, 1999, as the
agreement was entered into late in December, 1999.
3. No revenue generated during the year ended December 31, 1999, as the
agreement was entered into January 2000.
<PAGE>
-25-
Each of the Corporation's customers may, but is not obligated to, renew
its license agreement for additional terms. There is no guarantee that any
customers will renew their license agreement. If the customers do not renew
these agreements or otherwise license the Corporation's technology, its revenue
will decrease substantially.
DIGITAL WIRELESS AND OTHER NETWORK SERVICE PROVIDERS
The Corporation relies on wireless and other network service providers
to introduce and support services using its product in a timely and effective
manner. The Corporation has no control over the pace at which they will do
so. If these providers are slow to support the services that use its
solution, the Corporation's existing customers may not be able to effectively
offer these services, and potential customers may be reluctant to purchase
its 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 the Corporation's solution. Moreover, the continued
expansion of digital wireless services, especially in North America, is
critical to the Corporation's success. The pace of this expansion may not
increase for a variety of reasons, including, if for example, the U.S.
government does not allocate a sufficiently broad portion of the available
spectrum to render these services attractive.
TECHNOLOGY STANDARDS
The Corporation's future success will depend on its ability to address
the increasingly sophisticated needs of its 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, the
Corporation's competitors may develop alternative technologies that gain broader
market acceptance than its solution. As a result, the life cycle of the
Corporation's solution is difficult to estimate. The Corporation may need to
develop and introduce new products and enhancements to its existing solution on
a timely basis to keep pace with technological developments, evolving industry
standards, changing customer requirements and competitive technologies that may
render its solution obsolete. These research and development efforts may require
the Corporation to expend significant capital and other resources. In addition,
as a result of the complexities inherent in the Corporation's solution, major
enhancements or improvements will require long development and testing periods.
If the Corporation fails to develop products and services in a timely fashion,
or if it does not enhance its product to meet evolving customer needs and
industry standards, including security technology, it may not remain competitive
or sell its solution. For example, the Corporation believes that the
aggregation technology offered by ezlogin.com (which the Corporation has entered
into an agreement to acquire - see "Recent Developments") is a significant
functionality being demanded by the Corporation's current and proposed
customers. Failure to complete this acquisition may significantly impede the
Corporation's ability to market its product and services.
<PAGE>
-26-
SECURITY BREACHES
Despite its efforts to maintain Internet security, the Corporation may
not be able to stop unauthorized attempts to gain access to or disrupt
transactions between its 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 the
Corporation's reputation. The Corporation relies on encryption and
authentication technology licensed from third parties to provide the security
and authentication necessary to achieve secure transmission of confidential
information. The Corporation cannot assure that this technology or future
advances in this technology or other developments will be able to prevent
security breaches. The Corporation 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 the Corporation's 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, the
Corporation could be subject to claims, litigation or other potential
liabilities that could cause its expenses to increase substantially. In addition
to purposeful security breaches, the inadvertent transmission of computer
viruses could expose the Corporation to litigation or a significant loss of
revenue. Although its customer agreements contain provisions which limit the
Corporation's liability relating to security, its customers or their consumers
may seek to hold the Corporation liable for any losses suffered as a result of
unauthorized access to their communications. The Corporation may not have
adequate insurance or resources to cover these losses.
FUTURE ACQUISITIONS
The Corporation may acquire technologies or companies in the future.
Entering into an acquisition entails many risks, any of which could materially
harm the business, including:
- diversion of management's attention from other business concerns;
- failure to effectively assimilate the acquired technology or
company into the Corporation's business;
- the loss of key employees from either the Corporation's current
business or the acquired business; and
- assumption of significant liabilities of the acquired company.
Since January 1, 2000, the Corporation has entered into agreements to
acquire ezlogin.com and YRless, which acquisitions are discussed in the "Recent
Developments" section above (see "Business of the Corporation"). The Corporation
may not be able to complete its acquisition of ezlegin.com, or to integrate
ezlogin.com and YRless into its current operations effectively. To date, the
Corporation has not completed any other acquisitions and it may not be able to
effectively do so in an effective manner. In addition, holdings of existing
shareholders in the Corporation will be diluted if equity securities are issued
in connection with any acquisition.
<PAGE>
-27-
COMPETITION
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 the
Corporation's product. In addition, competitors may market their products
and services more effectively than the Corporation does, which could decrease
demand for the Corporation's product and cause its revenue to decline.
Currently, the Corporation's competitors include:
- financial institutions that develop their own in-house solutions;
- 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.
The Corporation 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 the Corporation's competitors have greater
resources, which may enable them to penetrate the market more quickly.
INTERNATIONAL OPERATIONS
The Corporation is expanding its activities outside the U.S. and
Canada. The Corporation's plans to expand internationally may be adversely
affected by a number of risks, including:
- difficulties in localizing its 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
Asian countries and in the financial services sector; and
- longer payment cycles.
<PAGE>
-28-
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES
The Corporation's 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 (including the value of the Canadian dollar, as the Corporation's
principal offices and staff generate Canadian dollar denominated expenses)
could cause currency exchange losses. The Corporation cannot predict the
effect of exchange rate fluctuations upon future operating results.
MANAGEMENT AND OTHER QUALIFIED PERSONNEL
The Corporation's future success will depend in large part on the
ability to recruit and retain experienced research and development, sales and
marketing, customer service and management personnel. In particular, future
success depends in part on the continued services of the Corporation's
current executive officers. If the Corporation does not attract and retain
such personnel, it may not be able to grow its business. Competition for
qualified personnel is intense in the industry. In the past, the Corporation
has experienced difficulty in recruiting qualified personnel, especially
technical and sales personnel. The Corporation is in a new market and there
are a limited number of people with the appropriate combination of skills
needed to provide the services that its customers demand. The Corporation
expects competition for qualified personnel to remain intense, and that it
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 it invests
significant resources to recruit, train and retain qualified personnel, the
Corporation may not be successful in its efforts.
DEFECTS OR ERRORS IN SOFTWARE
The software that the Corporation develops is complex and must meet
the stringent technical requirements of its customers. The Corporation must
develop its product quickly to keep pace with the rapidly changing industry
in which it operates. Software products that are as complex as those of the
Corporation are likely to contain undetected errors or defects, especially
when first introduced or when new versions are released. In addition, the
Corporation's software may not properly operate when integrated with the
systems of some customers, or when used to deliver services to a large number
of a customer's subscribers.
While the Corporation continually tests its product for errors and
works with customers through its customer support services to identify and
correct bugs, errors in its 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 the Corporation's customers
use its product. The Corporation's software may not be free from errors or
defects even after it has been tested, which could result in the rejection of
its product and damage to its reputation, as well as lost revenue, diverted
development resources, and increased support costs.
PRODUCT LIABILITY CLAIMS
The Corporation may be subject to claims for damages related to any
errors in its product. A major product liability claim could materially
adversely affect the business because of the costs of defending against these
types of lawsuits, diversion of key employees' time and attention
<PAGE>
-29-
from the business and potential damage to the Corporation's reputation. The
Corporation's license agreements with its customers contain provisions
designed to limit exposure to potential product liability claims. Limitation
of liability provisions contained in the Corporation's license agreements may
not be effective under the laws of some jurisdictions if local laws treat
them as unenforceable. As a result, the Corporation could be required to pay
substantial amounts of damages in settlement or upon the determination of any
of these types of claims.
PUBLIC KEY INFRASTRUCTURE
The Corporation expects 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 competitors. If the Corporation does not succeed in
integrating PKI into its solution, its product may not be attractive to
potential customers because of their security concerns. If PKI becomes a
widely used standard and the Corporation's product does not use that
standard, the Corporation may be at a competitive disadvantage.
ENCRYPTION TECHNOLOGY
The U.S. and Canadian governments generally limit the export of
encryption technology, which the Corporation's 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 the Corporation
receives is revoked or modified, if its 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, the Corporation may
not be able to distribute its solution to potential customers, which will
cause a decline in sales. The Corporation may need to incur significant
costs and divert resources in order 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 the Corporation's customers, in which case
its business may not grow. In addition, the Corporation may suffer similar
consequences if the laws of any other country limit the ability of third
parties to sell encryption technologies to the Corporation.
RELIANCE ON THIRD PARTY SOFTWARE, TECHNOLOGY AND CONTENT
The Corporation must now, and may in the future, license or otherwise
obtain access to the intellectual property of third parties. For example,
the Corporation has entered into a license agreement with Certicom and
Consensus for use of their encryption technology. The Corporation has also
entered into license agreements with third party content providers. In
addition, the Corporation uses, and will use in the future, certain third
party software that may not be available in the future on commercially
reasonable terms, or at all. For example, the Corporation could lose its
ability to use this software if the rights of its suppliers to license it
were challenged by individuals or companies that asserted ownership of these
rights. The loss of, or inability to maintain or obtain, any required
intellectual property could require the Corporation to use substitute
technology, which could be more expensive or of lower quality or
<PAGE>
-30-
performance, or force the Corporation to cease offering its product.
Moreover, some of its license agreements are non-exclusive and, therefore,
the Corporation's competitors may have access to the same technology used by
the Corporation.
INTELLECTUAL PROPERTY
The Corporation depends on its ability to develop and maintain the
proprietary aspects of its technology. The Corporation seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, as well as confidentiality provisions in contracts with its
customers, all of which afford limited protection. The Corporation also
seeks to protect its proprietary technology under patent laws. The
Corporation has applied for patents, although none have been issued to date.
The Corporation has also applied for several trademark registrations for its
trademarks, including "724 Solutions", "724 Solutions & Arrows Design", "724
Solutions Financial Services Platform", "Tellmewhen", "Tellmewhen.com",
"Secureofx", "Poet" and "E-Anywhere" in Canada and "724 Solutions", "724
Solutions & Design", "Dimecuando" and "Dimecuando.com" in the United States.
The Corporation has also applied for registration of the trademark "724
Solutions" in the United Kingdom, Japan and Australia. To date, none of these
patents have been issued and none of these trademarks have been registered.
Despite the measures the Corporation has taken to protect its
intellectual property, the Corporation cannot assure that these steps will be
adequate, that it will be able to secure patent or trademark registrations
for all of its patent applications or trademarks, respectively, in Canada,
the U.S. or other countries, or that third parties will not breach the
confidentiality provisions in its contracts or infringe or misappropriate its
copyrights, pending patents, trademarks and other proprietary rights. In the
event that a third party breaches the confidentiality provisions in the
Corporation's contracts or misappropriates or infringes on its intellectual
property, it may not have adequate remedies. In addition, third parties may
independently discover or invent competing technologies or reverse engineer
the Corporation's trade secrets, software or other technology. Moreover, the
laws of some foreign countries may not protect the Corporation's proprietary
rights to the same extent as do the laws of the U.S. and Canada. Therefore,
the measures the Corporation is taking to protect its proprietary rights may
not be adequate.
Although the Corporation is not currently aware of any claims asserted
by third parties that it infringed on their intellectual property, in the
future third parties may assert a claim that the Corporation's current or
future products infringe on their intellectual property. The Corporation
cannot predict whether third parties will assert these types of claims
against it or against the licensors of technology licensed to it, or whether
those claims will harm the business. If the Corporation is 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 it or its licensors, the
Corporation may face costly litigation and diversion of management's
attention and resources. As a result of these disputes, the Corporation may
have to develop costly non-infringing technology, or enter into licensing
agreements. These agreements, if necessary, may not be available on
acceptable terms, or at all, which could increase expenses or make the
Corporation's product less attractive to customers.
<PAGE>
-31-
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products of the
Corporation 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 21st Century dates from 20th Century dates. Any of
the Corporation's 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 the Corporation depends to provide customers with its
product and services. Although the Corporation has not suffered from any of
these types of events following the change to calendar year 2000, it may in
the future.
The year 2000 requirements affect the computers, software and other
equipment that uses, operates or maintains for its operations. Substantially
all the Corporation's software was developed after awareness of these issues
became widespread in the software industry, such that the Corporation's
software was designed with reference to preventing year 2000-related
difficulties from arising. Nonetheless, the Corporation has adopted an
internal policy to ensure that its product remains year 2000 compliant. The
Corporation has conducted interface testing with all other products with
which its product interacts to determine if there are areas where the
interfaces themselves are not year 2000 compliant. The Corporation has taken
practical measures, implementing a program of year 2000 awareness procedures
for its employees, customers and licensors to verify that all necessary
procedures have been undertaken and to ensure that its document management
processes are constantly reviewed to ensure year 2000 compliance. To the
best of the Corporation's knowledge, none of its internal systems or
equipment which are necessary for the conduct of the Corporation's 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 the Corporation's business plan.
The Corporation has taken steps to ensure that its non-information
technology systems are year 2000 compliant. In particular, the Corporation
established plans to ensure that its critical systems, including its
electoral power, communications and payroll systems, would not be impaired as
a result of issues relating to the year 2000. The Corporation also devised
an internal communication plan and a contingency plan, which designated
certain individuals to respond to particular year 2000-related problems if
one occurred.
AVAILABILITY OF CAPITAL
The Corporation may not have sufficient capital to fund its operations
and additional capital may not be available on acceptable terms, if at all.
Any of these outcomes could adversely impact the Corporation's ability to
respond to competitive pressures or prevent it from conducting all or a
portion of its planned operations. The Corporation expects that the net
proceeds from its initial public offering and cash on hand will be sufficient
to meet its working
<PAGE>
-32-
capital and capital expenditure needs for at least the next 12 months. After
that, the Corporation may need to raise additional funds, and additional
financing may not be available on acceptable terms, if at all. The
Corporation may also require additional capital to acquire or invest in
complementary businesses or products or obtain the right to use complementary
technologies. If the Corporation issues additional equity securities to raise
funds, the ownership percentage of existing shareholders of the Corporation
will be reduced.
TAX LIABILITY FOR SHAREHOLDERS
If at any time the Corporation qualifies as a passive foreign
investment company under U.S. tax laws, investors may be subject to adverse
tax consequences. The Corporation could be a passive foreign investment
company if 75% or more of its gross income in any year is considered passive
income for U.S. tax purposes. For this purpose, passive income generally
includes interest, dividends, some types of rents and royalties, and gains
from the sale of assets that produce these types of income. In addition, the
Corporation could be classified as a passive foreign investment company if
the average percentage of its assets during any year that produced passive
income, or that were held to produce passive income, is at least 50%. If the
Corporation is classified as a passive foreign investment company, and if
shareholders sell any of their common shares or receive some types of
distributions from the Corporation, they may have to pay taxes that are
higher than if the Corporation were not considered a passive foreign
investment company. It is impossible to predict how much shareholders' taxes
would increase, if at all.
Based on the nature of its revenue and its anticipated corporate
structure, the Corporation may be treated as a passive foreign investment
company. To determine whether the Corporation is a passive foreign
investment company, it will be required to examine each year its revenue and
expenses and the value of its assets. The tests are complex and require,
among other things, that the Corporation determine how much of its income
from its license agreements each year will be passive income. The
Corporation does not have the necessary data to determine whether these tests
will be met for the year 2000 or future years, nor can it predict whether the
tests are likely to be met. Moreover, the manner in which the tests apply to
the Corporation's business is not certain.
Each investor in the Corporation's common shares is urged to consult
his, her or its own tax advisor to discuss the potential consequences to such
investor if at any time the Corporation qualifies as a passive foreign
investment company.
ABILITY TO ISSUE PREFERRED SHARES
The Corporation's ability to issue preferred shares could make it more
difficult for a third party to acquire the Corporation to the detriment of
holders of common shares. Provisions in the Corporation's articles of
incorporation may make it difficult for a third party to acquire control of
it, even if a change in control would be beneficial to its shareholders. The
Corporation's articles authorize its board to issue, at its discretion, an
unlimited number of preferred shares. Without shareholder approval, but
subject to regulatory approval in certain circumstances, the board has the
authority to attach special rights, including voting or dividend rights, to
the
<PAGE>
-33-
preferred shares. Preferred shareholders who possess these rights could make
it more difficult for a third party to acquire the Corporation.
RISK FACTORS RELATED TO THE CORPORATION'S INDUSTRY
GROWTH OF THE INTERNET
The Corporation's future success is substantially dependent on
continued growth in the use of the Internet. The Corporation's business may
be adversely impacted if the number of users of 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, the Corporation will not be able to grow its
business.
GROWTH OF WIRELESS DATA SERVICES
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. The Corporation's 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. The Corporation cannot
be certain that these barriers will be overcome. Since the market for the
Corporation's solution is new and evolving, it is difficult to predict the
size of this market or its future growth rate, if any. The Corporation's
future financial performance will depend in large part upon the continued
demand for on-line financial services through wireless application devices.
The Corporation cannot assure 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 the Corporation currently
anticipates, revenue may not grow.
CONSUMER CONFIDENCE IN THE SECURITY OF ON-LINE FINANCIAL TRANSACTIONS
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 the Corporation's solution. If consumers do not gain
confidence in the security for on-line financial transactions that the
current technologies provide, revenue will not increase.
<PAGE>
-34-
GOVERNMENT REGULATIONS
The Corporation is 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 the Corporation 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 its product and increase the cost of doing business.
RISK FACTORS RELATED TO OWNERSHIP AND TRADING MARKET
CONCENTRATION OF SHARE OWNERSHIP
As of March 31, 2000, the Corporation's five principal shareholders,
including entities affiliated with members of the management team, held more
than 75% of the Corporation's 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. This concentration could also have the effect of delaying or
preventing a change in control that could be otherwise beneficial to
shareholders.
VOLATILITY OF STOCK PRICE
Stock markets have recently experienced extreme price and volume
fluctuations, particularly for the shares of technology companies. Since the
Corporation's initial public offering, the market value of its common shares
has fluctuated significantly. These fluctuations are often unrelated to the
operating performance of particular companies, including the Corporation.
The broad market fluctuations may adversely affect the market price of the
Corporation's common shares. This may adversely affect the ability of the
Corporation to use its common shares as consideration in acquisition
transactions. In addition, when the market price of a company's stock drops
significantly, shareholders often commence securities class action lawsuits
against that company. A lawsuit against the Corporation could cause it to
incur substantial costs and could divert the time and attention of management
and other resources.
FUTURE SALES OF COMMON SHARES
If the Corporation's shareholders sell substantial amounts of common
shares in the public market, the market price of the common shares could
fall. The perception among investors that these sales will occur could also
produce this effect. Subject to applicable securities laws and after giving
effect to lock-up agreements executed by the Corporation's directors,
executive officers and existing shareholders, the common shares will be
available for sale in the public
<PAGE>
-35-
market, and additional common shares issuable upon the exercise of stock
options will be available for sale in Canada upon the expiration of the
applicable period after the Corporation's initial public offering and in the
United States once the Corporation files a registration statement relating to
its stock option plans. In addition, holders of approximately 21.4 million
of the Corporation's common shares, acting as a group, may require the
Corporation to qualify a prospectus for, or effect the registration of, all
or part of those common shares beginning in September 2000.
DESCRIPTION OF PROPERTY
Pursuant to lease agreements, the operations of the Corporation are
located at the following principal facilities:
<TABLE>
<CAPTION>
APPROXIMATE LEASE EXPIRATION
LOCATION OPERATIONS SQUARE FEET DATE
- - ------------------------------ ----------------------- ----------- ------------------
<S> <C> <C> <C>
Toronto, Ontario Corporate Head Office 102,032 May 31, 2005
4101 Yonge Street,
Suite 702
San Francisco, CA Sales Office 2,706 February 29, 2004
1 Market, Steuart Tower
Suite 1475
London, England Sales Office 200 November 7, 2000
No. 1 Poultry Lane
Suite 208
New York, NY Sales Office 150 April 30, 2001
245 Park Avenue, 39th Floor
Sydney, Australia Sales Office 200 January 31, 2001
Level 20, Tower 2
Darling Park, 201 Sussex Street
Tokyo, Japan Sales Office 180 January 31, 2001
Kamiyacho Mori Building,
14th Floor, 4-3-20 Toranomon
Minato-ku
</TABLE>
LEGAL PROCEEDINGS
The Corporation was not during the year ended December 31, 1999
subject to any material legal proceedings and it is not currently subject to
any material legal proceedings. There are no material proceedings to which
any director, officer or affiliate of the Corporation, or any associate of
any such director, officer, or affiliate of the Corporation is a party
adverse to the Corporation or its subsidiaries.
<PAGE>
-36-
CONTROL OF THE CORPORATION
To the knowledge of the directors and officers of the Corporation, the
Corporation is not directly or indirectly owned or controlled by any other
corporation or foreign government.
To the knowledge of the directors and officers of the Corporation, as
at March 31, 2000, the only shareholders of the Corporation beneficially
owning or exercising control or direction over more than 5% of the common
shares of the Corporation are as follows:
<TABLE>
<CAPTION>
NUMBER OF COMMON
NAME OF SHAREHOLDER SHARES PERCENT OF CLASS
- - ----------------------------- ---------------- ----------------
<S> <C> <C>
Gregory Wolfond(1) 8,000,000 21.9%
Toronto, Ontario
Sonera Corporation(2) 6,400,000 17.5%
Helsinki, Finland
Citigroup Inc.(3) 6,400,000 17.5%
New York, NY
Bank of Montreal 3,428,570 9.4%
Toronto, Ontario
Bank of America Corporation 3,200,000 8.8%
Charlotte, NC
All directors and officers 9,059,842 24.8%
as a group (14 persons)(4)
</TABLE>
Notes:
(1) These shares are held of record by privately-held entities of which Mr.
Wolfond is the majority shareholder or has the sole power to vote and to
direct the disposition of their shares.
(2) These shares are held of record by SmartTrust Holding B.V., a subsidiary
of Sonera Corporation.
(3) These shares are held of record by Citicorp Strategic Technology
Corporation, a subsidiary of Citigroup Inc.
(4) Includes 917,996 common shares that are issuable upon the exercise of
options that are presently vested or that vest prior to May 31, 2000.
The directors and officers of the Corporation are not aware of any
arrangements, the operation of which may at a subsequent date result in a change
of control of the Corporation.
<PAGE>
-37-
NATURE OF THE TRADING MARKET
The common shares of the Corporation are listed on The Toronto Stock
Exchange under the symbol "SVN" and the NASDAQ National Market under the
symbol "SVNX". The high and low sales prices for the common shares of the
Corporation during the first quarter of fiscal 2000 are as follows:
<TABLE>
<CAPTION>
MARKET HIGH (FEBRUARY 1, 2000) LOW (MARCH 1, 2000)
- - ------ ----------------------- -------------------
<S> <C> <C>
The Toronto Stock Exchange Cdn. $337.00 (U.S. $232.93) Cdn. $92.50 (U.S. $63.93)
The NASDAQ National Market U.S. $232.00 U.S. $63.95
</TABLE>
As of March 31, 2000, approximately 18 of the holders of record of the
Corporation's common shares had addresses in the U.S., and these holders held
35.53% of the total issued and outstanding common shares of the Corporation.
GOVERNMENT REGULATION
The Corporation's business is regulated by Canadian federal,
provincial and local authorities as well as foreign authorities in applicable
jurisdictions. There are no federal or provincial laws applicable to the
Corporation in Canada that affect its remittance of dividends, interest or
other payments to nonresident holders of its common shares, except as set
forth in the "Taxation" section herein. In addition, there are no
limitations under such laws on the right of nonresidents of Canada or foreign
owners to hold or vote the Corporation's common shares, except for
transactions involving or being deemed to involve an acquisition of control,
which require compliance with the INVESTMENT CANADA ACT.
TAXATION
CERTAIN INCOME TAX CONSEQUENCES
In this section, the Corporation summarizes certain of the U.S. and
Canadian federal income tax considerations that may be relevant to holders of
the Corporation's common shares who acquired their in the initial public
offering, and that may be relevant to subsequent purchasers of common shares,
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;
<PAGE>
-38-
- 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 the Corporation's 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 the Corporation for purposes of
the INCOME TAX ACT and the Internal Revenue Code.
For purposes of this discussion, the Corporation 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.
The Corporation will assume, for the purposes of this discussion, that
a shareholder is 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 the Corporation's 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 Canada Customs and Revenue Agency;
- 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 hereof;
<PAGE>
-39-
- 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. This discussion does not
consider the potential effects of any proposed legislation in the U.S. and
does 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, which may differ from the
tax consequences described below.
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 THE
CORPORATION'S COMMON SHARES. THE CORPORATION HAS NOT TAKEN INTO ACCOUNT ANY
SHAREHOLDER'S PARTICULAR CIRCUMSTANCES AND DOES NOT ADDRESS ALL CONSEQUENCES
TO A SHAREHOLDER UNDER PROVISIONS OF U.S. OR CANADIAN INCOME TAX LAWS.
THEREFORE, SHAREHOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS REGARDING THE
PARTICULAR TAX CONSEQUENCES 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
Each Unconnected U.S. Shareholder generally will be required to
include the U.S. dollar value of any dividend distribution received by such
shareholder on the common shares in ordinary income to the extent of the
Corporation's 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, Unconnected U.S. Shareholders
generally will be required to report gross income in an amount greater than
the amount of cash received. To the extent any dividend distribution paid by
the Corporation exceeds its current and accumulated earnings and profits,
each Unconnected U.S. Shareholder's pro rata share of the excess amount will
be treated first as a return of capital up to such shareholder's adjusted tax
basis in the Corporation's 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 the Corporation on its common shares generally
will not be eligible for the "dividends received" deduction.
Subject to certain conditions and limitations, Unconnected U.S.
Shareholders 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 the Corporation makes. Alternatively,
Unconnected U.S. Shareholders may in some circumstances claim a deduction for
the amount of Canadian tax withheld in a taxable year, but only if such
shareholders do not elect
<PAGE>
-40-
to claim a foreign tax credit in respect of any foreign taxes paid in that
year. In general, an Unconnected U.S. Shareholder's amount of allowable
foreign tax credits in any year cannot exceed such shareholder's regular U.S.
federal income tax liability for the year attributable to certain foreign
source income. Because distributions in excess of the Corporation's current
and accumulated earnings and profits generally will not give rise to foreign
source income, Unconnected U.S. Shareholders 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, such shareholders 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. Unconnected U.S. Shareholders should
consult their own tax advisors concerning the application of the U.S. foreign
tax credit rules to their particular situations.
Each Unconnected U.S. Shareholder generally will recognize gain or
loss on the sale, exchange or other disposition of common shares in an amount
equal to the difference, if any, between the amount realized on the sale,
exchange or disposition and such shareholder's adjusted tax basis in the
common shares. Any gain or loss recognized by an Unconnected U.S. Shareholder
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 such shareholder 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 such 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 the Corporation
is a passive foreign investment company for any taxable year in which an
Unconnected U.S. Shareholder owns its common
<PAGE>
-41-
shares, the U.S. federal income tax consequences to such holder of owning and
disposing of such common shares may differ from those described above. The
Corporation will be classified as a passive foreign investment company for
any taxable year if either:
- 75% or more of the Corporation's 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 the Corporation's assets
that produce or are held for the production of "passive
income" is 50% or more.
In the event that the Corporation is a passive foreign investment
company, distributions by the Corporation which constitute "excess
distributions", as defined in Section 1291 of the Internal Revenue Code, and
gains from the disposition of the Corporation's 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 the Corporation was 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 tax 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 such Unconnected U.S. Shareholder in
the three immediately preceding taxable years, or such Unconnected U.S.
Shareholder's holding period, if shorter. The tax and interest charge on
amounts allocated to the taxable years during which the Corporation is a
passive foreign investment company, other than the taxable year in which the
gain was recognized or excess distribution was received, would be includable
in the holder's U.S. federal income tax liability for the current taxable
year. This portion of an Unconnected U.S. Shareholder's 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 the
Corporation as a qualified electing fund under section 1295 of the Internal
Reveue 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 the
Corporation's ordinary earnings and net capital gain, regardless of whether
such income or gain was actually distributed. Tax on the income resulting
from 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.
<PAGE>
-42-
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 the Corporation's revenue and its anticipated
corporate structure, it may be treated as a passive foreign investment
company. To determine whether the Corporation is a passive foreign investment
company, it will be required to examine each year its revenue and expenses
and the value of its assets. The tests are complex and require, among other
things, that the Corporation determine how much of its income from its
license agreements each year will be passive income. The Corporation does
not have the necessary data to determine whether these tests will be met for
the year 2000 or future years, nor can it predict whether the tests are
likely to be met. Moreover, the manner in which the tests apply to the
Corporation's business is not certain. Neither the Corporation nor its
advisors have the duty, or will undertake, to inform holders of its common
shares of a determination that the Corporation is or has become a passive
foreign investment company, and the Corporation does not currently intend to
take actions necessary to permit holders of its common shares to make a
"qualified electing fund election" in the event the Corporation is determined
to be a passive foreign investment company. Shareholders are urged to
consult their own tax advisors with respect to the potential consequences if
at any time the Corporation qualifies 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, the Corporation summarizes the material anticipated
Canadian federal income tax considerations relevant to ownership of common
shares by an Unconnected U.S. Shareholder. This section will only apply to
an Unconnected U.S. Shareholder who does not use or hold and is 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, an Unconnected U.S. Shareholder will
generally be exempt from Canadian tax on a capital gain realized on an actual
or deemed disposition of the common shares unless the Unconnected U.S.
Shareholder, persons with whom the Unconnected U.S. Shareholder did not deal
at arm's length for the purposes of the INCOME TAX ACT, or the Unconnected
U.S. Shareholder and such persons owned or had interests in or rights to
acquire 25% or more of the Corporation's issued common shares of any class of
the capital stock of the Corporation 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 the Corporation's
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 the
Corporation's shares, the value of its common shares is not derived
principally from real property situated in Canada. This relief under the
Convention may not be available if the Unconnected U.S. Shareholder had a
permanent establishment or fixed base available in Canada during the 12
months immediately preceding the disposition of the shares.
<PAGE>
-43-
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 the Corporation's voting shares, the rate of
withholding tax on dividends is reduced to 5%.
The Canadian federal government does not currently impose any estate
taxes or succession duties. However, on the death of an Unconnected U.S.
Shareholder, 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 the time of death. Capital gains realized
on the deemed disposition, if any, will generally have the income tax
consequences described above.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
The Corporation's 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 the Corporation's
consolidated financial statements. The following selected consolidated
financial data should be read with the "Management's Discussion and Analysis"
section on pages 4 to 12 of the Corporation's 1999 Annual Report, which is
incorporated by reference herein, and the Corporation's consolidated
financial statements and notes appearing elsewhere in this document. The
consolidated statements of operations data for the period from July 28, 1997
(inception) to December 31, 1997, for the years ended December 31, 1998 and
December 31, 1999, and the consolidated balance sheets data as of December
31, 1997, 1998 and 1999, are derived from the Corporation's consolidated
financial statements that have been audited by KPMG LLP.
<PAGE>
-44-
SUMMARIZED FINANCIAL INFORMATION DATA
<TABLE>
<CAPTION>
PERIOD FROM JULY 28,
1997 (INCEPTION) TO YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1998 DECEMBER 31, 1999
-------------------- ----------------- -----------------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Software development . . . . . . . . . . . . . . $ -- $ 1,678 $ 1,697
Services . . . . . . . . . . . . . . . . . . . -- 208 1,169
Less: Stock-based compensation related to
software development . . . . . . . . . . . -- (1,395) (1,644)
-------- --------- ---------
Net revenue . . . . . . . . . . . . . . . . -- 491 1,222
Operating expenses:
Cost of services revenue . . . . . . . . . . . . -- 61 1,890
Research and development . . . . . . . . . . . . 44 2,277 7,536
Sales and marketing . . . . . . . . . . . . . . 39 412 2,688
General and administrative . . . . . . . . . . . 82 547 3,938
-------- --------- ---------
Total operating expenses . . . . . . . . . 165 3,297 16,097
-------- --------- ---------
Income (loss) from operations . . . . . . . (165) (2,806) (14,875)
Interest income . . . . . . . . . . . . . . . . . . . 10 107 1,044
-------- --------- ---------
Income (loss) before income taxes . . . . . (155) (2,699) (13,831)
Income taxes . . . . . . . . . . . . . . . . . . . -- -- --
-------- --------- ---------
Net income (loss) . . . . . . . . . . . . . $ (155) $ (2,699) $ (13,831)
======== ========= =========
Basic and diluted net income (loss) per share . . . . $ (0.06) $ (0.47) $ (0.82)
======== ========= =========
Shares used in computing basic and diluted net income
(loss) per share (in thousands) . . . . . . . . . . . 2,752 5,784 16,887
======== ========= =========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------------------------------------------------
1997 1998 1999
-------------------- ----------------- -----------------
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents . . . . . . . . . . . . . . $1,299 $2,976 $65,287
Working capital . . . . . . . . . . . . . . . . . . . 1,267 2,333 64,827
Total assets. . . . . . . . . . . . . . . . . . . . . 1,321 3,892 73,242
Total shareholders' equity . . . . . . . . . . . . . 1,288 3,193 62,168
</TABLE>
QUARTERLY SUMMARY
<TABLE>
<CAPTION>
QUARTER ENDED QUARTER ENDED
1998 1999
------------------------------------- -----------------------------------------
31-MAR 30-JUN 30-SEP 31-DEC 31-MAR 30-JUN 30-SEP 31-DEC
-------- -------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS OF U.S. DOLLARS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenue (after deduction of stock-based
compensation related to software development) $208 $328 $(64) $19 $51 $12 $766 $393
Net income (loss) before extraordinary items
Total . . . . . . . . . . . . . . . . . . . . $(27) $(209) $(882) $(1,581) $(1,598) $(2,314) $(3,638) $(6,281)
Per equity share . . . . . . . . . . . . . . $(0.01) $(0.04) $(0.18) $(0.17) $ (0.14) $(0.20) $(0.22) $(0.23)
Net Income (Loss)
Total . . . . . . . . . . . . . . . . . . . . $(27) $(209) $(882) $(1,581) $(1,598) $(2,314) $(3,638) $(6,281)
Per equity share and fully diluted equity
share basis . . . . . . . . . . . . . . . $(0.01) $(0.04) $(0.18) $(0.17) $(0.14) $(0.20) $(0.22) $(0.23)
</TABLE>
<PAGE>
-45-
DIVIDEND POLICY
The Corporation has never declared or paid any cash dividends on its
common shares. The Corporation currently intends to retain any future
earnings to fund the development and growth of its business and does not
anticipate paying any cash dividends in the foreseeable future. There are no
restrictions preventing payment of dividends.
EXCHANGE RATES
As of December 31, 2000, the noon buying rate in New York City for
cable transfers in Canadian dollars was Cdn. $1.00 equals U.S. $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>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
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 $0.6925
Average for period . . . . . . 0.7194 0.7299 0.7353 0.7246 0.6757 0.6743
High for period . . . . . . . . 0.7634 0.7519 0.7519 0.7463 0.7092 0.6925
Low for period . . . . . . . . 0.7092 0.7042 0.7246 0.6944 0.6329 0.6536
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
The "Management's Discussion and Analysis" section on pages 4 to 12 of
the Corporation's 1999 Annual Report is incorporated by reference herein.
DIRECTORS AND OFFICERS
The following table sets forth the name of each director and officer of
the Corporation, their respective municipalities of residence, all positions and
offices of the Corporation held by him or her and his or her principal
occupation or employment at present (and for the five preceding years for
directors not previously elected by the Shareholders at a shareholders'
meeting). Please see "Election of Directors" on pages 9 to 11 of Corporation's
Management Information Circular dated April 25, 2000 filed in connection with
the annual and special meeting of shareholders to be held on May 31, 2000 and
which is incorporated by reference herein, for the number of common shares of
the Corporation beneficially owned or over which control or direction is
exercised as of April 7, 2000.
<PAGE>
-46-
<TABLE>
<CAPTION>
NAME AND
MUNICIPALITY OF PRINCIPAL OCCUPATION AND YEAR BECAME
RESIDENCE OFFICE PRIOR EMPLOYMENT DIRECTOR
- - --------------------------- --------------------- --------------------------------------------------------- -------------
<S> <C> <C> <C>
Gregory Wolfond Chairman and Chief Chairman and Chief Executive Officer of the Corporation 1997
Toronto, Ontario Executive Officer since April 1998 and September 1997, respectively. Mr.
Wolfond founded Footprint Software Inc. (a financial
services software company) in 1987. IBM Canada Ltd.
purchased Footprint Software Inc. in May 1995, and Mr.
Wolfond continued to serve as Chief Executive Officer
of Footprint Software Inc. until July 1997, when he co-
founded the Corporation.
Christopher E. Erickson President, General President and General Counsel of the Corporation since 1998
Toronto, Ontario Counsel, Secretary July 1997 and Secretary since April 1998. Mr. Erickson
and Director was a corporate/commercial and technology lawyer at
Fasken, Campbell, Godfrey (a Canadian law firm) from
1994 to July 1997 and President of Cygnus Computer
Associates Ltd. (a software engineering firm) from
January 1989 to July 1997.
Andre Boysen Chief Technology Chief Technology Officer of the Corporation since 1998
Toronto, Ontario Officer and Director August 1998. Mr. Boysen was Chief Technology Officer
of Footprint Software Inc. from March 1996 to March
1998 and was Chief Executive Officer of Footprint
Software Inc.'s Asia-Pacific operations between 1994
and 1996.
Kerry McLellan Chief Operating Chief Operating Officer of the Corporation since June 1999
Westfield, New Brunswick Officer and Director 1999. Dr. McLellan was Executive Vice-President,
Strategy of the Corporation from August 1998 to May
1999. Since 1995, Dr. McLellan has also been President
of Melansons Waste Management and of Ready John Inc.
(both waste disposal companies).
Karen Basian Chief Financial Chief Financial Officer of the Corporation since N/A
Toronto, Ontario Officer February 1999. Ms. Basian was Chief Financial Officer
and Vice-President, Finance at Hostess Frito-Lay from
September 1996 to February 1999 and was Director of
Strategic Planning of Frito-Lay Inc. from July 1995 to
September 1996.
Mina Wallace Executive Vice- Executive Vice-President of Field Operations of the N/A
Toronto, Ontario President of Field Corporation since April 1999. Ms. Wallace was General
Operations Manager of PeopleSoft Canada Co. from 1996 to April
1999 and was their Vice-President of Sales from 1991 to
1996.
</TABLE>
<PAGE>
-47-
<TABLE>
<CAPTION>
NAME AND
MUNICIPALITY OF PRINCIPAL OCCUPATION AND YEAR BECAME
RESIDENCE OFFICE PRIOR EMPLOYMENT DIRECTOR
- - --------------------------- --------------------- --------------------------------------------------------- -------------
<S> <C> <C> <C>
Alistair Rennie Senior Vice- Senior Vice-President of Marketing of the Corporation N/A
Toronto, Ontario President of since April 1999. Mr. Rennie was a business analyst
Marketing and held various product management and marketing
positions with IBM Canada Ltd. from 1989 to April 1999.
David Pasieka Senior Vice- Senior Vice-President, Application Hosting of the N/A
Oakville, Ontario President, Corporation since January 2000. Mr. Pasieka was Senior
Application Hosting Vice-President - Local Services of AT&T Canada (a
telecommunications company) from July 1999 to January
2000. Prior to that, Mr. Pasieka was Vice-President
and General Manager of MetroNet Communications (a
telecommunications company) from December 1996 to June
1999. Mr. Pasieka was also Vice-President Access
Management from August 1995 to November 1996, and Vice-
President Marketing from February 1994 to July 1995 of
Unitel Communications (a telecommunications company).
Roger Horton Senior Vice- Senior Vice-President, Application Development of the N/A
Whitby, Ontario President, Corporation since March 2000. Mr. Horton has been
Application President of Roger Horton & Associates Inc. (a
Development consulting company) since 1996. Mr. Horton was also
Vice-President Operations & Technology of CIBC (a
Canadian chartered bank) from 1995 to 1996.
Lloyd F. Darlington Director President & Chief Executive Officer, Emfisys division 1998
Toronto, Ontario of Bank of Montreal since May 1, 2000. Mr. Darlington
was Chief Technology Officer and General Manager of
Bank of Montreal (a Canadian chartered bank) from May
1996 to April 2000. Mr. Darlington is also a director
of Cebra Inc. (an electronic commerce subsidiary,
wholly-owned by Bank of Montreal) and of Symcor Inc. (a
payment processing corporation). Mr. Darlington was
Executive Vice-President, Operations of Bank of
Montreal from 1989 to 1996.
</TABLE>
<PAGE>
-48-
<TABLE>
<CAPTION>
NAME AND
MUNICIPALITY OF PRINCIPAL OCCUPATION AND YEAR BECAME
RESIDENCE OFFICE PRIOR EMPLOYMENT DIRECTOR
- - --------------------------- --------------------- --------------------------------------------------------- -------------
<S> <C> <C> <C>
Martin A. Stein Director President of Sonoma Mountain Ventures L.L.C. (a 1998
San Francisco, consulting company he founded) since October 1998, as
California well as a partner in RSA Ventures (a consulting and
venture capital company) since 1999. Mr. Stein was
Vice-Chairman of Technology and Operations of Bank of
America Corporation from June 1990 to October 1998.
James D. Dixon Director Executive of Bank of America.com, a subsidiary of Bank 1999
Atlanta, Georgia of America, since February 2000. Mr. Dixon was Group
Executive of Bank of America Technology and Operations,
a subsidiary of Bank of America, from September 1998 to
February 2000. Mr. Dixon was President of NationsBank
Services, Inc., a subsidiary of NationsBank
Corporation, from 1992 until the 1998 merger of
NationsBank Corporation and Bank of America
Corporation.
Harri Vatanen Director Founder and President of Sonera SmartTrust (a wireless 1999
London, U.K. e-commerce security company) and Senior Vice-President
of Sonera Corporation (a telecommunications company),
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.
Alan Young Director Vice-President, Access Devices and Distribution 1999
New Canaan, Technologies for e-Citi, a division of Citigroup Inc.
Connecticut (a diversified holding company), since March 1998. Mr.
Young was Vice-President of Engineering of MTV Networds
(a multimedia corporation), a division of Viacom Inc.
(an international entertainment and media company) from
March 1995 to March 1998. Prior to March 1995, Mr.
Young was an executive of MTV Networks.
</TABLE>
The Corporation does not have an executive committee. The Corporation
has an audit committee that oversees the retention, performance and compensation
of the Corporation's independent auditors, and the establishment and oversight
of the its systems of internal accounting and auditing control. The members of
the Audit Committee are Kerry McLellan,
<PAGE>
-49-
Lloyd F. Darlington and James D. Dixon. The Corporation expects to appoint
three new members to its board at its annual and special shareholders'
meeting scheduled to be held on May 31, 2000, at least two of which will
become members of its audit committee. Assuming the shareholders approve the
election of three new members to the Board of Directors, the Corporation
intends to reconstitute its other committees to include these new members.
The Corporation also has the following committees:
- THE COMPENSATION COMMITTEE, which is comprised of Gregory
Wolfond, Martin A. Stein, Alan Young, Christopher Erickson
and Kerry McLellan;
- THE STOCK OPTION COMMITTEE, which is comprised of Christopher
Erickson and Andre Boysen; and
- THE CORPORATE GOVERNANCE COMMITTEE, which is comprised of
Christopher Erickson, Kerry McLellan, Lloyd F. Darlington, Martin
A. Stein and Alan Young.
COMPENSATION OF DIRECTORS AND OFFICERS
See "Executive Compensation" on pages 12 to 18 of the Corporation's
Management Information Circular dated April 25, 2000 filed in connection with
the annual and special meeting of shareholders to be held on May 31, 2000 and
which is incorporated by reference herein.
In 1999, the Corporation paid aggregate cash compensation of $1,000,000
to its directors and executive officers, for services in all capacities.
OPTIONS TO PURCHASE SECURITIES FROM THE CORPORATION
See "Election of Directors" on pages 7 to 11 and "Executive Compensation"
on pages 12 to 18 of the Corporation's Management Information Circular dated
April 25, 2000 filed in connection with the annual and special meeting of
shareholders to be held on May 31, 2000 and which is incorporated by reference
herein.
INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS
See "Interest of Insiders in Material Transactions" on pages 25 to 29 of
the Corporation's Management Information Circular dated April 25, 2000 filed in
connection with the annual and special meeting of shareholders to be held on May
31, 2000 and which is incorporated by reference herein.
<PAGE>
-50-
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND ISSUED SHARE CAPITAL
COMMON SHARES
The Corporation's authorized share capital consists of an unlimited
number of common shares, of which 36,551,258 common shares were issued and
outstanding as of March 31, 2000 (December 31, 1999 - 29,402,426) and an
unlimited number of preference shares issuable in series. 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 the
Corporation's board of directors. Upon the voluntary or involuntary
liquidation, dissolution or winding-up of the Corporation, the holders of common
shares are entitled to share ratably in the Corporation's remaining assets
available for distribution, after payment of liabilities. A holder of common
shares has no preemptive, redemption or conversion rights.
PREFERRED SHARES
The Corporation's articles provide that its 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 the Corporation.
REGISTRAR AND TRANSFER AGENTS
The registrar and transfer agents for the Corporation's common shares are
Montreal Trust Company of Canada, 8th Floor, 151 Front Street West, Toronto,
Ontario M5J 2N1, and American Securities Transfer and Trust Inc., 12039 West
Alamenda Parkway, Lakewood, Colorado, 80228.
CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED
SECURITIES AND USE OF PROCEEDS
In February 2000, the Corporation completed its initial public
offering, pursuant to a Registration Statement on Form F-1 (File No.
333-90143), which was declared effective by the Securities and Exchange
Commission on January 27, 2000, on which date the offering commenced. All of
the common shares registered pursuant to the registration statement were sold
by the Corporation.
<PAGE>
-51-
The managing underwriters of the U.S. syndicate were Credit Suisse First
Boston Corporation, FleetBoston Robertson Stephens Inc. and Thomas Weisel
Partners LLC. The managing underwriters of the Canadian syndicate were Nesbitt
Burns Inc., RBC Dominion Securities Inc. and Credit Suisse First Boston
Securities Canada Inc.
6,900,000 of the Corporation's common shares were registered in the
offering. The aggregate price of these shares was $179.4 million. The
Corporation incurred expenses of approximately $12.5 million in connection with
the offering, together with underwriting commissions of $12.6 million. The
Corporation's expenses in the offering consisted of payments to parties other
than its directors, officers, their associates or holders of 10% of its common
shares, except that Nesbitt Burns Inc. is an affiliate of Bank of Montreal, of
which Lloyd Darlington, one of the Corporation's directors, served as Chief
Technology Officer and General Manager. The aggregate net proceeds of the
offering were $166.9 million.
The closing of the offering took place in February 2000, and therefore
none of the proceeds from the offering were used in the year ended December 31,
1999.
ADDITIONAL INFORMATION
Additional information including directors' and officers' indebtedness,
principal holders of securities and options to purchase securities, where
applicable, is contained in the Corporation's Management Information Circular
dated April 25, 2000 filed in connection with the annual and special meeting of
shareholders to be held on May 31, 2000, which involves the election of
directors, and which is incorporated by reference herein.
The Corporation will provide to any person or corporation, upon written
request made by such person or corporation to 724 Solutions Inc., Suite 702,
4101 Yonge Street, North York, Ontario, M2P 1N6, attention: Ray McManus,
Director, Public Relations and Investor Relations:
(a) when securities of the Corporation are in the course of a
distribution pursuant to a short form prospectus or a preliminary
short form prospectus has been filed in respect of a distribution
of its securities,
(i) one copy of the latest annual information form of the
Corporation, together with one copy of any document, or
the pertinent pages of any document, incorporated therein
by reference;
(ii) one copy of the comparative financial statements of the
Corporation for the Corporation's most recently completed
financial year, together with the report of the auditor
thereon, management's discussion and analysis of financial
condition and results of operations, as prescribed, and
one copy of any interim financial statements of the
Corporation subsequent to the date of the latest annual
financial statements;
<PAGE>
-52-
(iii) one copy of the information circular of the Corporation in
respect of the most recent annual meeting of shareholders
of the Corporation which involves the election of
directors; and
(iv) one copy of any other documents which are incorporated by
reference into the preliminary short form prospectus or
the short form prospectus; and
(b) at any other time, the documents referred to in clauses (a)(i),
(ii) and (iii) above, provided that the Corporation may require
the payment of a reasonable charge from such a person or
corporation who is not a security holder of the Corporation, where
the documents are furnished under this clause (b).
