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FILE NO. 333-52698
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY __, 2001
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM F-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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724 SOLUTIONS INC.
(Exact Name of Registrant as Specified in its Charter)
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ONTARIO 7372 INAPPLICABLE
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification Number)
incorporation or
organization)
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4101 YONGE STREET, SUITE 702
TORONTO, ONTARIO M2P 1N6
(416) 226-2900
(Address and Telephone Number of Registrant's Principal Executive Offices)
GREGORY WOLFOND
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
724 SOLUTIONS INC.
4101 Yonge Street, Suite 702
Toronto, Ontario M2P 1N6
(416) 226-2900
(Name, Address and Telephone Number of Agent for Service)
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COPIES TO:
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ROBERT S. TOWNSEND, ESQ. BRIAN LUDMER, ESQ. S. MICHAEL DUNN, P.C. SCOTT A. BARSHAY, ESQ.
JEFFREY S. MARCUS, ESQ. Ogilvy Renault HARLIN R. DEAN, JR., ESQ. Cravath, Swaine & Moore
LLOYD HARMETZ, ESQ. Suite 2100, P.O. Box 141 JENNIFER L. WILLIAMS, ESQ. Worldwide Plaza
Morrison & Foerster LLP Royal Trust Tower, TD Centre Brobeck, Phleger & 825 Eighth Avenue
1290 Avenue of the Americas 77 King Street West Harrison LLP New York, New York
New York, New York Toronto, Ontario M5K 1H1 4801 Plaza on the Lake 10019-7475
10104-0012 Canada Austin, Texas 78746 (212) 474-1000
(212) 468-8000 (416) 216-4001 (512) 330-4000
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APPROXIMATE DATE OF COMMENCEMENT OF THE PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective, upon
the
satisfaction or waiver of the conditions set forth in the merger agreement
described herein.
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If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
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If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
--------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THE REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE
ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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TANTAU SOFTWARE, INC.
Dear Tantau Stockholder:
I am writing to you today about our proposed merger with a subsidiary of 724
Solutions Inc. This merger will combine two leading providers of Internet
infrastructure software for enabling secure mobile transactions into one global
company, which your board of directors believes will be better positioned to
grow Tantau's business and expand its customer base.
Prior to the merger, the shares of each class of Tantau's outstanding
preferred stock will be converted into shares of Tantau common stock. In the
merger, we expect that each share of Tantau common stock will be converted into
the right to receive an estimated 0.623 common shares of 724 Solutions.
724 Solutions' common shares are traded on the Nasdaq National Market under the
trading symbol "SVNX", and on The Toronto Stock Exchange under the trading
symbol "SVN". The closing price of 724 Solutions' common shares on January 3,
2001 was US$19.50 on the Nasdaq National Market, and Cdn.$29.65 on The Toronto
Stock Exchange. The merger is described more fully in the accompanying
information statement/prospectus.
Approximately 10% of the common shares of 724 Solutions that each Tantau
stockholder will be entitled to receive will be held in escrow following the
merger in accordance with an indemnification and escrow agreement to be entered
into upon completion of the merger by Tantau, 724 Solutions, an escrow agent and
a representative of the Tantau stockholders. In addition, as a condition to the
merger, substantially all of Tantau's stockholders, optionholders and
warrantholders who own or have a right to acquire 100,000 or more shares of
Tantau common stock must enter into resale restriction agreements limiting each
stockholder's, optionholder's and warrantholder's ability to sell or hedge
common shares of 724 Solutions acquired in the merger or upon exercise of
options or warrants assumed in the merger until the expiration of specific time
periods. The terms of the indemnification and escrow agreement and the resale
restriction agreements are more fully described in the information
statement/prospectus.
We cannot complete the merger unless holders of a majority of the shares of
each class of Tantau preferred stock, voting as separate and distinct classes,
and the holders of a majority of the shares of Tantau preferred stock and Tantau
common stock, voting together as a single class, approve the merger and adopt
and approve the merger agreement. Tantau's board of directors has determined to
seek the required approval of Tantau's stockholders by written consents. To vote
FOR the approval of the merger and FOR the adoption and approval of the merger
agreement you must complete, sign and return the enclosed written consent in
accordance with the accompanying instructions. If you do not return a signed
written consent, it will, in effect, count as a vote against the merger and the
merger agreement.
We are very excited about the opportunities we envision for the combined
company. Your board of directors has unanimously approved the merger and the
merger agreement and has unanimously determined that the merger agreement and
the merger are advisable and that the terms of the merger agreement, including
the consideration to be received by Tantau's stockholders, are fair to and in
the best interests of Tantau's stockholders. Your board of directors unanimously
recommends that you vote to adopt and approve the merger agreement and the
merger.
The accompanying information statement/prospectus provides detailed
information about Tantau, 724 Solutions and the merger. Please give all of this
information your careful attention. IN PARTICULAR, YOU SHOULD CAREFULLY CONSIDER
THE DISCUSSION IN THE SECTION ENTITLED "RISK FACTORS" BEGINNING ON PAGE 19 OF
THE INFORMATION STATEMENT/PROSPECTUS.
To vote FOR the adoption and approval of the merger agreement and the
merger, please complete, sign and return the accompanying written consent in the
enclosed self-addressed envelope, or by fax to (214) 468-3704, attention:
Jennifer L. Williams, for delivery to Brobeck, Phleger & Harrison LLP, Tantau's
legal counsel, no later than January 12, 2001. Your execution of the written
consent will also constitute your approval of the appointment of Joseph Aragona
as the representative of Tantau's stockholders for purposes of the
indemnification and escrow agreement, as more fully described in the information
statement/prospectus.
Sincerely,
[Signature of John Sims]
JOHN SIMS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THIS TRANSACTION OR THE SECURITIES
OF 724 SOLUTIONS TO BE ISSUED IN THE MERGER, OR DETERMINED IF THE ACCOMPANYING
INFORMATION STATEMENT/ PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The information statement/prospectus is dated January 4, 2001, and is first
being mailed to Tantau stockholders on or about January 5, 2001.
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TANTAU SOFTWARE, INC.
108 WILD BASIN ROAD
SUITE 110
AUSTIN, TEXAS 78746
ACTION TO BE TAKEN BY WRITTEN CONSENT OF STOCKHOLDERS
It is proposed that, by written consent of the Tantau stockholders, the
following action be taken:
The approval and adoption together as one matter of:
- the Agreement and Plan of Merger, dated as of November 29, 2000, by and
among 724 Solutions Inc., Saturn Merger Sub, Inc., a wholly owned
subsidiary of 724 Solutions, and Tantau Software, Inc.;
- the merger, under the terms of the merger agreement, of Saturn Merger Sub
with and into Tantau, by which Tantau will become a wholly owned
subsidiary of 724 Solutions; and
- the appointment of Joseph Aragona as representative of the Tantau
stockholders, optionholders and warrantholders under the indemnification
and escrow agreement.
Only Tantau stockholders of record at the close of business on January 2,
2001 are entitled to vote on the above matters. To vote FOR the approval and
adoption of the merger agreement and the merger, which vote will include your
appointment of Joseph Aragona as your representative under the indemnification
and escrow agreement, please complete and sign the accompanying written consent
and either mail it promptly in the enclosed postage-paid envelope, or fax a copy
of it to Jennifer L. Williams of Brobeck, Phleger & Harrison LLP, Tantau's legal
counsel, at (214) 468-3704, as soon as possible for delivery no later than
January 12, 2001. As more fully described in the accompanying information
statement/prospectus, under Delaware law, Tantau stockholders are entitled to
appraisal rights in connection with the merger.
YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE MERGER
AGREEMENT AND HAS UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT AND THE
MERGER ARE ADVISABLE AND THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING THE
CONSIDERATION TO BE RECEIVED BY TANTAU'S STOCKHOLDERS, ARE FAIR TO AND IN THE
BEST INTERESTS OF THE TANTAU STOCKHOLDERS. YOUR BOARD OF DIRECTORS UNANIMOUSLY
RECOMMENDS THAT YOU VOTE TO ADOPT AND APPROVE THE MERGER AGREEMENT AND THE
MERGER.
By Order of the Board of Directors,
[Signature of James Treybig]
JAMES TREYBIG
CHAIRMAN OF THE BOARD
Austin, Texas
January 4, 2001
PLEASE DO NOT SEND YOUR STOCK CERTIFICATES WITH YOUR WRITTEN CONSENT.
<PAGE>
INFORMATION STATEMENT/PROSPECTUS
TABLE OF CONTENTS
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PAGE
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Questions and Answers about the Merger...................... 1
Summary..................................................... 4
Comparative Historical and Pro Forma Per Share and Other
Data....................................................... 12
Comparative Market Price Data............................... 13
724 Solutions Summary Historical Consolidated Financial
Data....................................................... 14
Tantau Summary Historical Consolidated Financial Data....... 16
Summary Unaudited Pro Forma Consolidated Financial Data..... 17
Risk Factors................................................ 19
Information Regarding Forward-Looking Statements............ 31
Action to be Taken by Written Consent....................... 33
The Merger.................................................. 36
The Merger Agreement and Related Documents.................. 52
Market Prices of 724 Solutions' Common Shares............... 69
Market Prices of Tantau Stock............................... 69
Dividend Policy............................................. 69
Unaudited Pro Forma Consolidated Financial Statements....... 70
724 Solutions -- Selected Historical Consolidated Financial
Data....................................................... 78
724 Solutions -- Management's Discussion and Analysis of
Financial Condition and Results of Operations.............. 80
724 Solutions -- Business................................... 91
724 Solutions -- Management................................. 105
Principal Shareholders of 724 Solutions..................... 115
724 Solutions -- Related Party Transactions................. 117
Tantau -- Selected Historical Consolidated Financial Data... 122
Tantau -- Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 123
Tantau -- Business.......................................... 128
Tantau -- Security Ownership of Management and Principal
Stockholders............................................... 131
Description of 724 Solutions' Capital Stock................. 136
Comparison of Stockholder Rights............................ 140
Legal Matters............................................... 151
Experts..................................................... 151
Where You Can Find More Information about 724 Solutions..... 152
Index to Financial Statements............................... F-1
724 Solutions Inc. Consolidated Financial Statements........ F-2
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Tantau Software, Inc. Consolidated Financial Statements..... F-27
Spyonit.com, Inc. Financial Statements...................... F-42
Ezlogin.com, Inc. Financial Statements...................... F-50
Annexes:
Annex A: Agreement and Plan of Merger....................... A-1
Annex B: Form of Voting Agreement........................... B-1
Annex C: Form of Resale Restriction Agreement............... C-1
Annex D: Form of Indemnification and Escrow Agreement....... D-1
Annex E: Appraisal and Dissenters' Rights................... E-1
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QUESTIONS AND ANSWERS ABOUT THE MERGER
Q. WHY ARE 724 SOLUTIONS AND TANTAU MERGING?
A. The boards of directors of each of 724 Solutions and Tantau took into
consideration a variety of different factors in deciding to approve the
merger. The parties believe that the merger will enable the combined company
to become the leading provider of Internet infrastructure software that
permits secure transactions using a broad range of Internet-enabled devices.
724 Solutions and Tantau believe the combined company can achieve this goal
because it will be able to move faster to develop and market advanced
services and technologies to its target market of leading financial
institutions and other enterprises. See "The Merger -- Tantau's Reasons for
the Merger" and "The Merger -- 724 Solutions' Reasons for the Merger."
Q: WHAT WILL I, AS A STOCKHOLDER OF TANTAU, RECEIVE IN THE MERGER?
A: If the merger is completed, you will receive an estimated 0.623 common shares
of 724 Solutions for each share of Tantau common stock you own at the time
of completion of the merger. 724 Solutions will not issue fractional shares
in connection with the merger. Instead of any fractional common shares of
724 Solutions, you will receive cash based on the market price of
724 Solutions' common shares on the closing date of the merger. See "The
Merger Agreement and Related Documents -- Description of the Merger
Agreement -- Consideration to be Received in the Merger."
Q. WHAT OTHER SECURITIES OF 724 SOLUTIONS ARE OUTSTANDING OTHER THAN THE COMMON
SHARES THAT WILL BE ISSUED IN THE MERGER?
A. As of November 15, 2000, 724 Solutions had 39,083,867 common shares
outstanding. In addition, as of September 30, 2000, 724 Solutions had
outstanding options to purchase 3,876,137 common shares, which had a
weighted average exercise price of $27.08 per share. See "Management -- 724
Solutions Executive Compensation -- Stock Option Plans."
Q. WHAT CORPORATE ENTITIES ARE INVOLVED IN THE MERGER?
A. In the merger, Saturn Merger Sub, Inc., a wholly owned subsidiary of
724 Solutions, will merge with and into Tantau. Tantau will be the surviving
corporation, and will continue as a wholly-owned subsidiary of
724 Solutions. See "The Merger Agreement and Related
Documents -- Description of the Merger Agreement -- Structure."
Q: HOW WILL THE MERGER AFFECT OPTIONS AND WARRANTS TO ACQUIRE TANTAU COMMON
STOCK?
A: Options to purchase shares of Tantau common stock will be assumed by
724 Solutions and become exercisable for common shares of 724 Solutions
after completion of the merger. The number of shares covered by these
options, and their applicable exercise prices, will be adjusted using the
merger exchange ratio of 0.623 common shares of 724 Solutions for each share
of Tantau common stock that was subject to the applicable option prior to
the merger. Currently outstanding warrants of Tantau that are not exercised
prior to the merger will be similarly treated. See "The Merger Agreement and
Related Documents -- Description of the Merger Agreement -- Treatment of
Stock Options and Warrants."
Q: WILL TANTAU STOCKHOLDERS BE ABLE TO TRADE THE 724 SOLUTIONS COMMON SHARES
THAT THEY RECEIVE IN THE MERGER?
A: Although the 724 Solutions common shares to be issued in the merger will be
listed on the Nasdaq National Market under the symbol "SVNX", and on The
Toronto Stock Exchange under the symbol "SVN", as a condition to
724 Solutions' obligation to complete the merger, substantially all of the
stockholders, optionholders and warrantholders of Tantau owning over 100,000
shares or more of Tantau's capital
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stock, including shares subject to outstanding options and warrants, will be
required to enter into resale restriction agreements. In addition, Tantau
has agreed to use its best efforts to cause all of its stockholders,
optionholders and warrantholders to enter into resale restriction agreements
prior to the effective time. These agreements will restrict the sale,
transfer and hedging of 724 Solutions common shares received in the merger
or upon exercise of options or warrants assumed in the merger for a period
of 18 months following the effective date of the merger. According to the
resale restriction agreements, 15% of the shares will cease to be restricted
and will become available for sale three months after closing, 15% of the
shares will cease to be restricted and will become available for sale six
months after closing, 15% of the shares will cease to be restricted and will
become available for sale nine months after closing, 15% of the shares will
cease to be restricted and will become available for sale twelve months
after closing, 20% of the shares will cease to be restricted and will become
available for sale fifteen months after closing, and the final 20% of the
shares will cease to be restricted and will become available for sale
eighteen months after closing. Under some circumstances, the release of
shares subject to the resale restriction agreements may be accelerated. The
resale restriction agreements are described under "The Merger Agreement and
Related Documents -- Resale of 724 Solutions Common Shares -- Resale
Restriction Agreements."
In addition, persons who are deemed affiliates of Tantau will be required to
comply with Rule 145 under the Securities Act in order to sell the common
shares of 724 Solutions they receive in the merger or upon exercise of
options or warrants assumed in the merger. Sales of 724 Solutions common
shares in Canada will also be subject to restrictions under applicable
Canadian securities laws described in this information statement/
prospectus. Finally, a portion of the 724 Solutions common shares and
assumed options and warrants to be issued in the merger will be placed into
escrow as described in the answer to the next question.
Q: WHAT PORTION OF THE 724 SOLUTIONS COMMON SHARES ISSUED IN THE MERGER WILL BE
HELD IN ESCROW?
A: Under the indemnification and escrow agreement to be entered into at the
closing of the merger, approximately 10% of the 724 Solutions common shares
to be issued in the merger to Tantau stockholders will be placed in escrow
to compensate and indemnify 724 Solutions for losses resulting from any
breaches of the merger agreement by Tantau and for other specified matters.
The shares will be released from escrow and distributed to the former
stockholders of Tantau fifteen months after the effective time of the merger
unless retained to cover unresolved pending claims. In addition,
approximately 10% of the Tantau options assumed in the merger, other than
the permitted interim period stock options described under "The Merger
Agreement and Related Documents -- Description of the Merger
Agreement -- Permitted Interim Period Stock Options," will be subject to
cancellation to indemnify 724 Solutions under the indemnification and escrow
agreement. Tantau's stockholders and optionholders may be obligated to
indemnify 724 Solutions beyond the 15 month period and for amounts in excess
of the securities in the escrow fund for specified matters. The
indemnification and escrow agreement is described under "The Merger
Agreement and Related Documents -- Indemnification and Escrow Agreement."
Q: WHEN DO YOU EXPECT TO COMPLETE THE MERGER?
A: We currently plan to complete the merger in the first quarter of 2001.
However, because the merger is subject to several
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conditions, we cannot predict the exact timing.
Q: WHAT DO I NEED TO DO NOW TO VOTE FOR THE MERGER AGREEMENT AND THE MERGER?
A: After carefully reading and considering the information contained in this
document, please complete and sign your written consent if you wish to
approve and adopt the merger agreement and the merger. Then either mail your
completed, signed and dated written consent in the enclosed return envelope,
or fax a copy of it to Jennifer L. Williams of Brobeck, Phleger &
Harrison LLP, Tantau's legal counsel, at (214) 468-3704, as soon as possible
for delivery no later than January 12, 2001 so that your shares are counted
toward approval of the merger. See "Action to Be Taken by Written Consent."
Q: WHAT HAPPENS IF I DON'T RETURN A WRITTEN CONSENT?
A: Not returning your written consent will have the same effect as voting
against adoption and approval of the merger agreement and against approval
of the merger.
Q: CAN I CHANGE MY VOTE AFTER I HAVE MAILED OR FAXED MY SIGNED WRITTEN CONSENT?
A: Yes. You can change your vote at any time before January 12, 2001 by sending
a written notice stating that you would like to revoke your written consent.
See "Action to Be Taken by Written Consent -- Revoking Consents." However,
Tantau stockholders and optionholders who are parties to voting agreements
with 724 Solutions may not revoke the proxies they granted to 724 Solutions
under those agreements. The voting agreements are described under "The
Merger Agreement and Related Documents -- Stockholder Voting Agreements."
Q: WILL THE MERGER BE TAXABLE TO ME?
A: The merger generally will not be taxable to Tantau stockholders. Tantau
stockholders who exchange their shares of Tantau common stock solely for
common shares of 724 Solutions in the merger will not recognize any gain or
loss on the exchange for United States federal income tax purposes. However,
Tantau stockholders will be subject to taxes relating to any cash received
in lieu of fractional common shares of 724 Solutions. The merger will not
have any tax consequences for 724 Solutions' stockholders. To review the tax
consequences of the merger to Tantau's stockholders in greater detail, see
"The Merger -- Material United States Federal and Canadian Income Tax
Consequences."
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. If the merger is completed, we will send you written instructions for
exchanging your Tantau stock certificates for 724 Solutions stock
certificates. See "The Merger Agreement and Related Documents -- Description
of the Merger Agreement -- Procedures for Exchanging Stock Certificates."
Q: AM I ENTITLED TO DISSENTERS' OR APPRAISAL RIGHTS IN CONNECTION WITH THE
MERGER?
A: Yes. Under applicable Delaware law, you are entitled to dissenters' or
appraisal rights in connection with the merger. See "The
Merger -- Dissenters' Rights/Appraisal Rights."
Q: ARE THERE RISKS I SHOULD CONSIDER IN DECIDING WHETHER TO VOTE FOR THE
MERGER?
A: Yes. We have set out in the section entitled "Risk Factors" beginning on
page 19 of this document a number of risk factors that you should consider
carefully in connection with the merger and the related conversion of your
shares of Tantau capital stock into common shares of 724 Solutions.
Q: WHO CAN HELP ANSWER MY QUESTIONS ABOUT THE MERGER?
A: Tantau stockholders may call Mr. John Reece, Chief Financial Officer of
Tantau, at (512) 306-4204, with any questions that they may have about the
merger.
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SUMMARY
THE FOLLOWING IS A SUMMARY OF THE INFORMATION CONTAINED IN THIS DOCUMENT AND
MAY NOT CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD
CAREFULLY READ THIS ENTIRE DOCUMENT AND THE OTHER DOCUMENTS WE REFER TO FOR A
MORE COMPLETE UNDERSTANDING OF THE MERGER AND RELATED TRANSACTIONS. SEE "WHERE
YOU CAN FIND MORE INFORMATION ABOUT 724 SOLUTIONS" FOR ADDITIONAL SOURCES OF
INFORMATION. BECAUSE THIS DOCUMENT CONSTITUTES A PROSPECTUS FOR 724 SOLUTIONS'
SECURITIES, THE TERMS "WE" AND "OUR" REFER TO 724 SOLUTIONS.
THE COMPANIES
724 SOLUTIONS INC.
4101 YONGE STREET, SUITE 702
TORONTO, ONTARIO M2P 1N6
CANADA
We provide Internet infrastructure software solutions that enable our
customers to deliver services involving transactions such as online banking,
brokerage and mobile electronic commerce, or m-commerce. Using our 724 platform,
these services can be delivered across a wide range of Internet-enabled wireless
and consumer electronic devices. Our products currently enable consumers to
securely access these services through network service providers using digital
mobile phones, personal digital assistants, two-way pagers and personal
computers. Our customers are now in the initial phases of offering m-commerce
services based upon our products. With critical security features built in, our
products can be quickly implemented and integrated with existing systems, and
scaled or expanded to accommodate future growth. Using our 724 platform and
related products, our customers can provide new levels of service in an easy to
use, personalized manner. Our customers may operate our software solutions
within their own facilities, or we can provide them with our application hosting
services.
Our product offering consists of two categories of components: a base
technology layer called the 724 platform, and a suite of features and functions
for consumers, called the 724 applications, which include financial service
applications and our LiveClips service, together with our 724 alerts and m-
commerce and content applications, and which can be used together with the
underlying platform infrastructure.
In recent months, we have entered into new license agreements with
additional financial institutions, and have begun to provide application hosting
services to our customers. We have also completed three acquisitions, including:
- YRLess, which has developed a carrier-grade short messaging service
gateway that we plan to use to enhance our ability to quickly connect our
services to carriers. The YRLess gateway includes advanced features that
are designed to enhance its operation with different networks, including
functions that control the amount of messages that cross a network,
advanced security features and anti-spamming features.
- ezlogin, a developer of Internet infrastructure tools for user-directed
personalization that are now the basis of our LiveClips product, which we
introduced in September 2000. LiveClips is a comprehensive aggregation
tool designed to enable our customers to provide consumers with a
consolidated view of their online accounts and other items of personal
interest across a wide range of Internet-enabled devices.
- Spyonit, which has developed intelligent alerting infrastructure software
that monitors the Internet or other data sources for items of interest,
such as stock prices, product sales and auction bids, and which notifies a
consumer when a particular condition selected by the consumer is met.
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TANTAU SOFTWARE, INC.
108 WILD BASIN ROAD, SUITE 110
AUSTIN, TEXAS 78746
(512) 306-4200
Tantau is a global provider of software and services that enable enterprises
to conduct high-volume, secure, m-commerce transactions while maintaining direct
access to their customers. Tantau's Wireless Internet Platform creates a link
for a variety of wireless and wired devices -- including cellular telephones,
personal digital assistants, pagers and web browsers -- to interact with
enterprise applications and data sources. Tantau's Wireless Internet Platform
allows enterprises to offer access to their Internet e-commerce activities, such
as banking, stock trading and shopping, through wireless mobile devices.
Tantau's software is structured to ensure scalability, availability, transaction
security and integrity. Through the use of wireless application protocol (WAP)
and other technologies, Tantau's Wireless Internet Platform is designed to be
interoperable with a wide variety of wireless devices, networks, protocols and
operating systems. Headquartered in Austin, Texas, Tantau maintains offices
throughout Europe, the United States, and the Asia/Pacific region, with
significant engineering operations in Germany, Switzerland and Finland.
ACTION TO BE TAKEN BY WRITTEN CONSENT
TIMING. All written consents must be received at 2001 Ross Avenue, Suite
2500, Dallas, Texas 75201, Attention: Jennifer L. Williams, by January 12, 2001
to be counted toward approval of the merger.
MATTERS TO BE APPROVED BY WRITTEN CONSENT. By written consent, the holders
of Tantau stock will be asked to approve the merger, adopt and approve the
merger agreement, and approve the appointment of Joseph Aragona as the
representative of Tantau's stockholders, optionholders and warrantholders under
the indemnification and escrow agreement.
RECORD DATE. The close of business on January 2, 2001 is the record date
for determining which holders of Tantau stock are entitled to vote on the
matters to be approved by written consent. At the record date, there were
approximately 7,748,366 shares of Tantau common stock outstanding, 12,850,000
shares of Tantau Series A preferred stock outstanding, and 6,472,785 shares of
Tantau Series B preferred stock outstanding.
Holders of Tantau common stock and Tantau preferred stock as of the record
date are entitled to one vote per share on each matter to be approved by written
consent.
CONSENT REQUIRED
Adoption of the merger agreement by Tantau's stockholders is required under
Delaware law and Tantau's certificate of incorporation. The proposal to approve
and adopt the merger agreement and the merger requires the affirmative vote or
consent of:
- the holders of a majority of the outstanding shares of Tantau common stock
and Tantau preferred stock, voting together as a single class;
- the holders of a majority of the outstanding shares of Tantau Series A
preferred stock, voting as a distinct and separate class; and
- the holders of a majority of the outstanding shares of Tantau Series B
preferred stock, voting as a distinct and separate class.
SHARE OWNERSHIP OF MANAGEMENT
As of the record date, the executive officers and directors of Tantau and
their affiliates collectively owned approximately 17,047,993 shares of Tantau
common stock and Tantau preferred stock, together
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representing approximately 63.0% of the total outstanding Tantau capital stock,
consisting of: 9,840,000 shares of Tantau Series A preferred stock, representing
approximately 76.6% of the total outstanding Tantau Series A preferred stock;
2,855,743 shares of Tantau Series B preferred stock, representing approximately
44.1% of the total outstanding Tantau Series B Preferred Stock; and 4,352,250
shares of Tantau common stock, representing approximately 56.2% of the total
outstanding Tantau common stock.
The executive officers and directors of Tantau and their affiliates who own
shares of Tantau capital stock have entered into voting agreements with 724
Solutions. Under these agreements, these stockholders have agreed to vote their
shares for the approval and adoption of the merger agreement and the merger.
SHARES SUBJECT TO VOTING AGREEMENTS
Pursuant to voting agreements entered into with 724 Solutions by the
executive officers and directors of Tantau and their affiliates who own shares
of Tantau capital stock and by several stockholders who are affiliates of
Tantau, Tantau stockholders holding 4,352,250 shares of Tantau common stock,
12,240,000 shares of Tantau Series A preferred stock, and 4,774,257 shares of
Tantau Series B preferred stock, representing approximately 56.2% of the shares
of Tantau common stock outstanding on the record date, 95.3% of the shares of
Tantau Series A preferred stock outstanding on the record date, and 73.7% of the
shares of Tantau Series B preferred stock outstanding on the record date, have
agreed to vote for adoption and approval of the merger agreement and the merger.
The Tantau stockholders who entered into voting agreements also granted proxies
to 724 Solutions to vote for adoption and approval of the merger agreement and
the merger. The vote by the stockholders party to the voting agreements of their
shares in favor of the merger agreement and the merger will be sufficient to
adopt and approve the merger agreement and the merger under Delaware law and
Tantau's certificate of incorporation. Additional optionholders of Tantau have
also executed voting agreements in which they have agreed to vote the shares
issued upon exercise of these options prior to the record date, if any, in favor
of the merger agreement and the merger. See "The Merger Agreement and Related
Documents -- Stockholder Voting Agreements."
A form of the stockholder voting agreements is attached as Annex B to this
information statement/ prospectus. We encourage you to read this document
carefully.
RECOMMENDATION OF THE TANTAU BOARD OF DIRECTORS
The Tantau board of directors has unanimously approved the merger and the
merger agreement and has unanimously determined that the merger agreement and
the merger are advisable and that the terms of the merger agreement, including
the consideration to be received by Tantau's stockholders, are fair to and in
the best interests of the Tantau stockholders.
THE TANTAU BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TANTAU
STOCKHOLDERS VOTE TO ADOPT AND APPROVE THE MERGER AGREEMENT AND THE MERGER.
THE MERGER
724 Solutions, Saturn Merger Sub, Inc., a wholly owned subsidiary of 724
Solutions, and Tantau have entered into a merger agreement that provides for the
merger of Saturn Merger Sub with and into Tantau. Tantau will be the surviving
corporation in the merger and will become a wholly owned subsidiary of
724 Solutions. As a condition to 724 Solutions' obligations to complete the
merger, all of the outstanding shares of Tantau's preferred stock must be
converted into shares of Tantau common stock prior to the merger. In the merger,
we expect that each share of Tantau common stock will be converted into the
right to receive an estimated 0.623 common shares of 724 Solutions. We urge you
to read the merger agreement, which is included as Annex A to this information
statement/prospectus, carefully and in its entirety.
6
<PAGE>
CONDITIONS TO THE MERGER
The completion of the merger is subject to the satisfaction of a number of
conditions, including:
- adoption and approval of the merger agreement and the merger by Tantau's
stockholders;
- the continued accuracy in all material respects of 724 Solutions' and
Tantau's representations and warranties in the merger agreement;
- the delivery of resale restriction agreements (see "The Merger Agreement
and Related Documents -- Resale of 724 Solutions' Common Shares -- Resale
Restriction Agreements") by substantially all of the stockholders,
optionholders and warrantholders owning, or having the right to receive
upon the exercise of options or warrants, 100,000 or more shares of Tantau
capital stock;
- the absence of any material adverse effect on the respective businesses,
assets, financial condition or results of operations of 724 Solutions and
Tantau;
- holders of no more than 5% of Tantau's capital stock shall have exercised
appraisal rights under Delaware law;
- conversion of all of the outstanding shares of Tantau preferred stock into
shares of Tantau common stock; and
- receipt by Tantau of an opinion of tax counsel that the merger will be
treated as a tax-free reorganization.
Some of the closing conditions may be waived by the party entitled to assert
the conditions. See "The Merger Agreement and Related Documents -- Description
of the Merger Agreement -- Conditions to Completion of the Merger."
REQUIRED REGULATORY APPROVALS
The merger is subject to the Hart-Scott-Rodino Act. 724 Solutions and Tantau
have made the required filings with the Department of Justice and the applicable
waiting periods associated with those filings expired in December 2000. However,
the Department of Justice and the Federal Trade Commission, as well as a state
antitrust authority or private person, may challenge the merger at any time
before its completion. Neither 724 Solutions nor Tantau is aware of any other
material regulatory approval required for the merger, other than compliance with
applicable corporate law of Delaware, and except for approvals already obtained.
See "The Merger -- Regulatory and Other Approvals."
TERMINATION OF THE AGREEMENT
724 Solutions and Tantau may terminate the merger agreement at any time
prior to the merger by mutual consent. In addition, either 724 Solutions or
Tantau may terminate the merger agreement:
- if the other party shall have breached any of its representations,
warranties, covenants or agreements set forth in the merger agreement, and
that breach:
- would give rise to the failure of a condition to the obligation of the
party seeking to terminate, as set forth in the merger agreement, and
- has not been, or is incapable of being, cured within 30 days after the
breaching party has been notified of its breach;
- if any legal restraint preventing the completion of the merger shall have
become final and nonappealable;
- if the required Tantau stockholder approval is not obtained; or
- if the merger shall not have been completed on or before March 31, 2001.
7
<PAGE>
The right to terminate the merger agreement described in the last bullet
point above will not be available to any party whose failure to perform its
obligations results in the failure of the merger to be completed by March 31,
2001. See "The Merger Agreement and Related Documents -- Description of the
Merger Agreement -- Termination of the Merger Agreement."
NO SOLICITATION OF OTHER TAKEOVER PROPOSALS
Tantau has agreed that it will not, and that it will cause its officers,
directors, employees and other representatives not to, solicit, initiate or
encourage, or participate in any discussions or negotiations with respect to,
any takeover proposal involving Tantau. See "The Merger Agreement and Related
Documents -- Description of the Merger Agreement -- Other Covenants of Tantau."
FEE PAYABLE IF APPRAISAL RIGHTS CONDITION NOT SATISFIED
If the closing condition requiring that holders of no more than 5% of
Tantau's capital stock shall have exercised appraisal rights is not satisfied
and a takeover proposal with respect to Tantau has been announced or publicly
disclosed, or disclosed to Tantau stockholders generally, Tantau must pay a fee
to 724 Solutions in the amount of $12.0 million. See "The Merger Agreement and
Related Documents -- Description of the Merger Agreement -- Fee Payable if
Appraisal Rights Condition Not Satisfied."
INTERESTS OF RELATED PERSONS IN THE MERGER
In considering the recommendations of Tantau's board of directors, you
should be aware that some directors and executive officers of Tantau have
interests in the merger that are different from, or in addition to, your
interests. In particular:
- three of the directors of Tantau and one of the members of Tantau's
advisory board will become directors of 724 Solutions after the merger;
- some of the executive officers of Tantau have entered into employment
agreements with 724 Solutions and will become executive officers of 724
Solutions after the merger, including John Sims, who will become the chief
executive officer;
- the executive officers and certain employees of Tantau will receive grants
of additional options for Tantau common stock immediately prior to, and
subject to completion of, the merger; and
- Tantau's directors and officers will receive continuing indemnification
against specified types of liabilities from 724 Solutions.
See "The Merger -- Interests of Certain Persons in the Merger."
PERMITTED INTERIM PERIOD STOCK OPTIONS
The merger agreement permits Tantau to grant options meeting specified
criteria prior to the merger. These options, which are referred to as permitted
interim period stock options, will be assumed by 724 Solutions in the merger,
but will not count against the aggregate 19 million 724 Solutions common shares,
options and warrants issuable in the merger in exchange for shares of Tantau
capital stock, Tantau's other options to be assumed in the merger and warrants
to acquire Tantau common stock. These permitted interim period stock options
will include:
- Tantau stock options convertible into options to acquire an aggregate of
1.5 million common shares of 724 Solutions which will be issued to the
executive officers and specified other employees of Tantau immediately
prior to the merger; and
- options to acquire up to 500,000 shares of Tantau common stock which may
be issued to newly hired employees and promoted employees prior to the
merger.
8
<PAGE>
ACCOUNTING TREATMENT
The merger will be accounted for using the purchase method of accounting
under generally accepted accounting principles, with 724 Solutions having
acquired Tantau. See "The Merger -- Accounting Treatment."
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The merger is intended to qualify, for United States federal income tax
purposes, as a "tax-free reorganization" so that generally, no gain or loss
would be recognized by Tantau stockholders. It is a condition to consummation of
the merger that Tantau will have received an opinion of its tax counsel to the
effect that the merger will constitute a reorganization within the meaning of
Section 368(a)(1)(B) of the U.S. Internal Revenue Code of 1986, as amended. For
a further discussion of the U.S. federal income tax consequences of the merger,
see "The Merger -- Material United States Federal and Canadian Income Tax
Consequences." Tax matters are very complicated and the tax consequences of the
merger to you will depend on the facts of your own situation. You should consult
your own tax advisor for a full understanding of the tax consequences of the
merger to you.
EXPENSES
Each of 724 Solutions and Tantau will bear all expenses it incurs in
connection with the merger. However, 724 Solutions and Tantau will share equally
the costs of preparing and filing the registration statement of which this
information statement/prospectus is a part with the Securities and Exchange
Commission, the cost of printing and mailing this information
statement/prospectus, and the filing fees incurred in connection with obtaining
regulatory approval under the Hart-Scott-Rodino Act.
APPRAISAL RIGHTS
Under Delaware law, Tantau stockholders are entitled to appraisal rights in
connection with the merger, subject to conditions discussed more fully elsewhere
in this information statement/prospectus. Appraisal rights entitle a dissenting
stockholder, under some conditions, to receive a valuation of their shares and a
payment of that value in cash. Failure to follow the steps required by law for
perfecting appraisal rights may lead to the loss of those rights, in which case
the stockholder will be treated in the same manner as other non-dissenting
stockholders. In view of the complexity of the law relating to appraisal rights,
Tantau stockholders who are considering objecting to the merger should consult
their own legal advisors. See Annex E for a reproduction of Section 262 of the
Delaware General Corporation Law relating to dissenters' rights, and see "The
Merger -- Dissenters' Rights/Appraisal Rights."
RESALE OF 724 SOLUTIONS' COMMON SHARES
GENERAL. 724 Solutions' common shares to be issued to Tantau's stockholders
in connection with the merger are being registered under the U.S. Securities Act
of 1933, as amended. Accordingly, all of the common shares received by Tantau's
stockholders in the merger will be freely transferable, except as described in
the next paragraph and except that the common shares received by persons who are
deemed to be "affiliates," as such term is defined under the Securities Act, of
Tantau prior to the merger may be resold by them in the U.S. only in
transactions permitted by the resale provisions of Rule 145 under the Securities
Act, or Rule 144 in the case of such persons who become affiliates of 724
Solutions, or as otherwise permitted under the Securities Act. Persons who may
be deemed to be affiliates of 724 Solutions or Tantau generally include
individuals or entities that control, are controlled by, or are under common
control with, such party and may include the directors and certain officers of
that party as well as principal stockholders of that party. Sales of 724
Solutions' common shares in Canada will also be subject to Canadian securities
laws. See "The Merger Agreement and Related Documents -- Resale of 724
Solutions' Common Shares."
9
<PAGE>
RESALE RESTRICTION AGREEMENTS. As a condition to 724 Solutions' obligation
to complete the merger, substantially all of Tantau's stockholders,
optionholders and warrantholders owning 100,000 or more shares of Tantau stock,
including shares subject to outstanding options and warrants, must enter into a
resale restriction agreement. In addition, Tantau has agreed to use its best
efforts to cause all of its stockholders and optionholders to enter into resale
restriction agreements prior to the effective time. These agreements will
restrict their ability to sell, transfer or hedge the 724 Solutions common
shares issued in the merger or issuable upon exercise of options or warrants
assumed in the merger during the 18 month period following the effective time of
the merger. The 724 Solutions common shares issued in the merger will be
released from these restrictions in a series of installments as follows:
- 15% of these shares will be released three months after the effective
time;
- 15% of these shares will be released six months after the effective time;
- 15% of these shares will be released nine months after the effective time;
- 15% of these shares will be released twelve months after the effective
time;
- 20% of these shares will be released fifteen months after the effective
time; and
- 20% of these shares will be released eighteen months after the effective
time.
Under some circumstances, the release of the 724 Solutions common shares
subject to the resale restriction agreements may be accelerated. The resale
restriction agreements will also require the Tantau stockholders to agree to
enter into customary lock-up arrangements if 724 Solutions conducts an
underwritten public offering in the four year period following the effective
time. See "The Merger Agreement and Related Documents -- Resale of 724
Solutions' Common Shares -- Resale Restriction Agreements."
A form of the resale restriction agreement is attached as Annex C to this
information statement/ prospectus. We encourage you to read this document
carefully.
INDEMNIFICATION AND ESCROW AGREEMENT
At the closing of the merger, 724 Solutions, Tantau and the representative
of the Tantau stockholders will enter into an indemnification and escrow
agreement with an escrow agent acceptable to the parties. In addition, Tantau
has agreed to use its best efforts to cause all of its stockholders,
optionholders and warrantholders to consent in writing to be deemed to be a
party to, and to agree to be bound by the terms of, the indemnification and
escrow agreement. This agreement will provide that 1.9 million of the 724
Solutions common shares to be issued in the merger in exchange for Tantau stock
or to be reserved for issuance upon the exercise of Tantau options and warrants
assumed in the merger, other than permitted interim period stock options, will
be available to indemnify and compensate 724 Solutions for losses resulting from
breaches of Tantau's representations, warranties and covenants contained in the
merger agreement and for other specified matters. Subject to retention for
unresolved pending claims, the shares, options and warrants subject to the
indemnification and escrow agreement and not previously canceled by
724 Solutions in satisfaction of claims for indemnification, will be distributed
to the former Tantau stockholders, optionholders and warrantholders 15 months
after the effective time. The indemnification and escrow agreement also provides
that Tantau stockholders, optionholders and warrantholders will be obligated to
indemnify 724 Solutions beyond the 15 month period of the escrow fund and for
amounts in excess of the value of the shares, options and warrants subject to
the escrow fund for specified matters, subject to limitations on the amount
recoverable for these matters. See "The Merger Agreement and Related
Documents -- Indemnification and Escrow Agreement."
A form of the indemnification and escrow agreement is attached as Annex D to
this information statement/prospectus. We encourage you to read this document
carefully.
10
<PAGE>
THE STOCKHOLDER REPRESENTATIVE
Joseph Aragona has been recommended by the Tantau board of directors to
serve as the representative of, and to act on behalf of, Tantau's stockholders,
optionholders and warrantholders, under the indemnification and escrow
agreement. In the written consent, stockholders of Tantau are being asked to
appoint Mr. Aragona as the stockholder representative. In addition, each Tantau
stockholder, optionholder and warrantholder who executes a resale restriction
agreement will also appoint the stockholder representative as that party's
representative under that agreement. For a description of the powers that may be
exercised by the stockholder representative, please see "The Merger Agreement
and Related Documents -- Stockholder Representative."
11
<PAGE>
COMPARATIVE HISTORICAL AND PRO FORMA PER SHARE AND OTHER DATA
The following tables set forth comparative historical and pro forma per
share data relating to 724 Solutions, and historical per share and other data of
Tantau.
724 SOLUTIONS: BOOK VALUE PER SHARE
<TABLE>
<CAPTION>
DATE ACTUAL HISTORICAL PRO FORMA 1(1) PRO FORMA 2(2)
---- ----------------- -------------- --------------
<S> <C> <C> <C>
September 30, 2000................................. $7.24 $7.24 $10.66
December 31, 1999.................................. $2.11 $3.88 $ 9.13
</TABLE>
------------
(1) This column gives effect to our acquisitions of ezlogin and Spyonit as if
these transactions had taken place as of the dates shown. As the
acquisitions of ezlogin and Spyonit both occurred prior to September 30,
2000, the Pro Forma 1 book value per share is the same as the actual
historical as at September 30, 2000. The December 31, 1999 Pro Forma 1 book
value per share gives effect to the acquisition of ezlogin as if the
transaction had taken place on December 31, 1999. Spyonit was inactive on
December 31, 1999 and, therefore, the acquisition of Spyonit does not affect
the calculation of the Pro Forma 1 December 31, 1999 amount.
(2) This column gives effect to the acquisitions as described above, as well as
the Tantau merger, as if these transactions had taken place as of the dates
shown.
724 SOLUTIONS: LOSS PER SHARE FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
PERIOD ACTUAL HISTORICAL PRO FORMA 1(1) PRO FORMA 2(2)
------ ----------------- -------------- --------------
<S> <C> <C> <C>
Nine months ended September 30, 2000............... $(1.13) $(1.76) $(3.12)
Year ended December 31, 1999....................... $(0.82) $(2.43) $(4.08)
</TABLE>
------------
(1) This column gives effect to our acquisitions of ezlogin and Spyonit as if
these transactions had taken place as of the first day of the periods
presented.
(2) This column gives effect to the above acquisitions, as well as the Tantau
merger, as if these transactions had taken place as of the first day of the
periods presented.
TANTAU: BOOK VALUE PER SHARE
<TABLE>
<CAPTION>
DATE ACTUAL HISTORICAL
---- -----------------
<S> <C>
September 30, 2000.......................................... $0.27
December 31, 1999........................................... $0.29
</TABLE>
TANTAU: LOSS PER SHARE FROM CONTINUING OPERATIONS
<TABLE>
<CAPTION>
PERIOD ACTUAL HISTORICAL(1)
------ --------------------
<S> <C>
Nine months ended September 30, 2000........................ $(0.55)
Year ended December 31, 1999................................ $(1.74)
</TABLE>
------------
(1) Assuming the conversion of Tantau's Series A and Series B preferred stock
into common stock.
Neither 724 Solutions nor Tantau declared or paid any dividends to the
holders of their capital stock during any of the fiscal periods described in
this information statement/prospectus.
12
<PAGE>
COMPARATIVE MARKET PRICE DATA
724 Solutions' common shares are traded on the Nasdaq National Market under
the symbol "SVNX", and on The Toronto Stock Exchange under the symbol "SVN".
None of Tantau's securities are traded on any exchange, and there is no
established trading market for Tantau stock. The information shown in the table
below presents the closing price per share for 724 Solutions' common shares on
November 28, 2000, the last full trading day prior to the public announcement of
the merger, and, applying such closing prices, the equivalent value per share of
Tantau's common stock based upon the estimated 17.0 million common shares of 724
Solutions that will be issued on the closing date of the merger in accordance
with the terms of the merger agreement, and the number of shares of Tantau's
common stock expected to be outstanding at the effective time. Because the
consideration per share of Tantau common stock to be received in the merger is
fixed in the merger agreement, the equivalent value per share of Tantau's common
stock will fluctuate from time to time with the market price of 724 Solutions'
common shares.
<TABLE>
<CAPTION>
CLOSING MARKET PRICE AS OF NOVEMBER 28, 2000 724 SOLUTIONS TANTAU
-------------------------------------------- ------------- ----------
<S> <C> <C>
Nasdaq...................................................... US$19 11/16 US$ 12.29
Toronto Stock Exchange...................................... Cdn.$30.00 Cdn.$18.72
</TABLE>
On January 3, 2001, the last full trading date prior to the date of this
information statement/ prospectus, the closing price per share of 724 Solutions'
common shares was US$19.50 on the Nasdaq National Market and Cdn.$29.65 on The
Toronto Stock Exchange, resulting in Tantau common stockholders receiving in the
merger 724 Solutions common shares having an approximate value of US$12.15 and
Cdn.$18.47 per Tantau share as of such date. See "Market Prices of 724
Solutions' Common Shares." Holders of Tantau's capital stock are urged to obtain
current market quotations for 724 Solutions' common shares.
13
<PAGE>
724 SOLUTIONS SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
Our consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. These principles conform in
all material respects with U.S. generally accepted accounting principles except
as disclosed in note 14 to our consolidated financial statements. The following
summary consolidated financial data should be read with "724 Solutions --
Management's Discussion and Analysis of Financial Condition and Results of
Operations," and our 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 and for the years
ended December 31, 1998 and December 31, 1999, and the consolidated balance
sheet data as of December 31, 1998 and 1999, were derived from our consolidated
financial statements, which have been audited by KPMG LLP. The consolidated
statements of operations data for the nine months ended September 30, 1999 and
September 30, 2000 and the consolidated balance sheet data as of September 30,
1999 were derived from the unaudited interim consolidated financial statements
for these periods and have been prepared on the same basis as the audited
consolidated financial statements and, in the opinion of management, contain all
adjustments necessary for the fair presentation of the results of operations for
such periods. Please note that our operating results for these nine-month
periods are not necessarily indicative of the results of operations for a full
year or for any other future period.
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED YEARS ENDED JULY 28, 1997
SEPTEMBER 30, DECEMBER 31, (INCEPTION) TO
------------------------- ------------------- DECEMBER 31,
2000 1999 1999 1998 1997
----------- ----------- -------- -------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
(In thousands of U.S. dollars, except shares and per share
amounts)
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
Revenue:
Product.................................... $ 8,835 $ 1,314 $ 1,697 $ 1,678 $--
Less: Stock-based compensation related to
software development..................... (248) (1,273) (1,644) (1,395) --
Services..................................... 4,606 788 1,169 208 --
-------- ------- -------- ------- ------
Net revenue.................................. 13,193 829 1,222 491 --
Operating expenses(1):
Cost of net revenue........................ 8,744 816 1,858 82 --
Research and development................... 20,769 4,433 7,255 2,194 44
Sales and marketing........................ 9,748 1,124 2,598 405 39
General and administrative................. 12,797 1,902 3,634 528 82
Depreciation............................... 2,314 445 752 88 --
Amortization of intangibles................ 9,267 -- -- -- --
-------- ------- -------- ------- ------
Total operating expenses................... 63,639 8,720 16,097 3,297 165
-------- ------- -------- ------- ------
Loss from operations......................... (50,446) (7,891) (14,875) (2,806) (165)
Interest income.............................. 8,643 341 1,044 107 10
Equity in loss of affiliate.................. (543) -- -- -- --
Dilution gain................................ 1,229 -- -- -- --
-------- ------- -------- ------- ------
Loss for the period.......................... $(41,117) $(7,550) $(13,831) $(2,699) $ (155)
======== ======= ======== ======= ======
Basic and diluted loss per share............. $ (1.13) $ (0.57) $ (0.82) $ (0.47) $(0.06)
======== ======= ======== ======= ======
Weighted-average number of shares used in
computing basic and diluted loss per share
(in thousands)............................. 36,246 13,301 16,887 5,784 2,752
======== ======= ======== ======= ======
(1) Included in the above operating expense
line items are non-cash stock-based
compensation expenses for the following
amounts.................................. $ 3,854 $ 124 $ 165 $ 181 $--
======== ======= ======== ======= ======
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
(In thousands of U.S. dollars)
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents................................... $ 19,915 $65,287 $2,976
Short-term investments...................................... 158,062 -- --
Working capital............................................. 170,795 58,805 2,333
Intangible and other assets................................. 90,750 1,100 --
Total assets................................................ 297,266 73,242 3,892
Total shareholders' equity.................................. 282,858 62,168 3,193
======== ======= ======
</TABLE>
15
<PAGE>
TANTAU SUMMARY HISTORICAL CONSOLIDATED FINANCIAL DATA
Tantau's consolidated financial statements are prepared in accordance with
U.S. generally accepted accounting principles. The following summary historical
consolidated financial data of Tantau has been derived from Tantau's historical
consolidated financial statements, which have been audited by KPMG LLP. The
summary consolidated financial data presented below should be read in
conjunction with "Tantau -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Tantau's consolidated financial
statements and the notes thereto contained elsewhere in this information
statement/prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11, 1999
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- ------------------
(In thousands of U.S. dollars)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Software license revenue............................... $ 5,413 $ 2,296
Professional services revenue.......................... 1,161 580
-------- -------
Total revenue............................................ 6,574 2,876
-------- -------
Cost of revenue:
Software license....................................... 133 155
Professional services.................................. 897 601
-------- -------
Total cost of revenue.................................... 1,030 756
-------- -------
Gross profit............................................. 5,544 2,120
Operating expenses:
Research and development............................... 5,808 3,328
Sales and marketing.................................... 7,550 2,637
General and administrative............................. 6,155 4,480
-------- -------
Total operating expenses................................. 19,513 10,445
Loss from operations..................................... (13,969) (8,325)
Other income (expense):
Gain on sales of assets................................ 5,213 --
Realized loss on investment in Accrue
Software, Inc........................................ (31,413) --
Interest expense....................................... (550) --
Interest income........................................ 1,080 247
-------- -------
Net other income (expense)............................... (25,670) 247
-------- -------
Net loss................................................. $(39,639) $(8,078)
======== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- ------------------
(In thousands of U.S. dollars)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital........................................... $ 27,698 $ 3,259
Total assets.............................................. 62,910 7,529
Note payable, net of current portion and discount......... 3,380 --
Deferred gain on sales of assets, net of current
portion................................................. 17,516 --
Series A redeemable, convertible preferred stock.......... 12,533 12,533
Series B redeemable, convertible preferred stock.......... 39,939 --
Series B redeemable, convertible preferred stock purchase
warrants................................................ 1,655 --
Stockholders' deficit..................................... (45,239) (7,255)
</TABLE>
16
<PAGE>
SUMMARY UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL DATA
We have prepared the summary unaudited pro forma consolidated financial data
for the fiscal year ended December 31, 1999 and the nine months ended
September 30, 2000, and as of September 30, 2000, based on the historical
consolidated financial statements and other financial statements included
elsewhere in this information statement/prospectus. The pro forma consolidated
financial data are set forth to give effect to:
- our acquisitions of ezlogin and Spyonit, which acquisitions occurred prior
to September 30, 2000; and
- the above two acquisitions, together with the proposed acquisition of
Tantau, as if these acquisitions had been completed at the date of
commencement of operations during 1999 of each of the acquired companies'
operations.
The historical consolidated financial statement information for
724 Solutions used in the summary unaudited pro forma consolidated financial
statements has been prepared in accordance with U.S. generally accepted
accounting principles, as reconciled from Canadian generally accepted accounting
principles, or Canadian GAAP, after adjusting for the material differences set
forth in note 14 to our consolidated financial statements included elsewhere in
this information statement/ prospectus. The financial statements for ezlogin,
Spyonit and Tantau were prepared in accordance with U.S. GAAP.
The summary unaudited pro forma consolidated financial data are for
illustrative purposes only and are not necessarily indicative of what our actual
results of operations and financial position would have been as of and for the
periods indicated, nor do they purport to represent our future financial
position and results of operations. The unaudited pro forma income statement and
other data for the fiscal year ended December 31, 1999 and the nine months ended
September 30, 2000 give effect to the acquisitions as if these events occurred
at the date of the commencement of operations during 1999 of each of the
acquired companies' operations. The summary unaudited pro forma balance sheet
data gives effect to the acquisition of Tantau as if it occurred on
September 30, 2000.
The following information should be read in conjunction with "724
Solutions -- Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Tantau -- Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Unaudited Pro Forma
Consolidated Financial Statements" and all of the historical financial
statements and accompanying notes included elsewhere in this information
statement/prospectus.
17
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724 SOLUTIONS INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS DATA:
(In thousands of U.S. dollars, except shares and per share amounts)
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999
----------------- -------------
<S> <C> <C>
Revenue:
Product................................................... $ 14,248 $ 5,069
Less: Stock-based compensation related to software
development............................................. (248) (1,644)
Services.................................................. 5,776 1,749
--------- ---------
Net revenue................................................. 19,776 5,174
Operating expenses:
Cost of services revenue.................................. 10,220 3,486
Research and development.................................. 42,593 30,726
Sales and marketing....................................... 26,923 18,854
General and administrative................................ 24,201 12,766
Depreciation.............................................. 2,346 766
Amortization of intangibles............................... 68,677 82,549
--------- ---------
Total operating expenses.................................... 174,960 149,147
--------- ---------
Loss from operations........................................ (155,184) (143,973)
Gain on sale of assets...................................... 5,213 --
Realized loss on investment in Accrue Software, Inc......... (31,413) --
Interest income, net........................................ 9,249 1,308
Equity in income of affiliate............................... 686 --
--------- ---------
Loss for the period......................................... $(171,449) $(142,665)
========= =========
Basic and diluted loss per share............................ $ (3.12) $ (4.08)
========= =========
Weighted-average number of shares used in computing basic
and diluted loss per share (in thousands)................. 54,894 34,955
========= =========
</TABLE>
PRO FORMA CONSOLIDATED BALANCE SHEET DATA:
(In thousands of U.S. dollars)
<TABLE>
<CAPTION>
SEPTEMBER 30,
2000
--------------
(Unaudited)
<S> <C>
Cash and cash equivalents................................... $ 62,373
Short-term investments...................................... 158,062
Working capital............................................. 218,617
Intangible and other assets................................. 361,329
Total assets................................................ 632,874
Total shareholders' equity.................................. 598,504
========
</TABLE>
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RISK FACTORS
OWNERSHIP OF OUR COMMON SHARES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD
CAREFULLY CONSIDER THE RISKS DESCRIBED BELOW AND THE OTHER INFORMATION CONTAINED
IN THIS INFORMATION STATEMENT/PROSPECTUS BEFORE MAKING AN INVESTMENT DECISION
RELATING TO OUR COMMON SHARES, INCLUDING BEFORE EXECUTING THE WRITTEN CONSENT
APPROVING AND ADOPTING THE MERGER AGREEMENT AND THE MERGER. PLEASE NOTE THAT
NONE OF THESE RISKS WILL BE ELIMINATED AS A RESULT OF THE MERGER AND, AS
DESCRIBED BELOW, SOME OF THESE RISKS WILL INCREASE AS A RESULT OF THE MERGER.
RISK FACTORS RELATED TO OUR BUSINESS
WE HAVE A HISTORY OF LOSSES AND WE EXPECT LOSSES IN THE FUTURE.
We have not been profitable since our inception. We incurred losses of
$155,000 for the period between July 28, 1997 (inception) and December 31, 1997,
$2.7 million for the year ended December 31, 1998, $13.8 million for the year
ended December 31, 1999, and $41.1 million for the nine months ended
September 30, 2000. As of December 31, 1999, we had an accumulated deficit of
$16.7 million. We expect to continue to incur losses in the near future and
possibly longer.
We anticipate that our expenses will increase substantially in the
foreseeable future as we continue to expand our application hosting service,
increase our research and development, sales and marketing and general and
administrative expenses, and integrate the operations of Tantau, Spyonit,
ezlogin and YRLess into our business. These efforts may prove more expensive
than we currently anticipate. We cannot predict if we will ever achieve
profitability and, if we do, we may not be able to sustain or increase our
profitability.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, IT MAY BE DIFFICULT FOR YOU TO
EVALUATE OUR BUSINESS AND ITS FUTURE PROSPECTS.
The evaluation of our business is difficult because of our limited operating
history. We were founded in July 1997 and services based on our platform were
first launched on a trial basis in May 1999 with our initial licensee, Bank of
Montreal. Because we are in an early stage of development, our prospects are
difficult to predict and may change rapidly. We may encounter difficulties as a
young company in a new and rapidly evolving market, including our substantial
dependence on a small number of products with only limited market acceptance to
date and the need to manage expanding operations. Our business strategy may not
be successful, and we may not successfully address these risks.
Your ability to evaluate our prospects will be made more difficult as a
result of the acquisitions that we have made this year, as well as our
acquisition of Tantau. Our historical financial results only include the results
of operations of ezlogin, YRLess and Spyonit for a portion of the nine months
ended September 30, 2000, and do not include the results of operations of
Tantau. Although this document sets forth pro forma financial statements that
include the results of operations of Tantau, Spyonit and ezlogin, these
financial statements do not necessarily indicate what our results of operations
would have been had we actually completed these acquisitions as of the dates set
forth. In addition, they do not necessarily indicate what our results of
operations will be in the future, now that Spyonit and ezlogin are, and Tantau
is expected to become, part of our company.
OUR RAPID GROWTH MAY STRAIN OUR RESOURCES AND HINDER OUR ABILITY TO
IMPLEMENT OUR BUSINESS STRATEGY.
Our historical growth has placed, and any further growth is likely to
continue to place, a significant strain on our resources. The three acquisitions
that we have completed have further magnified this growth, as will our proposed
acquisition of Tantau. Our ability to achieve and maintain profitability will
depend on our ability to manage our growth effectively, to implement and expand
operational and
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customer support systems and to hire qualified personnel worldwide. We may not
be able to augment or improve existing systems and controls or implement new
systems and controls to respond adequately to any future growth. In addition,
future growth may result in increased responsibilities for our management
personnel, which may limit their ability to effectively manage our business.
IF WE DO NOT SUCCESSFULLY DELIVER OUR APPLICATION HOSTING SERVICES, WE MAY
NOT BE ABLE TO RETAIN OUR EXISTING CUSTOMERS OR ATTRACT NEW CUSTOMERS.
Some of our existing customers require, and some potential customers will
require, that we host and manage the server infrastructure and software platform
as part of the implementation of our software. Our customers have increased
their demand for our hosting services since we initially began to offer them in
the second quarter of 2000, and we must ensure that we maintain the capability
to satisfy this demand. In addition, because we expect our customer base to
demand these services in a wide variety of international locations, we must
locate quality providers in countries in which they are in limited supply. If we
cannot effectively deliver these hosting services, we may lose existing
customers and may not attract new customers.
We are currently working in conjunction with Exodus Communications to
provide our hosting services, and we may work with additional providers in the
future to deliver these services. If any natural disasters, computer breakdowns
or other circumstances occur that affect the computer systems in our network
operations center or the computer systems of Exodus Communications or any other
potential providers that we use to provide these services, our ability to
deliver our application hosting services may be substantially impaired. In
addition, if Exodus or any other provider of these services refuses to, or
becomes unable to deliver these services in an effective manner, we will need to
obtain services from a new provider on an expedited basis. If any of these
circumstances cause us to fail to deliver our application hosting services, we
may lose customers, and our reputation is likely to suffer.
BECAUSE SEVERAL OF OUR CURRENT CUSTOMERS ARE SHAREHOLDERS IN OUR COMPANY, IF
ONE OF THESE CUSTOMERS CEASES TO LICENSE OUR TECHNOLOGY AND ALSO SELLS ITS
SHARES IN OUR COMPANY, OUR CREDIBILITY MAY SUFFER AND THE MARKET PRICE OF
OUR SHARES MAY DECLINE.
Several of our current customers, including Bank of Montreal, Bank of
America, Citigroup and Wells Fargo, or their affiliates, are shareholders in our
company. If any of these customers ceases to license our technology, our
credibility in the market may suffer, which may impede our ability to attract
new customers. In addition, if a customer that switches to a competing
technology also sells its shares in us, our credibility may further suffer and
the market price of our shares will likely decline.
WE HAVE A LENGTHY AND COMPLEX SALES CYCLE FOR SEVERAL OF OUR PRODUCTS, WHICH
COULD CAUSE THE DELAY OR LOSS OF REVENUE AND INCREASE OUR EXPENSES.
Our sales efforts target large financial institutions and other enterprises
worldwide, which requires us to expend significant resources educating
prospective customers about the uses and benefits of our products. Because the
purchase of our products is a significant decision for these prospective
customers, they may take a long time to evaluate them. Our sales cycle has
typically ranged from four to six months, but can be longer due to significant
delays over which we have little or no control. As a result of the long sales
cycle, it may take us a substantial amount of time to generate revenue from our
sales efforts.
OUR PRODUCTS HAVE ACHIEVED LIMITED MARKET ACCEPTANCE TO DATE, AND IF THEY
FAIL TO ACHIEVE BROADER MARKET ACCEPTANCE OUR BUSINESS WILL NOT GROW.
Our products are among a number of competing products that are currently
available in a new and rapidly evolving market. Other companies may introduce
other software products that will compete
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<PAGE>
with ours. Customers may not prefer our products to competing technologies. If
customers do not accept our products as the preferred solution, we may not
attract new customers and our business will not grow.
OUR FUTURE REVENUE DEPENDS ON CONSUMERS USING THE SERVICES THAT ARE BASED ON
OUR PRODUCTS, AND IF OUR CUSTOMERS DO NOT SUCCESSFULLY MARKET THESE
SERVICES, OUR REVENUE WILL NOT GROW.
We expect that revenue under most of our license agreements will depend on
the number of monthly subscribers to these services. As a result, our revenue
growth will be limited if the number of subscribers does not increase. To
stimulate consumer adoption of these services, our customers must implement our
products quickly. However, our customers may delay implementation because of
factors that are not within our control, including budgetary constraints,
limited resources committed to the implementation process and limited internal
technical support.
Consumer adoption of these services also requires our customers to market
these services. However, our customers currently have no obligation to launch a
marketing campaign of any kind, may choose not to do so, or may not do so
effectively. Some of our customers have only provided these services on a test
basis to a limited number of consumers. Some of our customers may choose not to
expand their use of these services if they do not perceive a sufficiently high
rate of adoption among their consumers. As a result, we cannot ensure that a
large number of consumers will use these services in the future.
WE CURRENTLY DEPEND ON THE SALE OF A LIMITED NUMBER OF PRODUCTS TO GENERATE
MOST OF OUR REVENUE AND IF WE ARE UNABLE TO SELL THESE PRODUCTS WE MAY
NEVER BECOME PROFITABLE.
We expect sales of our 724 platform and our 724 applications to constitute
most of our revenue for the foreseeable future. If customers do not purchase our
existing offerings, we do not currently offer any other products or services
that would enable us to become profitable.
IF WE ARE NOT ABLE TO ESTABLISH RELATIONSHIPS WITH RESELLERS OR ADEQUATELY
ENCOURAGE RESELLERS TO SELL OUR PRODUCTS, OUR REVENUE MAY NOT GROW.
Historically, we have not made a major portion of our sales through
resellers. However, we anticipate that in future periods a substantial portion
of our sales will be made through resellers, particularly as a result of the new
products that were are selling through our acquisitions of ezlogin and Spyonit
and the relationships with resellers that we expect to obtain through our merger
with Tantau. If we are not able to establish relationships with resellers or
adequately encourage resellers to sell our products, our revenues may not grow.
We have a limited number of relationships with resellers and only limited
experience working with resellers. These resellers may not market our products
in a manner that will maximize our sales. In addition, we anticipate that most
of our resellers will be permitted to sell the products and services of our
competitors.
WE CURRENTLY RELY ON SALES TO A LIMITED NUMBER OF FINANCIAL INSTITUTIONS,
AND IF WE FAIL TO RETAIN THESE CUSTOMERS OR TO ADD NEW CUSTOMERS OUR
REVENUE MAY BE SUBSTANTIALLY REDUCED AND OUR PRODUCTS MAY NOT ACHIEVE
MARKET ACCEPTANCE.
We currently derive a significant portion of our revenue from the sale of
our solution to a limited number of financial institutions. Between our
inception and September 30, 2000, sales to our four largest financial
institution customers, Bank of Montreal, Wells Fargo, Bank of America and
Citibank, have accounted for the majority of our total revenue. We expect that a
relatively small number of customers will continue to account for a significant
portion of our revenue for the foreseeable future. If any of our customers
discontinue their relationship for any reason, do not renew their agreements or
seek to reduce or renegotiate their purchase and payment obligations, our
revenue may be substantially
21
<PAGE>
reduced. In addition, there are a limited number of large financial institutions
in our target market and we believe this number may decline in the future as a
result of consolidation in the financial services industry worldwide. If our
sales efforts to these potential customers are not successful, our products may
not achieve market acceptance and our revenue will not grow. See note 11 to our
consolidated financial statements.
In addition, as the market for mobile financial services evolves, our
customers may change their plans as to the services that they will provide using
our products. For example, in December 2000, one of our customers, BBVA
Bancomer, indicated that they sought to reevaluate their planned use of our
technology and that they may not roll out services based upon our platform.
Although Bancomer agreed to explore opportunities to work together with us, we
may not derive substantial revenues under our agreement with them or under our
agreement with any other customer that may decide in the future to reevaluate
how it approaches the market for mobile Internet financial services, other than
any applicable minimum contract payment.
IF THE DIGITAL WIRELESS AND OTHER NETWORK SERVICE PROVIDERS THAT ENABLE OUR
CUSTOMERS TO DELIVER SERVICES BASED ON OUR PRODUCTS TO CONSUMERS FAIL TO
SUPPORT OUR SERVICE, OUR REVENUE FROM EXISTING CUSTOMERS WILL DECLINE AND
WE MAY NOT ATTRACT NEW CUSTOMERS.
We rely on wireless and other network service providers to introduce and
support our products as well as services using our products in a timely and
effective manner. We have no control over the pace at which they will do so. If
these providers are slow to support the services that use our solution, our
existing customers may not be able to effectively offer these services and
potential customers may be reluctant to purchase our products. In addition,
wireless and other network service providers face implementation and support
challenges in introducing services delivered to Internet-enabled devices, which
may slow their rate of adoption or implementation of our solution. Moreover, the
continued expansion of digital wireless services, especially in North America,
is critical to our success. The pace of this expansion may not increase for a
variety of reasons, including, for example, if the U.S. government does not
allocate a sufficiently broad portion of the available spectrum to render these
services attractive.
IF WE DO NOT RESPOND ADEQUATELY TO EVOLVING TECHNOLOGY STANDARDS, SALES OF
OUR PRODUCTS MAY DECLINE.
Our future success will depend on our ability to address the increasingly
sophisticated needs of our customers by supporting existing and emerging
technologies, including technologies related to communications and the Internet
generally and the financial services industry in particular. Wireless Internet
access is a rapidly evolving market and is characterized by an increasing number
of market entrants that have introduced or developed, or are in the process of
introducing or developing, products that facilitate the delivery of
Internet-based services through wireless devices. In addition, our competitors
may develop alternative products that gain broader market acceptance than ours.
As a result, the life cycle of our products is difficult to estimate. We may
need to develop and introduce new products and enhancements to our existing
products on a timely basis to keep pace with technological developments,
evolving industry standards, changing customer requirements and competitive
technologies that may render our products obsolete. These research and
development efforts may require us to expend significant capital and other
resources. In addition, as a result of the complexities inherent in our
products, major enhancements or improvements will require long development and
testing periods. If we fail to develop products and services in a timely
fashion, or if we do not enhance our products to meet evolving customer needs
and industry standards, including security technology, we may not remain
competitive or sell our solution.
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<PAGE>
ANY DISRUPTION OF THE SERVICES SUPPORTED BY OUR PRODUCTS DUE TO ACCIDENTAL
OR INTENTIONAL SECURITY BREACHES MAY DAMAGE OUR REPUTATION, REDUCE OUR
REVENUE, EXPOSE US TO COSTLY LITIGATION AND REQUIRE CAPITAL INVESTMENTS IN
ALTERNATIVE SECURITY TECHNOLOGY.
Despite our efforts to maximize the security of the transactions effected
using our platform, we may not be able to stop unauthorized attempts to gain
access to or disrupt transactions between our customers and the consumers of
their services. Specifically, computer viruses, break-ins and other disruptions
could lead to interruptions, delays, loss of data or the inability to accept and
confirm the receipt of information or instructions regarding transactions. Any
of these events could substantially damage our reputation. We rely on encryption
and authentication technology licensed from third parties to provide key
components of the security and authentication necessary to achieve secure
transmission of confidential information. We cannot ensure that this technology
or future advances in this technology or other developments will be able to
prevent security breaches.
WE MAY NEED TO EXPEND FURTHER CAPITAL AND OTHER RESOURCES TO PROTECT AGAINST
THE THREAT OF SECURITY BREACHES OR TO ALLEVIATE PROBLEMS CAUSED BY THESE
BREACHES.
Because our activities involve the storage and transmission of proprietary
information such as credit card numbers and bank account numbers, if a
third-party were able to steal a user's proprietary information, we could be
subject to claims, litigation or other potential liabilities that could cause
our expenses to increase substantially. In addition to purposeful security
breaches, the inadvertent transmission of computer viruses could expose us to
costly litigation or a significant loss of revenue. Although our customer
agreements contain provisions which limit our liability relating to security,
our customers or their consumers may seek to hold us liable for any losses
suffered as a result of unauthorized access to their communications. Any
litigation of this kind, regardless of its outcome, could be extremely costly
and could significantly divert the attention of our management. We may not have
adequate insurance or resources to cover these losses.
OUR ACQUISITIONS OF TECHNOLOGIES OR COMPANIES COULD DISRUPT OUR BUSINESS AND
DILUTE YOUR HOLDINGS IN OUR COMPANY.
We have completed several acquisitions in 2000, plan to complete our
acquisition of Tantau, and may effect new acquisitions of technologies or
companies in the future. Entering into an acquisition entails many risks, any of
which could materially harm our business, including:
- diversion of management's attention from other business concerns;
- failure to effectively assimilate the acquired company into our business,
including its technology, personnel and customers;
- the loss of key customers or employees from either our current business or
the acquired business; and
- assumption of significant liabilities of the acquired company.
In addition, holdings of existing shareholders will be diluted if equity
securities are issued in connection with any acquisition. If we incur debt in
order to effect any acquisitions, we will incur debt service costs, and we
expect that we would enter into agreements that will restrict our operations in
some respects and our ability to declare dividends to the holders of our common
shares. If we incur indebtedness, our shareholders will also rank junior to the
holders of the indebtedness in connection with any liquidation of our company.
We may not be able to effectively integrate our acquisitions of Tantau,
Spyonit, ezlogin and YRLess into our current operations effectively. In
particular, as our largest proposed acquisition to date, our acquisition of
Tantau will pose several significant challenges to our company. Tantau will add
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approximately 175 employees to our organization, and we will be integrating
several officers of Tantau into our senior management team who have not
previously worked with our existing management. The successful integration of
our company and Tantau will require, among other things, integration of our
finance, human resources and sales and marketing groups, and coordination of our
development efforts. The integration of our operations with Tantau may be
complicated by the fact that Tantau's business and personnel, like ours, is
spread over several continents.
ANY FAILURE TO EXPAND AND MANAGE OUR INTERNATIONAL OPERATIONS COULD LIMIT
OUR POTENTIAL REVENUE GROWTH.
We, together with Tantau, plan to substantially expand our activities
outside the U.S. and Canada. Our plans to expand internationally may be
adversely affected by a number of risks, including:
- difficulties in adapting our product and services for foreign markets;
- challenges in staffing and managing foreign operations;
- difficulties in establishing relationships with local partners;
- restrictions on the export of encryption and other technologies;
- recessionary environments in foreign economies, particularly in Asian
countries and in the financial services sector; and
- longer payment cycles and increased difficulties in collecting amounts
owed to us.
FLUCTUATIONS IN THE VALUE OF FOREIGN CURRENCIES COULD RESULT IN CURRENCY
EXCHANGE LOSSES.
Our expanding operations outside the U.S. and Canada may be conducted in
currencies other than the U.S. dollar. Fluctuations in the value of foreign
currencies relative to the U.S. dollar, including the value of the Canadian
dollar, could cause currency exchange losses, as our principal offices and staff
generate Canadian dollar denominated expenses. We cannot predict the effect of
exchange rate fluctuations upon our future operating results.
WE WILL NEED TO RECRUIT, TRAIN AND RETAIN KEY MANAGEMENT AND OTHER QUALIFIED
PERSONNEL TO SUCCESSFULLY GROW OUR BUSINESS.
Our future success will depend in large part on the ability to recruit and
retain experienced research and development, sales and marketing, customer
service and management personnel. In particular, our future success depends in
part on the continued services of our current executive officers, as well as the
executive officers of Tantau who will continue to work for our company after the
merger. If we do not attract and retain such personnel, we may not be able to
grow our business. Competition for qualified personnel is intense in the
industry. In the past, we have experienced difficulty in recruiting qualified
personnel, especially technical and sales personnel. We are in a new market and
there are a limited number of people with the appropriate combination of skills
needed to provide the services that our customers demand in each of our target
markets. We expect competition for qualified personnel to remain intense, and we
may not succeed in attracting or retaining sufficient personnel. In addition,
new employees generally require substantial training, which requires significant
resources and management attention. We must also offer attractive compensation
packages to our personnel, whether that compensation consists of cash, equity
awards, or other forms of compensation. Even if we invest significant resources
to recruit, train and retain qualified personnel, we may not be successful in
our efforts.
OUR SOFTWARE MAY CONTAIN DEFECTS OR ERRORS THAT COULD DAMAGE OUR REPUTATION.
The software that we develop is complex and must satisfy the stringent
technical requirements of our customers. We must develop our products quickly to
keep pace with the rapidly changing industry
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in which we operate. Software products that are as complex as ours are likely to
contain undetected errors or defects, especially when first introduced or when
new versions are released. In addition, our software may not properly operate
when integrated with the systems of some customers or when used to deliver
services to a large number of a customer's subscribers.
While we continually test our products for errors and work with customers to
identify and correct bugs, errors in our product may be found in the future. Our
software may not be free from errors or defects even after it has been tested,
which could result in the rejection of our products and damage to our
reputation, as well as lost revenue, diverted development resources, and
increased support costs.
WE MAY BE SUBJECT TO PRODUCT LIABILITY CLAIMS THAT COULD RESULT IN
SIGNIFICANT COSTS TO US.
We may be subject to claims for damages related to any errors in our
product. A major product liability claim could materially adversely affect our
business because of the costs of defending against these types of lawsuits,
diversion of key employees' time and attention from the business and potential
damage to our reputation. Our license agreements with our customers contain
provisions designed to limit exposure to potential product liability claims.
Limitation of liability provisions contained in our license agreements may not
be effective under the laws of some jurisdictions if local laws treat them as
unenforceable. We could be required to pay substantial amounts of damages in
settlement or upon the determination of any of these types of claims.
WE HAVE NOT YET INTEGRATED PUBLIC KEY INFRASTRUCTURE INTO OUR PRODUCTS, AND
IF WE FAIL TO DO SO, WE MAY BE COMPETITIVELY DISADVANTAGED AND OUR BUSINESS
MAY NOT GROW.
We expect that the use of public key infrastructure (PKI), an emerging
technology which facilitates user identity authentication and non-repudiation of
transactions, will be used by financial institutions' customers and by
competitors. If we do not succeed in integrating PKI into our products, they may
not be attractive to potential customers because of their security concerns. If
PKI becomes a widely used standard and our products do not use that standard, we
may be at a competitive disadvantage. Although we are working with Certicom
Corporation to design and implement technologies that will allow us to integrate
PKI into our products, these efforts may not be successful.
OUR PRODUCTS CONTAIN ENCRYPTION TECHNOLOGY WHOSE EXPORT IS RESTRICTED BY
LAW, WHICH MAY SLOW OUR GROWTH OR RESULT IN SIGNIFICANT COSTS.
The U.S. and Canadian governments generally limit the export of encryption
technology, which our products incorporate. A variety of cryptographic products
generally require export approvals from certain U.S. government agencies in the
case of exports from the U.S., and from Canadian government agencies in the case
of exports from Canada, although there are currently no restrictions on exports
of these products from Canada into the U.S. If any export approval that we
receive is revoked or modified, if our software is unlawfully exported or if the
U.S. or the Canadian government adopts new legislation or regulations
restricting export of software and encryption technology, we may not be able to
distribute our products to potential customers, which will cause a decline in
sales. We 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 our
customers, in which case our business may not grow. In addition, we may suffer
similar consequences if the laws of any other country limit the ability of third
parties to sell encryption technologies to us.
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IF WE DO NOT HAVE SUFFICIENT CAPITAL TO FUND OUR OPERATIONS, WE MAY BE
FORCED TO DISCONTINUE PRODUCT DEVELOPMENT, REDUCE OUR SALES AND MARKETING
EFFORTS OR FOREGO ATTRACTIVE BUSINESS OPPORTUNITIES.
We may not have sufficient capital to fund our operations and additional
capital may not be available on acceptable terms, if at all. Any of these
outcomes could adversely impact our ability to respond to competitive pressures
or could prevent us from conducting all or a portion of our planned operations.
The speed at which we utilize our available capital is likely to increase
substantially as we integrate our acquisitions into our business, expand our
application hosting services and expand our operations internationally. We
expect that the cash we receive through our operations and our cash on hand will
be sufficient to meet our working capital and capital expenditure needs for the
next 12 months. After that, we may need to raise additional funds, and
additional financing may not be available on acceptable terms, if at all. We
also may require additional capital to acquire or invest in complementary
businesses or products or to obtain the right to use complementary technologies.
If we issue additional equity securities to raise funds, the ownership
percentage of existing shareholders will be reduced. If we incur debt, the debt
will rank senior to our common shares, we will incur debt service costs and we
will likely have to enter into agreements that will restrict our operations in
some respects and our ability to declare dividends to the holders of our common
shares.
RISK FACTORS RELATED TO OUR INDUSTRY
OUR BUSINESS WILL NOT GROW IF THE USE OF WIRELESS DATA SERVICES DOES NOT
CONTINUE TO GROW.
The markets for wireless data services and related products are still
emerging and continued growth in demand for, and acceptance of, these services
remains uncertain. Our products depend on the acceptance of wireless data
services and Internet-enabled devices in the commercial and financial markets.
Current barriers to market acceptance of these services include cost,
reliability, platform and distribution channel constraints, safety,
functionality and ease of use. We cannot be certain that these barriers will be
overcome. Since the market for our products is new and evolving, it is difficult
to predict the size of this market or its future growth rate, if any. Our future
financial performance will depend in large part upon the continued demand for
on-line financial services through wireless application devices. We cannot
ensure that a sufficient volume of subscribers will demand financial services or
will seek financial services provided through the Internet on wireless access
devices. If the market for wireless on-line financial services grows more slowly
than we currently anticipate, our revenue may not grow.
IF FINANCIAL INSTITUTIONS AND OTHER POTENTIAL CUSTOMERS DO NOT CONSIDER THE
INTERNET TO BE A VIABLE COMMERCIAL MEDIUM, OUR CUSTOMER BASE MAY NOT GROW.
Our success depends upon the extent to which large enterprises, particularly
financial institutions, accept the Internet as a viable means to deliver their
services. The adoption of the Internet for commerce and communication,
particularly by those financial institutions and other companies that have
historically relied upon traditional means, generally requires them to
understand and accept a new way of conducting business and exchanging
information. Financial institutions and other companies 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 and other potential customers
to use the Internet to deliver their services may prevent us from growing.
LACK OF CONSUMER CONFIDENCE IN THE SECURITY OF INTERNET-ENABLED TRANSACTIONS
COULD LIMIT ADOPTION OF OUR SOLUTION, WHICH COULD PREVENT US FROM BECOMING
PROFITABLE.
Consumers will not seek to effect transactions using the Internet and
wireless applications if they are not confident that financial transactions over
the Internet can be undertaken securely and
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confidentially. Although there is security technology currently available for
Internet-enabled transactions, many Internet users do not use the Internet for
commercial transactions because of continued security concerns. These concerns
may be heightened by well-publicized security breaches of any Internet-related
service, which could deter consumers from adopting the services provided by our
solution. If consumers do not gain confidence in the security for
Internet-enabled transactions that the current technologies provide, our revenue
will not increase.
WE FACE COMPETITION FROM EXISTING AND NEW COMPETITORS AND FROM NEW PRODUCTS
WHICH COULD CAUSE US TO LOSE MARKET SHARE AND CAUSE OUR REVENUE TO DECLINE.
The widespread adoption of open industry standards, such as Wireless
Application Protocol (WAP) specifications, may make it easier for new market
entrants and existing competitors to introduce products that compete with ours.
In addition, competitors may develop or market products and services that are
superior or more cost-effective than ours, which could decrease demand for our
products and cause our revenue to decline. Currently, our competitors include:
- financial institutions that develop their own in-house solutions;
- software vendors focused on financial institutions and other companies in
our target markets;
- wireless and other network service providers that provide their customers
with wireless financial services; and
- software and services vendors and portals that provide the infrastructure
to link devices to carriers and the Internet and to enable other wireless
applications.
We may also face competition in the future from established companies that
have not previously entered the market for wireless data services and
Internet-related services. Barriers to entry in the software market are
relatively low and it is possible that new competitors or alliances among
competitors may emerge and rapidly acquire significant market share. In
addition, many of our competitors and potential competitors have greater
resources, which may enable them to penetrate the market more quickly.
CHANGES IN GOVERNMENT REGULATIONS MAY RESULT IN INCREASED EXPENSES, TAXES OR
LICENSING FEES WHICH COULD DECREASE THE DEMAND FOR OUR PRODUCT AND
NEGATIVELY IMPACT OUR RESULTS.
We are not currently subject to direct regulation by any governmental
agency, other than regulations applicable to businesses generally and laws and
regulations directly applicable to access to, or commerce on, the Internet.
However, a number of legislative and regulatory proposals under consideration by
federal, state, provincial, local and foreign governmental organizations may
lead to laws or regulations concerning various aspects of the Internet,
including but not limited to, on-line content, user privacy, taxation, access
charges and liability for third-party activities. Additionally, it is uncertain
how existing laws governing issues such as property ownership, copyright, trade
secrets, libel and personal privacy will be applied to the Internet. The
adoption of new laws or the broader application of existing laws may expose us
to significant liabilities and additional operational requirements and may
decrease the growth in the use of the Internet, which could in turn both
decrease the demand for our products and increase the cost of doing business.
RISKS RELATING TO INTELLECTUAL PROPERTY
WE RELY ON THIRD PARTY SOFTWARE, TECHNOLOGY AND CONTENT, THE LOSS OF WHICH
COULD FORCE US TO USE INFERIOR SUBSTITUTE TECHNOLOGY OR TO CEASE OFFERING
OUR PRODUCTS.
We must now, and may in the future, license or otherwise obtain access to
the intellectual property of third parties. For example, we have entered into
license agreements with Certicom Corporation and
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Consensus for use of their encryption technology. We have also entered into
license agreements with third party content providers. In addition, we use, and
will use in the future, some third party software that may not be available in
the future on commercially reasonable terms, or at all. For example, we could
lose our ability to use this software if the rights of our suppliers to license
it were challenged by individuals or companies that asserted ownership of these
rights. The loss of, or inability to maintain or obtain, any required
intellectual property could require us to use substitute technology, which could
be more expensive or of lower quality or performance, or force us to cease
offering our products. Moreover, some of our license agreements from third
parties are non-exclusive and, as a result, our competitors may have access to
some of the technologies used by us.
IF OUR INTELLECTUAL PROPERTY IS NOT ADEQUATELY PROTECTED, WE MAY LOSE OUR
COMPETITIVE ADVANTAGE.
We depend on our ability to develop and maintain the proprietary aspects of
our technology. We seek to protect our software, documentation and other written
materials under trade secret and copyright laws, as well as confidentiality
provisions in contracts with our customers, all of which afford limited
protection. We also seek to protect our proprietary technology under patent
laws. We have applied for patents, although none have been issued to date. We
have also applied for several trademark registrations for many of our trademarks
in the U.S., Canada, the United Kingdom, Japan and Australia. To date, we have
received only one registered trademark in the U.K.
Despite the measures we have taken to protect our intellectual property, we
cannot ensure that these steps will be adequate, that we will be able to secure
patent or trademark registrations for any of our patent applications in Canada,
the U.S. or other countries, or that third parties will not breach the
confidentiality provisions in our contracts or infringe or misappropriate our
copyrights, pending patents, trademarks and other proprietary rights. If a third
party breaches the confidentiality provisions in our contracts or
misappropriates or infringes on our intellectual property, we may not have
adequate remedies. In addition, third parties may independently discover or
invent competing technologies or reverse engineer our trade secrets, software or
other technology. Moreover, the laws of some foreign countries may not protect
our proprietary rights to the same extent as do the laws of the U.S. and Canada.
Therefore, the measures we are taking to protect our proprietary rights may not
be adequate.
THIRD PARTIES MAY CLAIM THAT OUR PRODUCTS INFRINGE ON THEIR INTELLECTUAL
PROPERTY, WHICH COULD RESULT IN SIGNIFICANT EXPENSES FOR LITIGATION OR FOR
DEVELOPING OR LICENSING NEW TECHNOLOGY.
Although we are not currently aware of any material claims asserted by third
parties that we infringed on their intellectual property, in the future, third
parties may assert a claim that our current or future products infringe on their
intellectual property. We cannot predict whether third parties will assert these
types of claims against us or against the licensors of technology licensed to
us, or whether those claims will harm our business. If we are forced to defend
against these types of claims, whether they are with or without any merit or
whether they are resolved in favor of or against us or our licensors, we may
face costly litigation and diversion of management's attention and resources. As
a result of these disputes, we may have to develop costly non-infringing
technology, or enter into licensing agreements. These agreements, if necessary,
may not be available on acceptable terms, or at all, which could prevent us from
selling our products, increase our expenses or make our products less attractive
to customers.
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RISKS RELATING TO THE OWNERSHIP AND TRADING OF OUR COMMON SHARES
A LIMITED NUMBER OF SHAREHOLDERS WILL COLLECTIVELY CONTINUE TO OWN A
MAJORITY OF OUR COMMON SHARES AFTER THE MERGER AND MAY ACT, OR PREVENT
CERTAIN TYPES OF CORPORATE ACTIONS, TO THE DETRIMENT OF OTHER SHAREHOLDERS.
As of November 15, 2000, our six principal shareholders, including entities
affiliated with members of the management team, held more than 65% of our
outstanding common shares. After the completion of our merger with Tantau, these
shareholders, together with the principal stockholders of Tantau and our new
officers and directors after the merger, will hold a substantial portion of our
outstanding common shares. Accordingly, these shareholders may, if they act
together, exercise significant influence over all matters requiring shareholder
approval, including the election of a majority of the directors and the
determination of significant corporate actions. This concentration could also
have the effect of delaying or preventing a change in control that could be
otherwise beneficial to shareholders.
THE MARKET PRICE OF OUR COMMON SHARES IS VOLATILE, WHICH MAY RESULT IN
LITIGATION THAT COULD BE COSTLY AND DIVERT OUR RESOURCES.
Stock markets have recently experienced extreme price and volume
fluctuations, particularly for the shares of technology companies. Since our
initial public offering, the market value of our common shares has fluctuated
significantly. The closing price of our common shares on the Nasdaq National
Market has ranged from $240 during the second quarter of 2000 to $15 13/16
during the fourth quarter of 2000. These fluctuations are often unrelated to the
operating performance of particular companies, including ours. The broad market
fluctuations may adversely affect the market price of our common shares. This
may adversely affect our ability to use our 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, regardless of the merit of their claims. A
lawsuit against us could cause us to incur substantial costs and could divert
the time and attention of management and other resources, regardless of the
outcome of the lawsuit.
IF WE DO NOT SUCCESSFULLY INTEGRATE TANTAU, OR IF THE MERGER'S BENEFITS DO
NOT MEET THE EXPECTATIONS OF FINANCIAL OR INDUSTRY ANALYSTS, THE MARKET
PRICE OF OUR COMMON SHARES MAY DECLINE.
The market price of our common shares may decline as a result of the merger
if:
- the integration of our company and Tantau is inefficient or unsuccessful;
- we do not achieve the perceived benefits of the merger as rapidly as, or
to the extent anticipated by us or by financial or industry analysts; or
- the effect of the merger on our financial results is not consistent with
our expectations or the expectations of financial or industry analysts.
We can provide no assurances that we will effectively integrate our
operations with those of Tantau, or whether our combined results of operations
and our combined business efforts will be sufficiently positive to meet the
expectations of the financial community.
OUR ABILITY TO ISSUE PREFERRED SHARES COULD MAKE IT MORE DIFFICULT FOR A
THIRD PARTY TO ACQUIRE US, TO THE DETRIMENT OF HOLDERS OF COMMON SHARES.
Our ability to issue preferred shares could make it more difficult for a
third party to acquire us, to the detriment of holders of common shares.
Provisions in our articles of incorporation may make it difficult for a third
party to acquire control of us, even if a change in control would be beneficial
to our shareholders. Our articles authorize our board to issue, at its
discretion, an unlimited number of
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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 preferred shares. Preferred
shareholders who possess these rights could make it more difficult for a third
party to acquire us.
YOUR TAX LIABILITY MAY INCREASE IF WE ARE TREATED AS A PASSIVE FOREIGN
INVESTMENT COMPANY.
If at any time we qualify as a passive foreign investment company under
U.S. tax laws, investors may be subject to adverse tax consequences. We could be
a passive foreign investment company if 75% or more of our gross income in any
year is considered passive income for U.S. tax purposes. For this purpose,
passive income generally includes interest, dividends, some types of rents and
royalties, and gains from the sale of assets that produce these types of income.
In addition, we could be classified as a passive foreign investment company if
the average percentage of our assets during any year that produced passive
income, or that were held to produce passive income, is at least 50%. If we are
classified as a passive foreign investment company, and if shareholders sell any
of their common shares or receive some types of distributions from us, they may
have to pay taxes that are higher than if we 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 our revenue and our anticipated corporate structure,
we may be treated as a passive foreign investment company. To determine whether
we are a passive foreign investment company, we will be required to examine each
year our revenue and expenses and the value of our assets. The tests are complex
and require, among other things, that we determine how much of our income from
our license agreements each year will be passive income. Moreover, the manner in
which the tests apply to our business is not certain.
Each holder of our 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 we
qualify as a passive foreign investment company.
FUTURE SALES OF COMMON SHARES BY OUR EXISTING SHAREHOLDERS COULD CAUSE OUR
SHARE PRICE TO FALL.
If our shareholders sell substantial amounts of our common shares in the
public market, the market price of the common shares could fall. The perception
among investors that these sales will occur could also produce this effect.
Because many Tantau stockholders and optionees receiving our common shares in
this merger will be subject to resale restriction agreements, they may not be
able to effect sales of these shares during periods while other shareholders are
making substantial sales. In connection with the merger, we are filing a
registration statement on Form F-4 which will, subject to limitations under the
U.S. securities laws, make the common shares that we issue in this offering
available for resale in the U.S. In July 2000, we filed a registration statement
on Form S-8 relating to the issuance and sale of more than 6.5 million of our
common shares that are issuable under our stock option plans, including the
option plan of ezlogin, which we acquired in June 2000. We plan to file an
additional registration statement relating to options that may be exercised to
purchase our common shares by directors, officers, employees and consultants of
Tantau after the merger.
In connection with the merger, we plan to enter into a registration rights
agreement with shareholders that currently own a majority of our common shares,
as well as several of the current stockholders of Tantau. Under this agreement,
we will be obligated, under a number of circumstances, including upon the demand
of some of the shareholders that are parties to the agreement, to register a
substantial number of our common shares so that they may be freely sold on the
Nasdaq National Market and The Toronto Stock Exchange. If these rights are
exercised, a substantial number of shares could be sold in the public markets,
which is likely to adversely affect our stock price. For details of our
obligations, see "724 Solutions -- Related Party Transactions -- Registration
Rights."
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
Statements under "Questions and Answers about the Merger," "Summary," "Risk
Factors," "The Merger," "724 Solutions -- Management's Discussion and Analysis
of Financial Condition and Results of Operations," "724 Solutions -- Business,"
"Tantau -- Business," "Tantau -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and elsewhere in this information
statement/prospectus about our future results, levels of activity, performance,
goals or achievements or other future events constitute forward-looking
statements. These statements involve known and unknown risks, uncertainties and
other factors that may cause actual results or events to differ materially from
those anticipated in our forward-looking statements. These factors include,
among others, those listed under "Risk Factors" or described elsewhere in this
information statement/ prospectus. These statements include, but are not limited
to, the statements regarding:
- the expected growth in the number of wireless subscribers;
- the expected growth in the number of mobile commerce transactions;
- our plans to integrate our operations with those of Tantau;
- our plans to market our combined services to our existing customers and
Tantau's existing customers;
- our plans to increase our combined customer base;
- our plans to work with the companies with which Tantau has strategic
relationships;
- our plans to offer enhanced products and services;
- our plans to market our products and services to new industry sectors; and
- our plans to improve our future financial performance.
In some cases, you can identify forward-looking statements by our use of
words such as "may," "will," "should," "could," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative or other variations of these words, or other comparable words or
phrases.
Among the factors that could cause our actual results or events to differ
are the risks that are set forth in this document under the caption "Risk
Factors," in particular:
- unanticipated trends and conditions in our industry;
- risks associated with our ability to compete in a variety of international
markets;
- the risk that we will not have sufficient capital to expand our
operations;
- any failure to satisfy the conditions for the closing of the merger,
including any failure to obtain the required governmental approvals;
- any unanticipated costs arising from the merger with Tantau;
- any delay, inability or difficulty encountered in increasing our combined
revenues from our existing and future contracts;
- any adverse response of our customers, Tantau's customers or our
respective employees to the merger;
- risks associated with our ability to efficiently integrate acquired
businesses, including our acquisitions of ezlogin, Spyonit, YRLess and
Tantau;
- any inability to effectively develop and manage our combined international
operations; and
- risks associated with our ability to implement cost savings and combined
operational strategy.
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Although we believe that the expectations reflected in our forward-looking
statements are reasonable, we cannot guarantee future results, levels of
activity, performance or achievements or other future events. We are under no
duty to update any of our forward-looking statements after the date of this
information statement/prospectus, other than as required by law. You should not
place undue reliance on forward-looking statements.
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ACTION TO BE TAKEN BY WRITTEN CONSENT
TIMING
All written consents must be received at 2001 Ross Avenue, Suite 2500,
Dallas, Texas 75201, Attention: Jennifer L. Williams, by January 12, 2001 to be
counted toward approval of the merger.
MATTERS TO BE APPROVED BY WRITTEN CONSENT
In the action to be taken by written consent, stockholders of Tantau will be
asked to approve, together as one matter:
- the Agreement and Plan of Merger, dated as of November 29, 2000, by and
among 724 Solutions Inc., Saturn Merger Sub, Inc., a wholly owned
subsidiary of 724 Solutions, and Tantau Software, Inc.;
- the merger, pursuant to the merger agreement, of Saturn Merger Sub with
and into Tantau whereby Tantau will become a wholly owned subsidiary of
724 Solutions; and
- the appointment of Joseph Aragona as representative of the Tantau
stockholders, optionholders and warrantholders under the indemnification
and escrow agreement.
THE TANTAU BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AND THE
MERGER AGREEMENT AND HAS UNANIMOUSLY DETERMINED THAT THE MERGER AGREEMENT AND
THE MERGER ARE ADVISABLE AND THAT THE TERMS OF THE MERGER AGREEMENT, INCLUDING
THE CONSIDERATION TO BE RECEIVED BY TANTAU'S STOCKHOLDERS, ARE FAIR TO AND IN
THE BEST INTERESTS OF THE TANTAU STOCKHOLDERS.
THE TANTAU BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT TANTAU
STOCKHOLDERS VOTE TO ADOPT AND APPROVE THE MERGER AGREEMENT AND THE MERGER.
RECORD DATE; STOCKHOLDERS ENTITLED TO PARTICIPATE
Only stockholders of record of Tantau at the close of business on
January 2, 2001 are entitled to vote on the matters to be submitted for approval
by written consent. As of the close of business on the record date, there were
approximately 7,748,366 shares of Tantau common stock outstanding and entitled
to vote, held of record by 86 stockholders, 12,850,000 shares of Tantau
Series A Preferred Stock outstanding and entitled to vote, held of record by
seven stockholders, and 6,472,785 shares of Tantau Series B Preferred Stock
outstanding and entitled to vote, held of record by 15 stockholders. Each Tantau
stockholder is entitled to one vote for each share of Tantau stock held as of
the record date.
CONSENT REQUIRED
Adoption of the merger agreement by Tantau's stockholders is required under
Delaware law and Tantau's certificate of incorporation. The proposal to approve
and adopt the merger agreement and the merger requires the affirmative vote or
consent of:
- the holders of a majority of the outstanding shares of Tantau common stock
and Tantau preferred stock, voting together as a single class;
- the holders of a majority of the outstanding shares of Tantau Series A
preferred stock, voting as a distinct and separate class; and
- the holders of a majority of the outstanding shares of Tantau Series B
preferred stock, voting as a distinct and separate class.
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SHARE OWNERSHIP OF MANAGEMENT
As of the record date, the executive officers and directors of Tantau and
their affiliates collectively owned approximately 17,047,993 shares of Tantau
common stock and Tantau preferred stock, together representing approximately
63.0% of the total outstanding Tantau stock, consisting of: 9,840,000 shares of
Tantau Series A Preferred Stock, representing approximately 76.6% of the total
outstanding Tantau Series A Preferred Stock; 2,855,743 shares of Tantau
Series B Preferred Stock, representing approximately 44.1% of the total
outstanding Tantau Series B Preferred Stock; and 4,352,250 shares of Tantau
common stock, representing approximately 56.2% of the total outstanding Tantau
common stock.
The executive officers and directors of Tantau and their affiliates who own
shares of Tantau capital stock have entered into voting agreements with
724 Solutions in which they have agreed to vote their shares of Tantau capital
stock for the approval and adoption of the merger agreement and the merger.
SHARES SUBJECT TO VOTING AGREEMENTS
Under voting agreements entered into with 724 Solutions by the executive
officers and directors of Tantau and their affiliates who own shares of Tantau
capital stock and by several other stockholders who are affiliates of Tantau,
Tantau stockholders holding approximately 4,352,250 shares of Tantau common
stock, 12,240,000 shares of Tantau Series A Preferred Stock, and
4,774,257 shares of Tantau Series B Preferred Stock, representing approximately
56.2% of the shares of Tantau common stock outstanding on the record date, 95.3%
of the shares of Tantau Series A Preferred Stock outstanding on the record date,
and 73.7% of the shares of Tantau Series B Preferred Stock outstanding on the
record date, have agreed to vote for adoption and approval of the merger
agreement and the merger. The Tantau stockholders who entered into voting
agreements also granted proxies to 724 Solutions to vote for adoption and
approval of the merger agreement and the merger. The vote by the stockholders
party to the voting agreements of their shares in favor of the merger agreement
and the merger will be sufficient to adopt and approve the merger agreement and
the merger under Delaware law and Tantau's certificate of incorporation.
Additional optionholders of Tantau have also executed voting agreements in which
they have agreed to vote the shares issued upon exercise of these options prior
to the record date, if any, in favor of the merger agreement and the merger.
EXECUTION OF CONSENTS
Shares represented by all properly executed consents received by
January 12, 2001 will be counted as votes in favor of the transactions described
herein. For purposes of this written consent, only shares represented by a
written consent received by this date will be counted as favorable votes for
approval and adoption of the transactions described herein. The failure to
submit a written consent by such time will have the same effect as a vote
against approval and adoption of the merger agreement and the merger.
The written consent accompanying this information statement/prospectus is
solicited on behalf of Tantau's board of directors. Tantau stockholders are
requested to complete, date and sign the accompanying written consent and
promptly return it in the enclosed, self-addressed envelope or by fax to
Jennifer L. Williams of Brobeck, Phleger & Harrison LLP, Tantau's legal counsel,
at (214) 468-3704, as soon as possible for delivery no later than January 12,
2001.
REVOKING CONSENTS
Tantau stockholders of record may revoke their consents at any time prior to
January 12, 2001. Consents may be revoked by written notice, including by fax,
to Brobeck, Phleger & Harrison LLP. Any
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written notice of a revocation of a consent must be sent so as to be delivered
before January 12, 2001 as follows:
Brobeck, Phleger & Harrison LLP, 2001 Ross Avenue, Suite 2500, Dallas, Texas
75201, Attention: Jennifer L. Williams, fax number: (214) 468-3704.
Consents for shares held by stockholders who are party to the voting
agreements with 724 Solutions may not be revoked at any time or under any
circumstances.
CONSENT SOLICITATION
Tantau will bear the cost of the solicitation of consents from its
stockholders, except that 724 Solutions and Tantau will share equally the cost
of preparing, filing, printing and distributing the registration statement and
this information statement/prospectus. In addition to solicitation by mail, the
directors, officers and employees of Tantau may solicit consents from
stockholders of Tantau by telephone, fax or other means of communication. Such
directors, officers and employees will not be additionally compensated but may
be reimbursed for reasonable out-of-pocket expenses in connection with this
solicitation.
DO NOT SEND IN ANY STOCK CERTIFICATES WITH YOUR WRITTEN CONSENT.
724 SOLUTIONS WILL INSTRUCT ITS EXCHANGE AGENT TO SEND TRANSMITTAL FORMS WITH
INSTRUCTIONS FOR THE SURRENDER OF CERTIFICATES REPRESENTING THE CAPITAL STOCK OF
TANTAU TO FORMER TANTAU STOCKHOLDERS SHORTLY AFTER THE MERGER IS COMPLETED.
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THE MERGER
THIS SECTION OF THE INFORMATION STATEMENT/PROSPECTUS DESCRIBES MATERIAL
ASPECTS OF THE MERGER. WHILE WE BELIEVE THAT THE DESCRIPTION COVERS THE MATERIAL
TERMS OF THE MERGER AND THE RELATED TRANSACTIONS, THIS DESCRIPTION MAY NOT
CONTAIN ALL OF THE INFORMATION THAT IS IMPORTANT TO YOU. YOU SHOULD READ THE
ENTIRE MERGER AGREEMENT AND THE OTHER DOCUMENTS WE REFER TO CAREFULLY AND IN
THEIR ENTIRETY FOR A MORE COMPLETE UNDERSTANDING OF THE MERGER AND THE RELATED
TRANSACTIONS.
BACKGROUND OF THE MERGER
On June 9, 2000, Christopher Erickson, the President and General Counsel,
and Karen Basian, the Chief Financial Officer, of 724 Solutions, met in
New York with John Sims and Peter Klante, the Vice President of Marketing, of
Tantau. During this meeting, each of the parties expressed an interest in
exploring a possible business or strategic relationship. On June 13, 2000, the
parties entered into a preliminary confidentiality agreement. Discussions
regarding a possible transaction continued for the next month between
724 Solutions and Tantau and the parties agreed to meet on August 14, 2000 to
further explore the potential transaction and to discuss timing, structure and
due diligence matters. On August 7, 2000, the parties entered into a
non-disclosure agreement with respect to due diligence and other information to
be provided in connection with a possible transaction.
On August 14, 2000, representatives of 724 Solutions, including Gregory
Wolfond, the Chairman and Chief Executive Officer, Karen Basian, Alistair
Rennie, Executive Vice President of Marketing, Glenn Barrett, the Vice President
of Finance and Control, and Paul Mansz, the Vice President of Architecture, met
in Austin, Texas with representatives of Tantau, including John Sims, John
Reece, the Chief Financial Officer, Peter Klante, and Harald Sammer, the Chief
Technology Officer, to explore strategic opportunities and relationships
involving 724 Solutions and Tantau.
Following the meeting, 724 Solutions retained Cravath, Swaine & Moore and
Ogilvy Renault as its legal counsel. Tantau retained Brobeck, Phleger and
Harrison LLP and Stikeman Elliott as its legal counsel. Working with their
financial advisors, which were Credit Suisse First Boston on behalf of
724 Solutions and Goldman Sachs & Co., on behalf of Tantau, as well as their
respective legal counsel, both companies conducted due diligence investigations
using publicly available materials and other materials furnished by the parties,
and analyzed a possible combination. In addition, during mid-August through
November, representatives of 724 Solutions and Tantau held numerous and
extensive formal and informal in person and telephonic meetings in which the
parties discussed current operational, financial, legal, accounting and
strategic issues, opportunities and objectives of both companies.
On August 19, 2000, 724 Solutions submitted to Tantau a proposed term sheet
between 724 Solutions and Tantau outlining the material terms of a proposed
stock for stock merger of the two companies. The term sheet required several
agreements to be entered into between Tantau, its stockholders and
724 Solutions as a condition to the proposed merger, including stockholder
voting agreements, resale restriction agreements and an indemnification and
escrow agreement. By its terms, the term sheet was non-binding and was subject
to the completion of due diligence and the negotiation of definitive agreements
and finalization of the terms of any transaction. Over the next two days,
executives of Tantau reviewed the proposed term sheet with its financial and
legal advisors. On August 21, 2000, the board of directors of Tantau held a
telephonic board meeting to discuss the term sheet with Tantau's executive
officers and legal and financial advisors. Following this meeting,
representatives of Goldman, Sachs & Co. and Brobeck, Phleger & Harrison LLP
revised the term sheet to reflect issues raised by Tantau's board of directors
and on August 22, 2000, Goldman, Sachs & Co. delivered the revised term sheet to
Credit Suisse First Boston.
From August 22, 2000 until September 15, 2000, general discussions continued
between the parties concerning the potential benefits and opportunities which
the combination of the two companies would present, without agreement being
reached.
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On September 21, 2000, 724 Solutions sent a revised proposed term sheet to
Tantau. The board of directors of Tantau met on September 24th and 25th to
review and discuss the revised proposed term sheet. The parties continued to
engage in discussions concerning the principal terms of the proposed
transaction, without reaching an agreement.
On October 2, 2000, the Tantau board of directors held a meeting by
telephone with Tantau's financial and legal advisors to discuss the revised
proposed term sheet. During the period from October 2nd to October 24th,
revisions to the proposed term sheet were submitted by both 724 Solutions and
Tantau. On October 25, 2000, Tantau held a telephonic board meeting to discuss
the status of the proposed term sheet. The parties continued to propose
revisions to the proposed term sheet during the following week.
On November 3, 2000, the Tantau board of directors held a telephonic board
meeting, at which time the most recent revised proposed term sheet received from
724 Solutions was discussed with Tantau's executive officers and Tantau's
financial and legal advisors. The board of directors authorized Tantau's
management and Tantau's advisors to negotiate a final term sheet. The parties
negotiated the term sheet, and on November 6, 2000, management of 724 Solutions
and Tantau agreed on a final term sheet, which was subject to, among other
conditions, the satisfactory completion of due diligence and the negotiation of
definitive merger agreements. On November 6, 2000, the members of Tantau's board
of directors executed a unanimous written consent approving the final term
sheet. The parties also entered into a letter agreement at this time to
negotiate exclusively with each other for a period of 10 days, with automatic
extensions for successive 10 day periods, for the purpose of entering into
definitive agreements for the transaction.
Between November 6, 2000 and November 27, 2000 the parties and their
respective financial and legal advisors completed due diligence activities and
preparation and negotiation of definitive documentation.
On November 10, 2000, counsel for 724 Solutions delivered drafts of the
merger agreement, indemnification and escrow agreement, resale restriction
agreements and voting agreements to Tantau and Tantau's financial and legal
advisors. From November 14, 2000 to November 16, 2000, representatives of the
parties and their respective advisors met in New York to negotiate the merger
agreement and related documents.
Following these meetings and through November 26, 2000, the parties and
their representatives continued to negotiate the merger agreement and other
agreements through numerous telephone conferences and the exchange of revised
drafts of the agreements. During this period, Tantau's executive officers,
directors and certain affiliates were asked to enter into the stockholder voting
agreements and the resale restriction agreements, with the resale restriction
agreements being conditioned on consummation of the merger. Also, John Sims,
John Reece, Harald Sammer and Peter Klante were asked to enter into executive
employment agreements conditioned on consummation of the merger. In addition,
certain employees of Tantau, including its executive officers, were asked to
enter into agreements to defer the accelerated vesting of their Tantau stock
options resulting from the merger until the second anniversary of the effective
time.
On November 27, 2000, Tantau's board of directors held a telephonic board
meeting to consider the proposed merger with 724 Solutions and the terms of the
merger agreement, indemnification and escrow agreement and the other agreements
relating to the merger, copies of which had previously been provided to and
reviewed by each of the board members. At this meeting, Mr. Sims reviewed the
transaction with the board of directors, including the history of the
negotiations, the strategic reasons for the proposed transaction and the
principal terms of the proposed transaction.
Following Mr. Sims' review of the transaction, Tantau's legal counsel
discussed the terms of the proposed merger agreement and related documents,
variations between the merger agreement and related documents compared to the
final term sheet, applicable laws and regulations relating to the
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merger, and a schedule for completing the merger, including the principal
required approvals and conditions to the merger. Tantau's legal advisors then
advised the Tantau board of its fiduciary duties with respect to its
consideration of the merger, and in connection with this advice, the Tantau
board then considered the terms of the employment agreements between
724 Solutions and Messrs. Sims and Sammer, each a member of Tantau's board, and
the number and terms of the options to be granted to Messrs. Sims and Sammer
immediately prior to the effective time of the merger. See "The Merger --
Interests of Certain Persons in the Merger." Goldman, Sachs & Co. then made a
presentation to the Tantau board concerning strategic rationales, financial
aspects and other commercial considerations with respect to the proposed merger.
Following these presentations, the board of directors discussed the closing
condition requiring the conversion of Tantau's outstanding preferred stock into
Tantau common stock prior to the effective time and at what ratios the preferred
stock would convert into common stock. After lengthy discussions, the board
determined to adjourn the meeting pending the outcome of negotiations between
Tantau and the holders of a majority of Tantau's Series B preferred stock
regarding the ratios for conversion of the Series B preferred stock into Tantau
common stock prior to the merger.
After the board meeting was adjourned, representatives of Tantau and the
holders of a majority of Tantau's Series B preferred stock discussed various
proposals for the conversion of the Series B preferred stock into Tantau's
common stock prior to the merger. On the evening of November 27, 2000, Tantau
entered into a letter agreement with the holders of both classes of Tantau's
preferred stock, in which these holders agreed to convert all of their shares of
preferred stock into Tantau common stock prior to the merger based on a five
trading day average valuation of 724 Solutions common stock determined on the
date which was 15 business days following the date of the merger agreement.
Following the execution of this letter agreement, Mr. Sims contacted each of
the directors of Tantau to discuss the terms of the proposed conversion of the
Tantau preferred stock. Following discussions with all of the board members,
each of the directors signed a unanimous written consent which:
- determined that the terms of the merger agreement and related agreements,
and the transactions contemplated thereby were advisable and fair to and
in the best interests of Tantau and its stockholders;
- approved and adopted the merger agreement and the related agreements;
- directed that the merger agreement and the related agreements be submitted
for consideration by the Tantau stockholders; and
- recommended that the Tantau stockholders vote for the adoption and
approval of the merger agreement.
In reaching their approval of the merger and related transactions, directors
of Tantau, with the assistance of Tantau's financial and legal advisors,
considered and analyzed a number of factors, including, without limitation, the
following:
- reports from Tantau's management and Brobeck, Phleger & Harrison LLP on
the specific terms of the merger agreement and related agreements;
- the current financial position of Tantau;
- information concerning the financial performance, business operations and
prospects of 724 Solutions presented at meetings of Tantau's board of
directors, including, among other things, the presentation by Goldman,
Sachs & Co.;
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- the registration of the common shares of 724 Solutions to be exchanged for
Tantau stock in the merger; and
- the terms of the conversion of Tantau preferred stock into Tantau common
stock prior to the merger.
Based on information with respect to the financial condition, results of
operations, cash flow, business and prospects of Tantau on both a stand-alone
basis and as compared with those available in combination with 724 Solutions,
the board of directors of Tantau determined that Tantau stockholders would
benefit from the merger transaction since the combination of the two businesses
would result in a larger company with more sales channels, customers, products
and services, and more geographic presence, which the board believed should
enable the combined entity to compete more effectively in the Internet
infrastructure software market.
Tantau's board of directors also considered a number of potential negative
factors in its deliberations concerning the merger transaction, including:
- the possibility that common shares of 724 Solutions placed in escrow may
not be distributed to the Tantau stockholders;
- the length and terms of the restrictions on selling the 724 Solutions
common shares to be received in the merger;
- the risks associated with obtaining necessary regulatory and stockholder
approvals of the merger transactions;
- the risk that the potential benefits of the merger transactions might not
be realized; and
- the other risks described under "Risk Factors."
The foregoing discussion of the information and factors considered by
Tantau's board of directors is not intended to be exhaustive but includes
material factors considered by the board. In view of the complexity and wide
variety of information and factors, both positive and negative, considered by
the board of directors of Tantau, it did not find it practical to quantify, rank
or otherwise assign relative or specific weights to the factors considered. In
addition, the Tantau board of directors did not reach any specific conclusion
with respect to each of the factors considered, or any aspect of any particular
factor. Instead, the board of directors conducted an overall analysis of the
factors described above, including discussion with Tantau's management and
legal, financial and accounting advisors. In considering the factors described
above, individual members of Tantau's board of directors may have given
different weight to different factors.
The board of directors of Tantau considered all these factors as a whole and
believed the factors supported its determination to approve the merger.
After taking into consideration all of the factors set forth above, the
board of directors of Tantau concluded that the merger was fair to, and in the
best interests of, Tantau and its stockholders and that Tantau should proceed
with the merger.
Following the approval of the merger and the related transactions by
Tantau's board of directors, representatives of 724 Solutions and Tantau,
together with their respective legal advisors, worked together on November 28,
2000 and November 29, 2000 to negotiate final revisions to, and to prepare
execution copies of, the merger agreement and related documents as well as final
exhibits and schedules for each of them. In addition, during this period, the
executive officers, directors and their affiliates who owned Tantau stock and
certain affiliates of Tantau executed stockholder voting agreements agreeing to
vote their shares of Tantau stock for approval of the merger and the merger
agreement and resale restriction agreements limiting the resale of
724 Solutions common shares to be received in the merger. Messrs. Sims, Reece,
Sammer and Klante also executed their employment
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agreements and certain employees of Tantau signed agreements deferring the
acceleration of their Tantau stock options resulting from the merger for a
period of one year. On November 29, 2000, the merger agreement was executed and
724 Solutions and Tantau issued a joint press release announcing its execution.
TANTAU'S REASONS FOR THE MERGER
Tantau believes that the merger will result in a combined company better
positioned than Tantau alone to become a leader in the m-commerce software
market and to maximize the benefits to Tantau's stockholders based on the
following:
MARKET LEADING POSITION. Together, Tantau and 724 Solutions currently serve
financial institutions with more than 272 million customers worldwide. Tantau
expects that financial institutions will be the leaders in enabling m-commerce
and will be instrumental in exposing consumers to the benefits of m-commerce. As
a result, Tantau believes that the combined company's relationships with these
leaders in providing secure wireless transaction capabilities will increase the
value and acceptance of the combined company's products and services. Tantau
believes that the combined company will be in a strong position to build on each
of Tantau's and 724 Solutions' positions in the financial institutions sector of
the m-commerce market; enabling the combined company to attract additional
financial institutions and providing the opportunity to establish itself as a
market leader. Tantau believes the leading position of the combined company in
providing infrastructure software for secure wireless transactions to financial
institutions will enhance its ability to expand into other non-financial
services markets such as portals, telecom, retail, logistics and travel. In
addition, since there is limited customer overlap between Tantau and
724 Solutions, there are a variety of cross-selling opportunities that the
combined company will seek to capitalize on.
INTERNATIONAL PRESENCE. Tantau's strong position in Europe is expected to
complement 724 Solutions' established position in North America to provide the
combined company with an expanded international presence. Tantau believes this
international presence will position the combined company to attract additional
international customers, furthering its reputation as a global market leader. In
addition, Tantau expects that the resources which otherwise would have been
expended by the companies to increase their presence in Europe and North America
will be available to assist the combined company's expansion into additional
geographic markets and other sectors of the m-commerce market.
STRATEGIC RELATIONSHIPS. Tantau believes that relationships with wireless
and other network service providers, device manufactures, technology companies
and content providers are vital, especially in the areas of channels,
distribution, security and technology, to facilitate the adoption of the
combined company's products and services. In addition, Tantau believes that
strategic relationships are essential to gaining early awareness and access to
emerging Internet technologies. The merger will enable the combined company to
leverage 724 Solutions' and Tantau's current relationships to provide the
combined company access to many of the leading technology developers,
manufacturers and distributors.
IMPROVED FINANCIAL PERFORMANCE AND CONDITION. Due to the combined company's
wider geographic presence, larger customer base and increased competitive
advantage, Tantau believes the combined company will be better positioned to
increase revenue and profitability than Tantau would as an independent company.
In addition, Tantau believes that the combined company's assets and financial
condition, together with its expected ability to access and obtain additional
funds, will better position it to grow its business.
INCREASED LIQUIDITY FOR TANTAU STOCKHOLDERS. Tantau believes the merger
will afford greater liquidity to its stockholders upon exchange of their shares
of Tantau stock, for which there is no established
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trading market, for 724 Solutions common shares, which are listed for trading on
the Nasdaq National Market and The Toronto Stock Exchange.
RECOMMENDATION OF TANTAU'S BOARD OF DIRECTORS
The Tantau board of directors has unanimously approved the merger and the
merger agreement and has unanimously determined that the merger agreement and
the merger are advisable and that the terms of the merger agreement, including
the consideration to be received by Tantau's stockholders, are fair to and in
the best interests of the Tantau stockholders.
THE TANTAU BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO ADOPT
AND APPROVE THE MERGER AGREEMENT AND THE MERGER.
724 SOLUTIONS' REASONS FOR THE MERGER
Our objective is to become the leading provider of an Internet
infrastructure software that enables secure transactions using a broad range of
Internet-enabled devices. In order to accomplish this goal, we believe that we
must offer to customers rich applications on a highly scalable platform. We
believe that we must form customer relationships with large financial
institutions, which we believe will be the leaders in providing advanced
services of this kind. We believe that we must develop strategic relationships
with key developers and distributors of the technologies that relate to our
business, and establish our business in major markets worldwide.
We believe that our merger with Tantau will help us to achieve these goals
by enabling us to move faster in our target markets to develop and market
advanced services and technologies that may be offered to leading financial
institutions and other enterprises. We also believe that the key benefits to us
arising from the merger include the following:
INTERNATIONAL PRESENCE. We believe that the merger will enable us to more
rapidly establish ourselves as a competitor in European markets, where we can
market our services to large financial institutions and other companies. We
believe that obtaining a competitive position in the European market, a key
market for the delivery of mobile transaction services, will be needed to
enhance our reputation as a leading provider of Internet infrastructure software
solutions for m-commerce. While we conduct a portion of our operations in the
U.K. and Paris, Tantau has successfully established itself as a leading provider
of m-commerce solutions in Europe. In addition, we believe that by obtaining the
benefit of Tantau's established presence in Europe, we can reallocate a portion
of the amounts that we had planned to spend to expand our operations in this
market to other international markets, as well as to other business purposes.
CUSTOMER RELATIONSHIPS. Several major international financial institutions
are in various stages of implementing wireless services based upon Tantau's
technology, including Chase Manhattan Bank, Commerzbank, Credit Suisse Group,
MeritaNordbanken, the New Zealand Stock Exchange, Rabobank International, and SE
Banken. These additional customers expand our addressable market by adding a
substantial number of consumers to whom services based upon our platform may be
offered. We believe that the integrated 724 Solutions/Tantau product offerings
will enable us to continue to service our financial institution customers
through the provision of our advanced applications, and by expanding the range
of services that we can offer and sell to many of them. In addition, we believe
that our establishment of relationships with these customers through the merger
will help us to expand our reputation as a premier provider of m-commerce
software infrastructure solutions. In order to coordinate our sales and
marketing efforts with Tantau prior to the effective date of the merger, we have
entered into a pair of coseller service agreements with Tantau that enable each
of us to market the other's services to designated targeted customers.
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SCALEABLE, FAULT TOLERANT, SOFTWARE PLATFORM. Tantau shares our commercial
goal of providing financial institutions and other enterprises with a scaleable
solution that will enable them to deliver secure transactions across a wide
range of Internet-enabled devices and networks. Tantau pursues this goal using
its robust application platform technology. We believe that this infrastructure
will complement our advanced suite of applications. By integrating Tantau's
platform with our platform and applications, we believe that we will be able to
offer enhanced services to our existing and future customers that require a
strong enterprise-wide solution. We also expect to be able to offer solutions
for new industries either through the sale of technologies based on the Tantau
platform or the integration of specific applications. In addition, the
integration of the Tantau infrastructure into our products will enable our
products to function with a wider range of operating systems that may be used by
our customers.
EXPERIENCED MANAGEMENT AND DEVELOPMENT TEAM. We believe that we will
benefit from increased marketing opportunities, and that we will develop our
products more rapidly, by adding Tantau's personnel to our operations,
particularly the members of Tantau's management and development teams. Tantau's
management team has obtained sophisticated Internet and mobile transaction
experience through their years of working for key companies in these industries,
including Tandem Computers, IBM, KPMG, VTEL Corporation, SCC Communications and
Vignette Corporation. In addition, we believe that Tantau's team of experienced
developers will increase our ability to rapidly enhance our existing products,
and develop new products, for the emerging market for mobile commerce solutions.
STRATEGIC RELATIONSHIPS. We are continually seeking to establish worldwide
relationships with wireless and other network service providers, device
manufacturers, technology companies and content providers to facilitate the
adoption of our customers' Internet-related products and services. Through
strategic relationships, we seek to gain technological leadership, worldwide
access and positioning and an early awareness of emerging Internet technologies.
Through the merger with Tantau, we believe that we will gain access to Tantau's
relationships with leading technology and distribution companies, including
computer and telecommunication equipment manufacturers such as Nokia, Compaq and
Hewlett-Packard, financial service providers, and Internet technology
developers.
IMPROVED FINANCIAL PERFORMANCE. We believe that our merger with Tantau will
help us improve our financial performance and accelerate the timing of our
achieving profitability. We believe that the combined company will achieve
substantially greater revenues than we would have achieved if we remained
independent. We expect that Tantau's customer contracts, which involve different
combinations of subscriber-based license fees, maintenance fees and professional
services fees, will provide additional sources of recurring revenues in future
fiscal periods. We are seeking to achieve combined revenues of $75.0 million
during the year ending December 31, 2001.
We believe that the merger will improve our gross margins as we integrate
the two companies, particularly because we will not need to make as significant
a level of investment in several of Tantau's existing markets in Europe as we
had planned in order to roll out our operations in those geographic areas. We
are seeking to increase our gross margins to a target of approximately 46% to
48% of revenues in 2001. As a result of the merger, we believe that it will be
possible for us to become profitable more rapidly than we would have achieved as
an independent company. On a combined basis, we are seeking to become profitable
on an operating basis by the end of the first quarter of 2002, before giving
effect to stock based compensation, amortization of intangibles and any
interests that we may have in the equity of our affiliates. Over the long term,
we seek to increase our gross margins to approximately 60% of revenues and to
decrease sales and marketing, research and development, and general and
administrative expenses to targets of 15%, 15% and 5% of revenues, respectively.
Excluding stock-based compensation and amortization of intangibles, we are
seeking to achieve an operating margin of 25% of revenues in the long term.
However, we cannot assure you that any of our financial targets will be
achieved. See "Information Regarding Forward-Looking Statements."
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COMBINED 724 SOLUTIONS/TANTAU PRODUCT OFFERING
The following diagram illustrates the general manner in which we currently
plan to integrate the Tantau Wireless Internet Platform with our product
offerings after the completion of the merger:
[DIAGRAM]
[The diagram consists of three levels. The bottom portion of the diagram is
a rectangular block lying horizontally, and indicates that TANTAU provides
adapters, a wireless server and gateways. The middle level of the diagram is a
rectangular block lying horizontally, and indicates that 724 Solutions provides
application services including alerts, aggregation, payment, PKI portal, device
support and content. On top layer are three smaller blocks representing
electronic banking, electronic brokerage and m-commerce services, and an arrow
pointing to the right indicating that new industry verticals can be added.]
As indicated above, we believe that Tantau's robust infrastructure can be
combined with our platform and advanced application services in order to provide
customers with advanced e-banking, e-brokerage and m-commerce services, using a
platform that can also be adapted to new industry sectors.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Several directors, officers, employees and significant stockholders of
Tantau have interests in the merger in addition to their interests as
stockholders of Tantau generally. The Tantau board of directors was aware of
such interests and considered them, among other matters, in approving the merger
agreement and the transactions contemplated thereby.
NEW DIRECTORS OF 724 SOLUTIONS. Under the terms of the merger agreement,
the Tantau board of directors will designate four individuals to be appointed to
the 724 Solutions board of directors. The Tantau board of directors has selected
John Sims, Joseph Aragona, Charles Goldman and Ted White as its designees, and
these individuals will become directors of 724 Solutions at the effective time
of the merger, subject to their approval by the corporate governance committee
of the 724 Solutions board of directors and by The Toronto Stock Exchange.
Messrs. Sims, Aragona and Goldman currently serve on the Tantau board of
directors and Mr. White is a member of the advisory board to the Tantau board of
directors. Mr. Sims is also the President and Chief Executive Officer of Tantau.
NEW EXECUTIVE OFFICERS OF 724 SOLUTIONS AND EMPLOYMENT AGREEMENTS. In
connection with the merger, three of Tantau's current executive officers will
become executive officers or employees of 724 Solutions. These individuals
include John Sims, Tantau's President and Chief Executive Officer and a director
of Tantau, Harald Sammer, Tantau's Chief Technology Officer and a director of
Tantau and Peter Klante, Tantau's Vice President of Marketing. At the effective
time of the merger, Gregory Wolfond, the current Chairman and Chief Executive
Officer of 724 Solutions, will resign from his position as Chief Executive
Officer and Mr. Sims will be appointed as the new Chief Executive Officer
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of 724 Solutions. Mr. Wolfond will remain in his position as Chairman of
724 Solutions. Within 60 days after the effective time of the merger,
Mr. Sammer will be appointed Chief Technology Officer of 724 Solutions and
Mr. Klante will be appointed General Manager, Infrastructure Group of
724 Solutions. In addition, John Reece, Tantau's Chief Financial Officer will be
appointed as a Vice President of 724 Solutions, but will not be an executive
officer of 724 Solutions. Each of Messrs. Sims, Sammer, Klante and Reece have
entered into an employment agreement, conditioned upon completion of the merger,
with 724 Solutions providing for his appointment to the positions listed above
and also containing the following material terms relating to compensation:
- JOHN SIMS. Mr. Sims will receive a base salary of $250,000 per annum and
will be entitled to a performance related bonus if specified objectives
are met. Mr. Sims' employment will be at-will and may be terminated by
either party at any time and for any reason. If Mr. Sims is terminated
without cause or Mr. Sims terminates his employment for good reason, he
will be entitled to a lump sum severance payment equal to twelve or
eighteen months' current base salary and target bonus as determined upon
that termination, based upon the period of time thereafter in which
Mr. Sims agrees to be bound to non-competition and non-solicitation
covenants.
- HARALD SAMMER. Mr. Sammer will receive a base salary of DM 414,700
(approximately US$189,400) per annum and will be entitled to a performance
related bonus if specified objectives are met. Mr. Sammer's employment
will be at-will and may be terminated by either party at any time and for
any reason. If Mr. Sammer is terminated without cause or Mr. Sammer
terminates his employment for good reason, he will be entitled to a lump
sum severance payment equal to twelve months' current base salary and
target bonus.
- PETER KLANTE. Mr. Klante will receive a base salary of $175,000 per annum
and will be entitled to a performance related bonus if specified
objectives are met. Mr. Klante's employment will be at-will and may be
terminated by either party at any time and for any reason. If Mr. Klante
is terminated without cause or Mr. Klante terminates his employment for
good reason, he will be entitled to a lump sum severance payment equal to
twelve months' current base salary and target bonus.
- JOHN REECE. Mr. Reece will receive a base salary of $170,000 per annum and
will be entitled to a performance related bonus if specified objectives
are met. Mr. Reece's employment will be at-will and may be terminated by
either party at any time and for any reason. If Mr. Reece is terminated
without cause or Mr. Reece terminates his employment for good reason, he
will be entitled to a lump sum severance payment equal to twelve months'
current base salary and target bonus.
In addition, these individuals will be entitled to participate in
724 Solutions' employee benefit plans.
GRANTS OF PERMITTED INTERIM PERIOD STOCK OPTIONS. Under the merger
agreement, key employees of Tantau mutually identified by 724 Solutions and
Tantau will, immediately prior to the merger, receive permitted interim period
stock options which, in the aggregate, will convert into options to purchase up
to 1,500,000 common shares of 724 Solutions upon consummation of the merger. See
"Description of the Merger Agreement and Related Documents -- Permitted Interim
Period Stock Options." The exercise price of the permitted interim period stock
options will be based on the trading price of common shares of 724 Solutions as
of the most recently ended trading day prior to the date of grant as adjusted
for the exchange ratio. The permitted interim period stock options will be
assumed by 724 Solutions, but the number of common shares of 724 Solutions which
will be issuable under the permitted interim period stock options granted to
these key employees will not count against or be included in the 19 million
common shares and options of 724 Solutions issuable by 724 Solutions in the
merger in exchange for shares of Tantau's capital stock, the options (other than
permitted interim period stock options) to acquire Tantau common stock, and the
warrants to acquire Tantau common
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stock outstanding at the effective time. These permitted interim period stock
options will have a term of ten years and will vest in four equal annual
installments on each of the second, third, fourth and fifth anniversaries of the
effective time. However, the permitted interim period stock options granted to
Harald Sammer will vest in one installment on the second anniversary of the
effective date.
The three executive officers of Tantau who will become executive officers of
724 Solutions, John Sims, Harald Sammer and Peter Klante, together with John
Reece, will each receive permitted interim period stock options which will
convert into options for the number of 724 Solutions common shares listed below
at the effective time of the merger:
- John Sims 175,000
- Harald
Sammer 60,000
- Peter
Klante 100,000
- John Reece 60,000
In addition, 33 other executive officers and employees of Tantau will
receive permitted interim period stock options which will convert into options
for an aggregate of 1,105,000 common shares of 724 Solutions at the effective
time of the merger. Options to purchase up to 500,000 shares of Tantau common
stock granted by Tantau prior to the effective time of the merger to new hires
and promoted employees will also be permitted interim period stock options with
exercise prices based on the trading price of 724 Solutions' common shares as of
the most recent trading day prior to the date of grant.
INDEMNIFICATION AND DIRECTORS' AND OFFICERS' INSURANCE. The merger
agreement provides that 724 Solutions will cause the surviving corporation to
indemnify each present and former director and officer of Tantau to the fullest
extent permitted under Tantau's certificate of incorporation, bylaws, applicable
law or any current indemnification agreement between an officer or director and
Tantau, for liabilities for acts or omissions occurring at or prior to the
effective time of the merger. In addition, for a period of at least six years
from the effective time of the merger, the surviving corporation's certificate
of incorporation and bylaws will contain provisions with respect to exculpation
and indemnification that are as favorable to Tantau's present and former
officers and directors as those contained in Tantau's current certificate of
incorporation and bylaws. The merger agreement also provides that 724 Solutions
will maintain directors' and officers' liability insurance coverage for Tantau's
present and former officers and directors on terms no less favorable than the
policies currently in effect for six years after the effective time of the
merger, but 724 Solutions will only be obligated to pay for premiums which in
the aggregate are no more than 150% of the aggregate amount paid by Tantau in
1999 for this insurance coverage. Finally, each of the individuals who becomes a
director and/or officer of 724 Solutions will be entitled to director's and
officer's insurance coverage from 724 Solutions having comparable benefits to
those that 724 Solutions currently provides to its officers and directors.
REGISTRATION RIGHTS. Stockholders of Tantau holding an aggregate of
12,840,000 shares of Tantau's Series A preferred stock, 6,446,112 shares of
Tantau's Series B preferred stock, and warrants to purchase additional shares of
Tantau's Series B preferred stock will enter into a registration rights
agreement with 724 Solutions at the effective time of the merger. The
registration rights agreement will grant "piggyback" registration rights to
these stockholders, allowing them to participate in future underwritten
registered public offerings by 724 Solutions, including in connection with
registrations that may be demanded by our chairman and chief executive officer,
and several of our major shareholders. See "The Merger Agreement and Related
Documents -- Registration Rights Agreement" and "724 Solutions -- Related Party
Transactions."
REGULATORY AND OTHER APPROVALS
REGULATORY APPROVALS. The merger is subject to the requirements of the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, under which a
transaction cannot be completed until
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required information and materials are furnished to the Antitrust Division of
the Department of Justice and the Federal Trade Commission and the applicable
waiting periods expire or are terminated. 724 Solutions and Tantau have made the
required filings with the Department of Justice and Federal Trade Commission,
and the applicable waiting periods expired in December 2000.
The Antitrust Division of the Department of Justice or the Federal Trade
Commission may challenge the merger on antitrust grounds either before or after
the completion of the merger. In addition, either the Antitrust Division of the
Department of Justice or the Federal Trade Commission could take action under
the antitrust laws as it deems necessary or desirable in the public interest.
Other persons could also take action under the antitrust laws, including seeking
to enjoin the merger. Additionally, at any time before or after the completion
of the merger, any state could take action under the antitrust laws as it deems
necessary or desirable in the public interest. There can be no assurance that a
challenge to the merger will not be made or that, if a challenge is made, we
will prevail.
Neither 724 Solutions nor Tantau is aware of any other material governmental
or regulatory approval required for completion of the merger, other than
compliance with applicable corporate law of Delaware and except for approvals
already obtained.
NO 724 SOLUTIONS SHAREHOLDER VOTE REQUIRED. Based on the execution by
certain of 724 Solutions' principal shareholders of a letter setting forth such
shareholders' support of the proposed merger, 724 Solutions has received from
each of the Nasdaq National Market and The Toronto Stock Exchange a letter
confirming that, subject to the satisfaction of several documentary and
procedural matters, no vote or meeting of 724 Solutions' shareholders would be
required to effect the merger.
ACCOUNTING TREATMENT
The merger will be accounted for as a purchase under U.S. generally accepted
accounting principles. Under this accounting method, 724 Solutions will record
assets and liabilities of Tantau at their fair value at the effective time of
the merger, with the excess of the purchase price over the net tangible and
identifiable intangible assets acquired being recorded as goodwill.
MATERIAL UNITED STATES FEDERAL AND CANADIAN INCOME TAX CONSEQUENCES
GENERAL
The following discussion of material U.S. federal income tax consequences
and Canadian federal income tax consequences of the merger and ownership of
724 Solutions' common shares is included for general information purposes only
and does not purport to be a complete description of all potential tax
consequences affecting the decision of Tantau stockholders whether to vote to
approve the merger. The discussion and the opinions described below apply only
to U.S. Holders, as defined below, who hold shares of Tantau capital stock as
"capital assets". The discussion and the tax opinions described below do not
address any potential tax effects to non-U.S. Holders nor do they address all
potential tax effects that may be relevant to U.S. Holders subject to special
U.S. federal income or Canadian tax treatment, including:
- persons who own (actually or constructively) 5% or more of either the
total voting power or total value of all capital stock of 724 Solutions
immediately before or immediately after the merger;
- persons subject to the alternative minimum tax;
- persons who hold shares of Tantau capital stock through partnerships or
other pass-through entities;
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- persons who are or have been residents of Canada or engaged in a trade or
business in Canada through a permanent establishment;
- persons who hold their shares as part of a hedge, straddle or conversion
transaction;
- persons whose functional currency is not the U.S. dollar;
- insurance companies;
- financial institutions;
- dealers in securities;
- traders that mark to market;
- tax-exempt organizations;
- retirement plans; and
- persons who acquired their shares of Tantau common stock upon the exercise
of employee stock options or otherwise as compensation.
The following discussion does not address the effect of applicable state,
provincial, local or foreign (other than Canadian) tax laws.
A "U.S. Holder" means a holder of shares of Tantau capital stock who is
(i) a citizen or resident of the U.S., (ii) a corporation or other entity
taxable as a corporation created in or organized under the laws of the U.S. or
any political subdivision thereof, (iii) an estate the income of which is
subject to U.S. federal income tax regardless of its source or (iv) in general,
a trust if a U.S. court can exercise primary supervision over the administration
of such trust, and one or more U.S. persons have the authority to control all of
the substantial decisions of such trust. A "non-U.S. Holder" means a holder of
shares of Tantau capital stock who is not a "U.S. Holder."
MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES
This summary of material U.S. federal income tax consequences is based on
the Internal Revenue Code, Treasury regulations, administrative rulings and
practice and judicial precedent, each as in effect at the date of this
information statement/prospectus, all of which are subject to change. Any such
change, which may or may not be retroactive, could alter the tax consequences
discussed herein. No rulings have been or are expected to be sought from the
Internal Revenue Service concerning the tax consequences of the merger, and the
opinions of counsel described below and this tax discussion as to the material
U.S. federal income tax consequences of the merger will not be binding on the
Internal Revenue Service or any court. This discussion relies on assumptions,
including assumptions regarding the absence of changes in existing facts and the
completion of the merger in accordance with this information
statement/prospectus and the merger agreement. This discussion is also based on
certain representations made by 724 Solutions and Tantau. If any of these
representations is inaccurate, the tax consequences of the merger could differ
from those described herein.
GENERAL U.S. FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER. The obligation
of Tantau to consummate the merger is conditioned on its receipt of an opinion
from its counsel, Brobeck, Phleger & Harrison LLP, to the effect that the merger
will be treated for U.S. federal income tax purposes as a reorganization within
the meaning of Section 368(a)(1)(B) of the Code and that no gain or loss will be
recognized by a Tantau stockholder on the exchange of shares of Tantau capital
stock solely for 724 Solutions' common shares in the merger (except with respect
to any cash received in lieu of a fractional share); PROVIDED that (i) Tantau
complies with the reporting requirements contained in Treasury Regulation
Section 1.367(a)-3(c)(6) (requiring Tantau to file with its tax return for the
year in which the merger occurs a statement that, among other things, describes
the merger, provides information concerning the number of common shares of
724 Solutions received by Tantau stockholders
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in the merger, and contains certain statements regarding the nature of
724 Solutions' business and the ownership of 724 Solutions' shares), and
(ii) the Tantau stockholder owns (including beneficial, indirect and
constructive ownership) less than 5% of the total voting power and total value
of 724 Solutions' outstanding common shares immediately after the merger. The
opinion of Brobeck, Phleger & Harrison LLP will be based on certain facts,
representations and assumptions that counsel reasonably deem relevant (including
certain representations regarding the ownership of 724 Solutions' common
shares). Assuming the accuracy of the opinion of counsel described above, the
following additional U.S. federal income tax consequences would arise:
- neither 724 Solutions, Saturn Merger Sub, Inc. or Tantau will recognize
gain or loss solely as a result of the merger;
- Tantau stockholders will not recognize any gain or loss as a result of the
exchange of Tantau capital stock solely for 724 Solutions' common shares
pursuant to the merger;
- the tax basis of the 724 Solutions common shares received by a Tantau
stockholder in the merger will be equal to the tax basis of the shares of
Tantau capital stock exchanged therefor, reduced by any amount of basis
allocable to any fractional common share of 724 Solutions for which cash
is received;
- the holding period, for purposes of capital gains taxation, of the
724 Solutions common shares received by a Tantau stockholder in the merger
will include the holding period of the shares of Tantau common stock
exchanged therefor; and
- the receipt of cash in lieu of a fractional common share of 724 Solutions
by a Tantau stockholder pursuant to the merger generally will result in
taxable capital gain or loss to such stockholder based on the difference
between the amount of cash received by such stockholder and such
stockholder's basis in such fractional 724 Solutions common share.
TAXATION OF DIVIDENDS. Subject to the discussion below under "Passive
Foreign Investment Company Considerations," for U.S. federal income tax
purposes, the gross amount of any distribution made out of 724 Solutions'
current or accumulated earnings and profits as determined for U.S. federal tax
income purposes will be included in gross income by a U.S. Holder and will be
treated as foreign source dividend income (except that if more than 50% of
724 Solutions' stock is owned by U.S. persons, a portion of any dividends may be
treated as U.S. source for purposes of calculating such Holder's U.S. foreign
tax credit).
If dividends paid by 724 Solutions were to exceed 724 Solutions' current and
accumulated earnings and profits as determined for U.S. federal income tax
purposes, any excess would be treated as a non-taxable return of capital to the
extent of the U.S. Holder's adjusted basis in the common shares of
724 Solutions, and thereafter as a capital gain.
A U.S. Holder will be required to include in income the Canadian withholding
tax paid with respect to dividends and may claim a foreign tax credit with
respect to such tax, subject to applicable limitations.
TAXATION OF GAINS. Upon the sale or disposition of a common share of
724 Solutions, you will recognize gain or loss for U.S. federal income tax
purposes in an amount equal to the difference between the U.S. dollar value of
the amount realized and your adjusted tax basis in the share. Subject to the
discussion below under the heading "Passive Foreign Investment Company
Considerations," such gain or loss will generally be treated as U.S. source
capital gain or loss. If you are an individual, any such capital gain will
generally be subject to U.S. federal income tax at preferential rates if
specified minimum holding periods are met.
PASSIVE FOREIGN INVESTMENT COMPANY CONSIDERATIONS. 724 Solutions has
represented that it is not a passive foreign investment company ("PFIC") for
U.S. federal income tax purposes for its current
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taxable year. In the future, the determination of 724 Solutions' PFIC status
will depend on, among other things, a valuation of 724 Solutions' assets,
including goodwill and other intangible assets. No assurance can be given that
724 Solutions will not be attributed PFIC status in future years.
724 Solutions will be classified as a PFIC in a particular taxable year if
either 75% or more of its gross income for the taxable year is passive income,
or during the taxable year, the average percentage of the value of
724 Solutions' assets that produce or are held for the production of passive
income is at least 50%. The U.S. Internal Revenue Service has indicated that
cash balances, even if held as working capital, are considered to be assets that
produce passive income.
If 724 Solutions were classified as a PFIC, any gain recognized by a
U.S. Holder upon the sale of common shares of 724 Solutions, or the receipt of
certain distributions, would generally be treated as ordinary income. In this
case, this income would be allocated over the period that the U.S. Holder held
724 Solutions shares and an interest charge would be imposed on the amount of
deferred tax on such income allocated to prior taxable years. If 724 Solutions
were determined to be a PFIC, however, a U.S. Holder could elect to treat his or
her shares as an interest in a qualified electing fund (a "QEF Election"), in
which case the U.S. Holder would be required to include in income annually his
or her proportionate share of 724 Solutions' income and net capital gain in
years in which 724 Solutions was a PFIC, but any gain subsequently recognized
upon the sale by such U.S. Holder of the shares would generally be taxed as
capital gain. Alternatively, a U.S. Holder could make an election (a
"Mark-to-Market Election"), pursuant to which the U.S. Holder would be required
to include as ordinary income annually the excess of the fair market value of
the 724 Solutions shares over the U.S. Holder's basis therein. If a U.S. Holder
makes a Mark-to-Market Election, then any gain recognized upon the sale by such
U.S. Holder of his or her common shares of 724 Solutions generally would be
taxed as ordinary income in the year of sale.
You should consult with your own tax advisors regarding your eligibility
for, and the manner and advisability of making, the QEF Election or
Mark-to-Market Election if 724 Solutions is treated as a PFIC.
U.S. BACKUP WITHHOLDING AND INFORMATION REPORTING. A holder of
724 Solutions common shares may, under certain circumstances, be subject to
certain information reporting requirements and backup withholding tax at the
rate of 31% with respect to dividends paid on the 724 Solutions common shares,
or the proceeds of sale of the 724 Solutions common shares, unless such holder
(i) is a corporation or comes within certain other exempt categories, and when
required, demonstrates this fact or (ii) provides a correct taxpayer
identification number ("T.I.N."), certifies that such holder is not subject to
backup withholding and otherwise complies with applicable requirements of the
backup withholding rules. A holder of 724 Solutions common shares who does not
provide a correct T.I.N. may be subject to penalties imposed by the
U.S. Internal Revenue Service. Any amount withheld under backup withholding
rules generally will be creditable against the holder's U.S. federal income tax
liability.
THE OPINION OF COUNSEL DESCRIBED ABOVE AND THIS TAX DISCUSSION DO NOT
PURPORT TO CONTAIN A COMPLETE ANALYSIS OR DISCUSSION OF ALL POTENTIAL TAX
CONSIDERATIONS RELEVANT TO THE MERGER OR THE OWNERSHIP OF 724 SOLUTIONS COMMON
SHARES. THUS, TANTAU STOCKHOLDERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS
TO THE SPECIFIC TAX CONSEQUENCES TO THEM OF THE MERGER AND THE OWNERSHIP OF
724 SOLUTIONS COMMON SHARES, INCLUDING TAX RETURN REPORTING REQUIREMENTS, THE
APPLICABILITY AND EFFECT OF FEDERAL, STATE, LOCAL, FOREIGN AND OTHER APPLICABLE
TAX LAWS AND THE EFFECT OF ANY PROPOSED CHANGES IN THE TAX LAWS. STOCKHOLDERS
THAT ARE NOT U.S. HOLDERS AND WHO HOLD OR HAVE HELD, ACTUALLY OR CONSTRUCTIVELY,
5% OF THE OUTSTANDING CAPITAL STOCK OF TANTAU, SHOULD CONSULT THEIR TAX ADVISOR
REGARDING, AMONG OTHER THINGS, THE CONSEQUENCES OF THE MERGER UNDER THE FOREIGN
INVESTMENT IN REAL PROPERTY TAX ACT, INCLUDING ANY REPORTING REQUIREMENTS THAT
MAY APPLY. TANTAU STOCKHOLDERS THAT ARE U.S. HOLDERS AND WHO OWN, ACTUALLY OR
CONSTRUCTIVELY, 5% OR MORE OF THE TOTAL VOTING POWER OR TOTAL VALUE OF ALL
CAPITAL STOCK OF 724 SOLUTIONS IMMEDIATELY AFTER THE MERGER SHOULD CONSULT THEIR
TAX
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ADVISOR REGARDING, AMONG OTHER THINGS, THE ADVISABILITY OF ENTERING INTO A GAIN
RECOGNITION AGREEMENT AS PROVIDED IN TREASURY REGULATION SECTION 1.367(A)-3(C).
MATERIAL CANADIAN INCOME TAX CONSEQUENCES
The following discussion is applicable only to U.S. Holders who are treated
as residents of the U.S. under the provisions of the Convention between Canada
and the United States of America with Respect to Taxes on Income and Capital
Gains, who will hold their 724 Solutions common shares as capital property and
who will deal at arm's length with 724 Solutions. The discussion is intended
only as a general guide to the position under Canadian tax law and will not
apply to certain classes of investors, such as "financial institutions" as
defined in Section 142.2 of the Canadian Income Tax Act. If you are in any doubt
as to your tax position, you should consult with your tax advisor.
CANADIAN TAXATION OF CAPITAL GAINS. A U.S. Holder will not be subject to
Canadian income taxation on the disposal of 724 Solutions common shares,
provided the value of the 724 Solutions shares at the time of disposal is not
derived principally from real property located in Canada. 724 Solutions does not
believe the value of its common shares currently is derived principally from
real property located in Canada and believes that it is unlikely for the
foreseeable future that the value of its common shares will be derived
principally from real property located in Canada.
TAXATION OF U.S. HOLDERS ON MERGER CONSIDERATION. U.S. Holders will not be
subject to Canadian tax on income or gains arising from the receipt of
consideration payable under the terms of the merger and no withholding tax will
apply to any such payment.
CANADIAN TAXATION OF DIVIDENDS. Under the Convention between Canada and the
United States of America with Respect to Taxes on Income and Capital Gains,
dividends paid by 724 Solutions to U.S. Holders will be subject to Canadian
withholding tax at the rate of 15% (except that dividends paid to a corporate
shareholder who owns more than 10% of the shares of 724 Solutions will be
subject to Canadian withholding tax at the rate of 5%).
THE FOREGOING SUMMARY OF MATERIAL U.S. AND CANADIAN TAX CONSEQUENCES IS
BASED ON THE CONVENTION BETWEEN CANADA AND THE UNITED STATES OF AMERICA WITH
RESPECT TO TAXES ON INCOME AND CAPITAL GAINS, U.S. LAW, CANADIAN LAW, AND
REGULATIONS, ADMINISTRATIVE RULINGS AND PRACTICES OF THE U.S. AND CANADA, ALL AS
THEY EXIST AS OF THE DATE OF THIS INFORMATION STATEMENT/PROSPECTUS. THIS SUMMARY
DOES NOT DISCUSS ALL ASPECTS THAT MAY BE RELEVANT TO TANTAU STOCKHOLDERS IN
LIGHT OF THEIR PARTICULAR CIRCUMSTANCES. TANTAU STOCKHOLDERS ARE URGED TO
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THEIR OWN PARTICULAR
CIRCUMSTANCES AND WITH RESPECT TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO
THEM AND OF OWNERSHIP OF 724 SOLUTIONS COMMON SHARES, INCLUDING THE
APPLICABILITY AND EFFECT OF STATE, PROVINCIAL, LOCAL AND FOREIGN TAX LAWS,
ESTATE TAX LAWS AND PROPOSED CHANGES IN APPLICABLE LAWS.
DISSENTERS' RIGHTS/APPRAISAL RIGHTS
The following summary of the provisions of Section 262 of the Delaware
General Corporation Law is not intended to be a complete statement of the
provisions of, and is qualified in its entirety by, reference to the full text
of Section 262 of the Delaware General Corporation Law, which is included as
Annex E to this information statement/prospectus.
Under Delaware law, Tantau stockholders are entitled to appraisal rights. If
the transaction is consummated, each holder of Tantau capital stock who:
- files a written demand with Tantau of an intention to exercise rights to
appraisal of his, her or its shares within 20 days of the mailing of
notice by Tantau of the approval of the merger and the existence of
appraisal rights;
- does not vote in favor of the merger or consent thereto in writing; and
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- follows the procedure set forth in Section 262 of the Delaware General
Corporation Law,
will be entitled to be paid the fair value for his, her or its common or
preferred stock, as the case may be. The fair value of shares of Tantau stock
will be determined without giving effect to any value arising out of the merger.
The shares of Tantau stock with respect to which holders have perfected their
appraisal rights in accordance with Section 262 and have not effectively
withdrawn or lost their appraisal rights are referred to as the "dissenting
shares."
Within 10 days after the effective date of the merger, Tantau, as the
surviving corporation in the merger, must mail a second notice to all
stockholders, notifying those stockholders of the effective date of the merger.
Within 120 days after the effective date of the merger, holders of Tantau stock
may file a petition in the Delaware Court of Chancery for the appraisal of their
shares, although they may, within 60 days of the effective date, withdraw their
demand for appraisal. Within 120 days of the effective date of the merger, the
holders of dissenting shares may also, upon written request, receive from Tantau
a statement setting forth the aggregate number of shares with respect to which
demands for appraisal have been received.
A demand for appraisal should be signed by or on behalf of the stockholder
exactly as the stockholder's name appears on the stockholder's stock
certificate(s). If the shares are owned of record in a fiduciary capacity, such
as by a trustee, guardian or custodian, the demand should be executed in that
capacity, and if the shares are owned of record by more than one person, as in a
joint tenancy or tenancy in common, the demand should be executed by or on
behalf of all joint owners. An authorized agent, including one or more joint
owners, may exercise a demand for appraisal on behalf of a record holder;
however, in the demand the agent must identify the record owner or owners. A
record holder, such as a broker, who holds shares as nominee for several
beneficial owners, may exercise appraisal rights for shares held for one or more
beneficial owners and not exercise rights for the shares held for other
beneficial owners. In this case, the written demand should state the number of
shares for which appraisal rights are being demanded. When no number of shares
is stated, the demand will be presumed to cover all shares held of record by the
broker or nominee.
If any Tantau stockholder who demands appraisal of his, her or its shares
under Section 262 of the Delaware General Corporation Law fails to perfect, or
effectively withdraws or loses, the right to appraisal, his, her or its shares
will be converted into a right to receive a number of common shares of
724 Solutions in accordance with the terms of the merger agreement. Dissenting
shares lose their status as dissenting shares if:
- the merger is abandoned;
- the dissenting stockholder fails to make a timely written demand for
appraisal;
- the dissenting shares are voted, or a written consent is given, in favor
of the merger;
- neither Tantau nor the stockholder files a complaint or intervenes in a
pending action within 120 days of the effective date of the merger; or
- the stockholder delivers to Tantau, as the surviving corporation, within
60 days of the effective date of the merger, or thereafter with Tantau's
approval, a written withdrawal of the stockholder's demand for appraisal
of the dissenting shares, although no appraisal proceeding in the Court of
Chancery may be dismissed as to any stockholder without the approval of
the court.
FAILURE TO FOLLOW THE STEPS REQUIRED BY SECTION 262 OF THE DELAWARE GENERAL
CORPORATION LAW FOR PERFECTING APPRAISAL RIGHTS MAY RESULT IN THE LOSS OF
APPRAISAL RIGHTS, IN WHICH EVENT A TANTAU STOCKHOLDER WILL BE ENTITLED TO
RECEIVE THE CONSIDERATION WITH RESPECT TO THE HOLDER'S DISSENTING SHARES IN
ACCORDANCE WITH THE MERGER AGREEMENT. IN VIEW OF THE COMPLEXITY OF THE
PROVISIONS OF SECTION 262, TANTAU STOCKHOLDERS WHO ARE CONSIDERING OBJECTING TO
THE MERGER SHOULD CONSULT THEIR OWN LEGAL ADVISORS.
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THE MERGER AGREEMENT AND RELATED DOCUMENTS
THIS SECTION OF THE INFORMATION STATEMENT/PROSPECTUS SUMMARIZES THE MATERIAL
PROVISIONS OF THE MERGER AGREEMENT AND RELATED DOCUMENTS, INCLUDING THE
STOCKHOLDER VOTING AGREEMENTS, THE RESALE RESTRICTION AGREEMENTS AND THE
INDEMNIFICATION AND ESCROW AGREEMENT. TO THE EXTENT IT RELATES TO THE MERGER
AGREEMENT AND DOCUMENTS ENTERED INTO OR TO BE ENTERED INTO IN CONNECTION WITH
THE MERGER AGREEMENT, THE FOLLOWING DESCRIPTION IS QUALIFIED BY ITS ENTIRETY BY
REFERENCE TO THE MERGER AGREEMENT AND THE APPLICABLE RELATED DOCUMENTS, EACH OF
WHICH IS ATTACHED AS AN APPENDIX TO THIS INFORMATION STATEMENT/PROSPECTUS OR
FILED AS AN EXHIBIT AND IS INCORPORATED HEREIN BY REFERENCE. YOU ARE URGED TO
READ THE MERGER AGREEMENT AND EACH OF THE RELATED DOCUMENTS CAREFULLY AND IN
THEIR ENTIRETY.
DESCRIPTION OF THE MERGER AGREEMENT
STRUCTURE
724 Solutions, Saturn Merger Sub, Inc., a wholly owned subsidiary of
724 Solutions, and Tantau have entered into the Agreement and Plan of Merger
dated as of November 29, 2000. The merger agreement provides for the merger of
Saturn Merger Sub with and into Tantau. After the merger, Tantau will be the
surviving corporation and will become a wholly owned subsidiary of
724 Solutions.
CLOSING MATTERS
CLOSING. The closing of the merger will take place as soon as practicable
following the satisfaction or waiver of the closing conditions contained in the
merger agreement, unless the merger agreement is terminated or the parties agree
to a different time for closing. See "-- Conditions to the Completion of the
Merger" below.
EFFECTIVE TIME. In connection with the closing, the parties will file a
certificate of merger with the Secretary of State of the State of Delaware. The
merger will become effective at the time the certificate of merger is duly filed
with the Secretary of State of the State of Delaware or at any later time as may
be agreed to by the parties and specified in the certificate of merger. The time
at which the merger will become effective is referred to herein as the
"effective time."
CONSIDERATION TO BE RECEIVED IN THE MERGER
The merger agreement provides that 724 Solutions will issue a total of
19 million common shares and options to purchase common shares in exchange for
all shares of capital stock of Tantau and all options and warrants to acquire
Tantau capital stock outstanding at the effective time, other than options that
are to be issued after the date of the merger agreement and prior to the
effective time as permitted by the merger agreement. See "-- Permitted Interim
Period Stock Options" below.
Prior to the merger, and as a condition to the completion of the merger, all
of the outstanding shares of each class of Tantau's outstanding preferred stock
will be converted into shares of Tantau common stock. Holders of more than
66 2/3% of the outstanding shares of Tantau's Series A preferred stock and
Series B preferred stock have agreed to convert their shares of preferred stock
into Tantau common stock prior to the merger. Under Tantau's certificate of
incorporation, the conversion of this amount of shares of Tantau preferred stock
will cause an automatic conversion of all of the outstanding shares of Tantau's
preferred stock into shares of Tantau common stock. Under an amendment to
Tantau's certificate of incorporation, Tantau estimates that each share of
Tantau's Series A preferred stock and each share of Tantau's Series B preferred
stock will convert into one share of Tantau common stock.
In the merger, each share of Tantau common stock will be converted into the
right to receive an estimated 0.623 common shares of 724 Solutions.
724 Solutions' common shares are traded on the Nasdaq National Market under the
trading symbol "SVNX" and on The Toronto Stock Exchange
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under the trading symbol "SVN". On January 3, 2001, the closing price on the
Nasdaq National Market was US$19.50 per share and the closing price on The
Toronto Stock Exchange was Cdn.$29.65. After the merger takes place, no shares
of Tantau's capital stock that were outstanding before the merger will be
outstanding, and all of those shares will be canceled and retired and will cease
to exist. Each certificate representing shares of any class of Tantau's capital
stock will thereafter represent only the right to receive the merger
consideration.
724 Solutions will not issue fractional shares in the merger. Instead of any
fractional common shares of 724 Solutions, after taking into account all shares
of Tantau common stock you hold at the effective time of the merger, you will
receive cash based on the last quoted sale price of 724 Solutions' common shares
on the closing date of the merger. See "-- Treatment of Stock Options and
Warrants."
PROCEDURES FOR EXCHANGING STOCK CERTIFICATES
THE EXCHANGE AGENT. As of the effective time, 724 Solutions is required to
deposit with Computershare Investor Services Inc., or a bank or trust company
designated by 724 Solutions and reasonably acceptable to Tantau, certificates
representing the common shares of 724 Solutions to be exchanged for shares of
Tantau common stock in the merger, less the number of shares to be deposited
into escrow under the indemnification and escrow agreement. 724 Solutions must
also make available to the exchange agent cash to be paid in lieu of issuing
fractional shares.
PROCEDURES FOR EXCHANGING STOCK CERTIFICATES. As soon as reasonably
practicable after the effective time, the exchange agent will mail to each
Tantau stockholder a letter of transmittal and instructions for surrendering
Tantau stock certificates in exchange for 724 Solutions stock certificates and
cash in lieu of fractional shares. When you deliver your Tantau stock
certificates to the exchange agent (duly endorsed, if required) together with a
completed letter of transmittal and any other required documents, your Tantau
stock certificates will be cancelled and you will receive 724 Solutions stock
certificates representing the number of full 724 Solutions common shares to
which you are entitled under the merger agreement, less that portion of the
724 Solutions common shares to which you are entitled that will be deposited
into escrow under the indemnification and escrow agreement. You will also
receive payment in cash, without interest, in lieu of any fractional common
shares of 724 Solutions which would otherwise be issuable to you as a result of
the merger, after taking into account all shares of Tantau common stock held by
you at the effective time of the merger.
DO NOT SUBMIT YOUR TANTAU STOCK CERTIFICATES WITH YOUR WRITTEN CONSENT. YOU
SHOULD SUBMIT YOUR TANTAU STOCK CERTIFICATES FOR EXCHANGE ONLY AFTER YOU HAVE
RECEIVED THE LETTER OF TRANSMITTAL AND INSTRUCTIONS FROM THE EXCHANGE AGENT.
DISTRIBUTIONS WITH RESPECT TO 724 SOLUTIONS COMMON SHARES. Tantau
stockholders are not entitled to receive any dividends or other distributions on
724 Solutions common shares with a record date after the effective time of the
merger until surrender of Tantau stock certificates. Promptly after your
724 Solutions stock certificates are issued, you will receive payment for any
dividend or other distribution on 724 Solutions common shares with a record date
after the merger and a payment date prior to the date you surrender your Tantau
stock certificates. You will receive payment for any dividend or other
distribution on 724 Solutions' common shares with a record date after the merger
and a payment date after the date you surrender your Tantau stock certificates
promptly after the payment date of that dividend or distribution. With respect
to shares of 724 Solutions held in escrow under the indemnification and escrow
agreement, any dividends or other distributions paid in cash or property other
than securities of 724 Solutions will be promptly distributed to the respective
Tantau stockholders by the escrow agent. Any dividends or other distributions on
724 Solutions common shares held in escrow under the indemnification and escrow
agreement which are paid in 724 Solutions securities will be retained by the
escrow agent in escrow and shall be subject to the indemnification and escrow
agreement.
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Please note that 724 Solutions does not currently plan to declare any
dividends in the immediate future. See "Dividend Policy."
TREATMENT OF STOCK OPTIONS AND WARRANTS
Each option to acquire Tantau common stock outstanding at the effective time
will be assumed by 724 Solutions and converted into an option to acquire that
number of 724 Solutions' common shares equal to the number of shares of Tantau
common stock subject to that option multiplied by the exchange ratio, rounded
down to the nearest whole share. The exercise price per share will be equal to
the exercise price per share of Tantau common stock divided by the exchange
ratio, rounded up to the nearest whole cent. All other terms and conditions of
each outstanding option will be unchanged by the merger, except with respect to
options held by employees of Tantau who have signed agreements which, among
other things, postpone the accelerated vesting of such options resulting from
the merger until the second anniversary of the effective time. As of January 2,
2001, options to purchase approximately 3,206,192 shares of Tantau common stock
were outstanding. Up to 10% of the options assumed by 724 Solutions in the
merger, other than the permitted interim period stock options described below,
will be subject to the terms of the indemnification and escrow agreement. See
"-- Indemnification and Escrow Agreement" below.
Within 30 days after the effective time, 724 Solutions has agreed to file a
registration statement on Form S-8 for the 724 Solutions common shares issuable
with respect to options assumed by 724 Solutions in connection with the merger.
As of December 15, 2000, warrants to purchase up to 20,000 shares of Tantau
common stock were outstanding. The merger agreement requires Tantau to use its
best efforts to cause these warrants to be exercised in full prior to the
effective time. The merger agreement provides that such warrants will not be
assumed by 724 Solutions. As a result, under the terms of such warrants, these
warrants will automatically convert into shares of Tantau common stock on a
cashless basis if not previously exercised. Tantau expects these warrants to be
exercised for Tantau common stock prior to the effective time.
As of December 15, 2000, warrants to purchase 310,880 shares of Tantau
Series B preferred stock were outstanding. The merger agreement requires Tantau
to use its best efforts to cause these warrants to be exercised in full prior to
the effective time. In the event these warrants shall not have been exercised in
full prior to the effective time, these warrants shall be assumed by
724 Solutions and converted into a warrant to acquire that number of
724 Solutions common shares, rounded down to the nearest whole share, equal to
the number of 724 Solutions common shares that the holder of such warrants would
have been entitled to receive in the merger if such warrants had been exercised
prior to the merger. The exercise price will be equal to the exercise price per
share at the effective time divided by the exchange ratio, rounded up to the
nearest whole cent.
PERMITTED INTERIM PERIOD STOCK OPTIONS
Between the date of the merger agreement and the effective time of the
merger, Tantau may, subject to further conditions outlined in the merger
agreement, grant:
- stock options which will convert, in the aggregate, into options to
purchase up to 1,500,000 common shares of 724 Solutions upon consummation
of the merger as incentive compensation to key employees of Tantau
mutually identified by 724 Solutions and Tantau, which options must be
granted immediately prior to the effective time of the merger; and
- stock options to buy up to 500,000 shares of Tantau common stock to new
hires and promoted employees.
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These stock options are referred to collectively as the "permitted interim
period stock options." The exercise price of the permitted interim period stock
options will be based on the trading price of 724 Solutions' common shares as of
the most recently ended trading day prior to the date of grant, as adjusted for
the exchange ratio. The permitted interim period stock options will be assumed
by 724 Solutions as provided under "-- Treatment of Stock Options and Warrants"
above, but the number of 724 Solutions common shares which will be issuable
under the permitted interim period stock options will not count against or be
included in the aggregate 19 million common shares of 724 Solutions and options
issuable by 724 Solutions in the merger in exchange for the shares of Tantau's
capital stock, the options (other than permitted interim period stock options)
to acquire Tantau common stock, and the warrants to acquire Tantau common stock
outstanding at the effective time. In addition, the permitted interim period
stock options will not be subject to the indemnification and escrow agreement.
The 1,500,000 permitted interim stock options referred to above will be
subject to commercial terms specified by 724 Solutions, substantially in
accordance with the provisions of 724 Solutions' other stock option plans. These
options will vest in equal installments on each of the second, third, fourth and
fifth anniversaries of the effective date.
REPRESENTATIONS AND WARRANTIES
TANTAU. In the merger agreement, Tantau has made representations and
warranties to 724 Solutions regarding, among other things, the following:
- Tantau's organization, existence and qualification to do business and
similar corporate matters;
- Tantau's subsidiaries and specified equity investments;
- Tantau's authority to enter into and perform its obligations under the
merger agreement;
- the absence of conflict of the merger agreement and the related
transactions with Tantau's certificate of incorporation, by-laws,
specified agreements and applicable law;
- specified regulatory consents and approvals;
- Tantau's capitalization and financial statements;
- undisclosed liabilities;
- tax matters;
- title to assets;
- intellectual property matters;
- contracts;
- litigation involving Tantau;
- operation of Tantau's business and absence of certain changes or events;
- compliance with applicable laws;
- employee and employee benefit matters;
- insurance matters;
- customers of Tantau;
- information supplied for inclusion in this information
statement/prospectus;
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- the vote required in connection with the approval of the merger agreement
and the related transactions;
- Tantau's financial advisors; and
- non-applicability of state anti-takeover statutes.
724 SOLUTIONS. In the merger agreement, 724 Solutions has made
representations and warranties to Tantau regarding, among other things, the
following:
- 724 Solutions' organization, existence and qualification to do business
and similar corporate matters;
- 724 Solutions' authority to enter into and perform its obligations under
the merger agreement;
- the absence of conflict of the merger agreement and the related
transactions with 724 Solutions' articles of amalgamation, by-laws,
specified agreements and applicable law;
- specified regulatory consents and approvals;
- 724 Solutions' capitalization;
- 724 Solutions' filings with the SEC and the financial statements contained
therein;
- undisclosed liabilities;
- operation of 724 Solutions' business and absence of certain changes or
events;
- litigation involving 724 Solutions;
- that no stockholder approval is required by 724 Solutions in connection
with the merger agreement and the transactions contemplated thereby;
- tax matters;
- information supplied for inclusion or incorporation by reference in this
information statement/ prospectus;
- financial advisors;
- title to assets;
- intellectual property matters;
- material contracts; and
- compliance with applicable laws.
CONDUCT OF BUSINESS PENDING THE MERGER -- TANTAU
Under the merger agreement, Tantau has agreed that, until the effective
time, unless consented to in writing by 724 Solutions or as specifically
contemplated by the merger agreement, Tantau will, and will cause its
subsidiaries to, carry on their respective businesses in the ordinary course
consistent with past practice, particularly in the following areas:
- research and development;
- hiring of new employees;
- compliance with applicable laws; and
- preservation of their assets, technology and relationships with customers,
suppliers, licensors, licensees, distributors and others with whom Tantau
conducts business.
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In addition, Tantau has agreed, subject to limited exceptions, that until
the effective time, Tantau will not, and will not permit any of its subsidiaries
to:
- declare dividends, effect changes to its capital stock, or repurchase or
redeem any of its outstanding shares of capital stock;
- issue shares of its capital stock or options or warrants to purchase these
shares, other than upon conversion of shares of Tantau preferred stock,
the issuance of Tantau common stock upon the exercise of outstanding stock
options or warrants or the granting of permitted interim period stock
options;
- amend its certificate of incorporation or by-laws;
- merge or consolidate with another company, or acquire a substantial
portion of another company's assets;
- directly or indirectly acquire or agree to acquire any assets that, in the
aggregate, have a purchase price in excess of $250,000;
- directly or indirectly sell, lease, license, mortgage, sell and leaseback
or otherwise encumber or subject to any lien or otherwise dispose of any
of its properties or assets or any interest therein, including any shares
of the capital stock of any of Tantau's subsidiaries, except in the
ordinary course of business consistent with past practice or as
specifically contemplated by the merger agreement;
- repurchase, pay, prepay or incur any indebtedness or guarantee any
indebtedness of another person, issue or sell any options, warrants, calls
or other rights to acquire any indebtedness of Tantau or any of its
subsidiaries or make any loans, advances or capital contributions to, or
investments in, any other person;
- incur or commit to incur any capital expenditures, or any related
obligations or liabilities, which, in the aggregate, exceed $250,000;
- enter into any contract by which the consummation of any of the merger and
related transactions will violate, conflict, breach or give rise to any
increase, addition, acceleration or activation of guaranteed rights or
entitlements under, any provision of that contract;
- pay, discharge, settle or satisfy any claims, liabilities or obligations,
other than the payment, discharge or satisfaction of claims, liabilities
or obligations in the ordinary course of business consistent with past
practice or in accordance with their terms as of the date of the merger
agreement;
- waive, release, grant or transfer any right of material value outside the
ordinary course of business, except as consistent with past practice;
- waive any material benefits of, or agree to modify in any adverse respect,
or fail to enforce, any confidentiality, standstill or similar agreement
to which Tantau or any of its subsidiaries is a party;
- modify, amend or terminate any material contract to which Tantau or such
subsidiary is a party or waive, release or assign any material rights or
claims under that contract;
- enter into any material contract, including any contract relating to any
material intellectual property, other than in the ordinary course of
business consistent with past practice;
- revalue any of its material assets or, except as required by generally
accepted accounting principles, make any change in accounting methods,
principles or practices;
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- commence any litigation, other than litigation relative to the collection
of accounts receivable or as a result of litigation commenced against
Tantau or any of its subsidiaries;
- pay any material benefit to its personnel not provided for under any of
its current benefit plans;
- increase in any manner the severance or termination pay of any director,
officer or employee;
- enter into any employment, severance, termination, deferred compensation,
indemnification or consulting agreement with any current or former
director, officer, employee or consultant other than in the ordinary
course of business;
- enter into any agreement with any current or former director, officer,
employee or consultant where the benefits are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction of the
nature contemplated by the merger agreement involving Tantau or any of its
subsidiaries;
- increase in any manner the compensation or fringe benefits of, or pay any
bonus to, any director, officer, employee or consultant, other than
specified compensation increases for non-executive employees;
- terminate, adopt, enter into or amend any collective bargaining agreement,
benefit plan, employment agreement or any other agreement, plan or policy
involving Tantau or its subsidiaries, and any current or former director,
officer, employee or consultant, or grant any awards under any benefit
plan other than grants of options under Tantau's stock plans in the
ordinary course of business consistent with past practices and grants of
permitted interim period stock options; or
- authorize, commit, resolve or agree to take any of the actions described
above.
Notwithstanding the foregoing restrictions, Tantau was originally obligated
under the merger agreement to sell the 1,432,000 shares of common stock of
Accrue Software that it held as of November 29, 2000. Tantau has sold
1.1 million of these shares, and 724 Solutions waived Tantau's obligation to
sell the remainder. See "Tantau -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Results of Operations -- Nine
Months Ended September 30, 2000 Compared to the Period from February 11, 1999
(Inception to December 31, 2000) -- Operating Expenses -- Gain on Sales of
Assets."
CONDUCT OF BUSINESS PENDING THE MERGER -- 724 SOLUTIONS
Under the merger agreement, 724 Solutions has agreed that, until the
effective time of the merger, 724 Solutions will not take any action outside of
the ordinary course of business without consulting the chief executive officer
of Tantau a reasonable amount of time prior to taking that action. In addition,
without the prior written consent of Tantau, 724 Solutions will not, nor will it
permit its subsidiaries to:
- directly or indirectly acquire, including through a merger or similar
transaction, any assets that are material to 724 Solutions and its
subsidiaries, taken as a whole;
- directly or indirectly sell, lease, license, sell and leaseback, mortgage
or otherwise encumber or subject to any lien or otherwise dispose of any
properties or assets, in each case that is material to 724 Solutions and
its subsidiaries, taken as a whole;
- agree to any issuance of greater than 10% of the outstanding
724 Solutions common shares; or
- authorize, commit, resolve or agree to take any of the actions described
above.
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Moreover, without the prior written consent of Tantau, 724 Solutions may
not:
- declare, set aside or pay any dividends on, or make other distributions in
respect of, any of its capital stock;
- split, combine or reclassify any of its capital stock or issue or
authorize or propose the issuance of any other securities in respect of,
in lieu of, or in substitution for, shares of its capital stock or any of
its other securities;
- purchase, redeem or otherwise acquire any shares of capital stock or any
other securities of 724 Solutions, or any options, warrants, calls or
rights to acquire any such shares or other securities, except under
724 Solutions' contractual rights in connection with its acquisition of
ezlogin and Spyonit;
- authorize or issue any shares of its capital stock, other than the
granting of stock options under its existing options plans and the
issuance of common shares upon the exercise of outstanding options, and
the issuance to the former shareholders of YRLess Internet Corporation of
common shares in satisfaction of its obligations relating to
724 Solutions' acquisition of YRLess; or
- amend or propose to amend its articles of amalgamation or by-laws.
OTHER COVENANTS OF TANTAU
NO SOLICITATION. In the merger agreement, Tantau has agreed that it will
not, and will not permit any of its subsidiaries to, nor will it authorize or
permit any of their respective agents or representatives to, directly or
indirectly:
- take any action to solicit, initiate or encourage the making or submission
of any takeover proposal with respect to Tantau; or
- participate in any way in the facilitation of inquiries, discussions or
negotiations with, or furnish any information to, any person in connection
with, the making of any proposal that constitutes, or may reasonably be
expected to lead to, any takeover proposal with respect to Tantau.
Tantau must promptly notify 724 Solutions, orally and in writing, of any request
for information relating to Tantau or the receipt of any takeover proposal, as
well as the principal terms and conditions of that request or proposal and the
identity of the person making the request or proposal.
For purposes of the merger agreement, "takeover proposal" means any inquiry,
proposal or offer from any person relating to any direct or indirect acquisition
or purchase of a business that constitutes 15% or more of the net revenues, net
income or the assets, including equity securities, of Tantau and its
subsidiaries, taken as a whole (referred to as a "material business"), or 15% or
more of any class of voting securities of Tantau or any subsidiary of Tantau
that owns, operates or controls a material business, any tender offer or
exchange offer that if consummated would result in any person beneficially
owning 15% or more of any class of voting securities of Tantau or any such
subsidiary, or any merger, amalgamation, consolidation, business combination,
recapitalization, liquidation, dissolution or similar transaction involving
Tantau or any such subsidiary, other than the transactions contemplated by the
merger agreement.
TAX MATTERS. In the merger agreement, Tantau has agreed that it will not,
and will not permit any of its subsidiaries to make or change any material tax
election, amend any tax return or take any other action, or fail to take any
other action, in respect of taxes, in each case, if such action or failure to
take action could reasonably be expected to have the effect of increasing the
tax liability of 724 Solutions or any of its affiliates (including, after the
closing date, Tantau and its subsidiaries) with respect to a taxable period that
ends after the closing date.
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EXECUTION BY STOCKHOLDERS OF ADDITIONAL AGREEMENTS. In the merger
agreement, Tantau has agreed to use its best efforts to cause each stockholder,
optionholder and warrantholder, as the case may be, to consent in writing prior
to the closing date to be bound by the terms of the indemnification and escrow
agreement and to enter into a resale restriction agreement. See
"-- Indemnification and Escrow Agreement" and "-- Resale of 724 Solutions'
Common Shares -- Resale Restriction Agreements."
724 SOLUTIONS' BOARD OF DIRECTORS
Subject to the prior approval of the corporate governance committee of
724 Solutions' board of directors and to approval by The Toronto Stock Exchange,
at the effective time, four persons designated by the board of directors of
Tantau will be appointed to the board of directors of 724 Solutions. We expect
that these individuals will be John Sims, Joseph Aragona and Charles Goldman,
who are currently members of the Tantau's board, and Ted White, who is currently
an advisory director to Tantau's board. In addition, the board of directors of
724 Solutions must appoint one designee of Tantau to the corporate governance
committee of the board of directors of 724 Solutions effective at the first
meeting of the board of directors of 724 Solutions following the consummation of
the merger. See "The Merger -- Interests of Certain Persons in the Merger -- New
Directors of 724 Solutions" and "724 Solutions -- Management."
CONDITIONS TO THE COMPLETION OF THE MERGER
MUTUAL CONDITIONS. Each party's obligation to effect the merger is subject
to the satisfaction or waiver of various conditions, which include the
following:
- the Tantau stockholder approval must have been obtained;
- the registration statement of which this information statement/prospectus
forms a part must have become effective under the Securities Act and must
not be the subject of any stop order or proceedings seeking a stop order;
- no temporary restraining order, preliminary or permanent injunction or
other order, writ, decree, judgment or stipulation issued by any court of
proper jurisdiction or other legal restraint or prohibition preventing the
consummation of the merger may be in effect; and
- the Nasdaq National Market and The Toronto Stock Exchange approval for
listing of the 724 Solutions common shares to be issued in the merger and
issuable upon the exercise of assumed stock options and assumed warrants,
if any, must have been obtained.
724 SOLUTIONS. 724 Solutions' obligation to effect the merger is further
subject to the satisfaction of the following conditions, unless waived by
724 Solutions:
- The representations and warranties of Tantau contained in the merger
agreement shall be true and correct in all material respects as of the
date of the merger agreement and as of the closing date;
- Tantau must have performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior to
the closing date;
- there shall not be pending or threatened any suit, action or proceeding
brought by any governmental entity, or any suit, action or proceeding with
a reasonable probability of success brought by any other third party
seeking to:
- restrain or prohibit the consummation of the merger;
- prohibit or limit in any material respect the ownership or operation by
724 Solutions, Tantau or any of their respective affiliates of a
material portion of the business or assets of 724 Solutions, Tantau, or
their respective subsidiaries, taken as a whole;
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- require 724 Solutions, Tantau or any of their respective subsidiaries
to dispose of or hold separate any material portion of the business or
assets of 724 Solutions, Tantau, or their respective subsidiaries,
taken as a whole, as a result of the merger; or
- prohibit 724 Solutions or any of its affiliates from effectively
controlling in any material respect the business or operations of
Tantau or its subsidiaries;
- no order, writ, decree, judgment or stipulation issued by any court of
competent jurisdiction shall have been issued that could reasonably be
expected to result in any of the effects described in the preceding item;
- holders of no more than 5% of the shares of capital stock of Tantau shall
have demanded appraisal of their shares under Delaware law in connection
with the merger;
- each of the employment agreements between 724 Solutions, Tantau and
specified key employees and executives of Tantau shall be in full force
and effect (see "The Merger -- Interests of Certain Persons in the
Merger");
- the indemnification and escrow agreement shall have been executed by
Tantau, the escrow agent and the stockholders' representative (see
"-- Indemnification and Escrow Agreement");
- substantially all of the stockholders, optionholders and warrantholders of
Tantau owning 100,000 shares or more of Tantau stock, including shares
subject to outstanding options and warrants, shall have entered into a
resale restriction agreement, and all of the resale restriction agreements
shall be in full force and effect (see "-- Resale of 724 Solutions' Common
Shares -- Resale Restriction Agreements");
- Tantau must provide written certification to 724 Solutions that the
options to acquire Tantau common stock issued between the date of the
merger agreement and the effective time of the merger that were intended
to be permitted interim period stock options satisfy the criteria to be
permitted interim period stock options;
- all issued and outstanding shares of Tantau preferred stock must have been
converted by their holders into shares of Tantau common stock in
accordance with Tantau's certificate of incorporation, as amended;
- all agreements between Tantau and its stockholders that do not by their
terms terminate upon consummation of the merger must have been terminated;
and
- no material adverse effect shall have occurred with respect to Tantau.
TANTAU. Tantau's obligation to effect the merger is further subject to the
satisfaction of the following conditions, unless waived by Tantau:
- the representations and warranties of 724 Solutions contained in the
merger agreement shall be true and correct in all material respects as of
the date of the merger agreement and as of the closing date;
- 724 Solutions must have performed in all material respects all obligations
required to be performed by it under the merger agreement at or prior to
the closing date;
- receipt of an opinion from Brobeck, Phleger & Harrison LLP that the merger
will be treated as a tax-free reorganization for U.S. federal income tax
purposes;
- execution and delivery by 724 Solutions of the Registration Rights
Agreement (see "-- Registration Rights Agreement" below); and
- no material adverse effect shall have occurred with respect to
724 Solutions.
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The merger agreement provides that a "material adverse effect" means any
state of facts, change, effect, condition, development, event or occurrence that
has been, is or is reasonably likely to be, materially adverse to the business,
assets, financial condition or results of operations of 724 Solutions, Tantau or
their respective subsidiaries, taken as a whole, other than any state of facts,
change, effect, condition, development, event or occurrence:
- arising directly as a result of material changes in:
- general economic or business conditions in the e-commerce and
m-commerce software and applications development market; or
- economic conditions in the United States generally; or
- resulting from the announcement of the merger agreement or the effects of
the pendency of the transactions contemplated by the merger agreement.
TERMINATION OF THE MERGER AGREEMENT
The merger agreement may be terminated at any time prior to the effective
time of the merger:
- by mutual consent of 724 Solutions and Tantau;
- by either 724 Solutions or Tantau if the other party shall have breached
any of its representations, warranties, covenants or agreements set forth
in the merger agreement, which breach:
- would give rise to the failure of a condition to the obligation of the
party seeking to terminate, as set forth in the merger agreement; and
- has not been, or is incapable of being, cured by the breaching party
within 30 calendar days after such breaching party receives written
notice of that breach from 724 Solutions or Tantau, as the case may be;
- by either 724 Solutions or Tantau if any court order or administrative
ruling preventing the consummation of the merger shall have become final
and nonappealable;
- by either 724 Solutions or Tantau if the approval of the merger agreement
and the merger by Tantau's stockholders shall not have been obtained; or
- by either 724 Solutions or Tantau if the merger shall not have been
consummated on or before March 31, 2001, provided that this right of
termination will not be available to any party whose failure to perform
its obligations under the merger agreement results in the merger not being
consummated by such date.
In the event of a termination of the merger agreement by either
724 Solutions or Tantau, the merger agreement will become void and none of
724 Solutions, Saturn Merger Sub or Tantau, or their respective officers or
directors, will have any further obligations or liabilities under the merger
agreement, except with respect to any willful breach of any representation,
warranty, covenant or agreement contained in the merger agreement prior to that
termination. In addition, the provisions of the merger agreement relating to the
payment of expenses and confidentiality and the miscellaneous provisions of the
merger agreement, which relate to matters such as governing law and other
general provisions, will continue in effect notwithstanding termination of the
merger agreement.
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AMENDMENT; EXTENSION AND WAIVER
Subject to applicable law:
- the parties may amend the merger agreement by action taken or authorized
by their respective boards of directors prior to the effective time,
except that no amendment shall be made that by law requires approval by
stockholders of 724 Solutions or Tantau without the approval of those
stockholders; and
- at any time prior to the effective time of the merger, a party may, by
written agreement, extend the time for performance of the obligations of
any other party to the merger agreement, waive inaccuracies in
representations and warranties of any other party contained in the merger
agreement or in any related document and, except as provided in the merger
agreement, waive compliance by any other party with any agreements or
conditions in the merger agreement.
Under Section 251(d) of the Delaware General Corporation Law, no amendment
to the merger agreement made after the adoption of the merger agreement by
Tantau stockholders may, without further stockholder approval, alter or change
the amount or kind of shares, securities, cash, property and/or rights to be
received by Tantau stockholders in the merger, alter or change any terms of
Tantau's certificate of incorporation to be effected by the merger, or alter or
change any terms and conditions of the merger agreement if that alteration or
change would adversely affect the holders of any class or series of stock of
Tantau.
EXPENSES
Whether or not the merger is completed, all fees and expenses incurred in
connection with the merger, the merger agreement, and the related transactions
will be paid by the party incurring such fees or expenses, except that
724 Solutions and Tantau will share equally the expenses incurred in connection
with preparing, filing, printing and mailing of this information
statement/prospectus and the registration statement of which it is a part and
the filing fees for the pre-merger notification and report forms under the
Hart-Scott-Rodino Act.
FEE PAYABLE IF APPRAISAL RIGHTS CONDITION NOT SATISFIED
As stated above under "-- Conditions to the Completion of the
Merger -- 724 Solutions," it is a condition to 724 Solutions' obligation to
complete the merger that holders of no more than 5% of the shares of Tantau's
capital stock shall have demanded appraisal of those shares under Delaware law.
If this condition shall have not been satisfied and a takeover proposal in
respect of Tantau, other than the merger with 724 Solutions, has been announced
or otherwise publicly disclosed, or disclosed to the Tantau stockholders
generally, Tantau must pay 724 Solutions $12.0 million in immediately available
funds promptly upon receipt of a written demand from 724 Solutions.
STOCKHOLDER VOTING AGREEMENTS
In connection with the signing of the merger agreement, 724 Solutions
entered into stockholder voting agreements with the executive officers and
several affiliates of Tantau. Under these agreements, these stockholders agreed:
- to vote all shares of Tantau capital stock owned by such stockholders in
favor of approval and adoption of the merger agreement and the merger and
the related transactions in connection with each written consent relating
to the merger and the merger agreement, or at any stockholder meeting held
for that purpose; and
- to deliver to 724 Solutions a duly executed proxy to vote all shares of
Tantau capital stock owned by those stockholders in favor of the approval
and adoption of the merger agreement and
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the merger and related transactions in connection with each written
consent relating to the merger and the merger agreement, or at any
stockholder meeting held for that purpose.
The stockholders party to the stockholders voting agreements retained the
right to vote their shares of Tantau capital stock on all matters other than
those specified in the stockholder voting agreements.
In addition, each stockholder party to a stockholder voting agreement has
agreed not to solicit, directly or indirectly, any proposal, plan or offer to
acquire all or any substantial part of the business or properties or capital
stock of Tantau, or to initiate or solicit, directly or indirectly, any contact
with any person in an effort to, or with a view towards, soliciting any
transaction of that kind; or to furnish non-public information regarding
Tantau's business, properties or assets to any person or group (other than
724 Solutions and its representatives) under any circumstances that could
reasonably be expected to relate to a transaction of that kind; or to negotiate
or enter into discussions or an agreement, directly or indirectly, with any
entity or group with respect to any potential transaction of that kind.
In connection with the execution of the merger agreement, stockholders
holding shares representing approximately 79.1% of the combined voting power of
Tantau's capital stock outstanding as of the record date (including
approximately 95.3% of the outstanding shares of Series A preferred stock, 73.7%
of the outstanding shares of Series B preferred stock and 56.2% of the
outstanding shares of common stock) entered into the voting agreements. The
affirmative vote by these holders will be sufficient for the adoption of the
merger agreement under Tantau's certificate of incorporation and Delaware law.
The stockholders who are parties to the stockholder voting agreements were not
paid any additional consideration in connection with these agreements. Further,
additional Tantau optionholders have executed voting agreements in which they
have agreed to vote any shares of Tantau common stock that they obtain upon
exercise of their options prior to the effective time in favor of the merger
agreement and the merger.
RESALE OF 724 SOLUTIONS' COMMON SHARES
GENERAL. 724 Solutions' common shares to be issued to Tantau stockholders
in connection with the merger are being registered under the U.S. Securities Act
of 1933, as amended. Accordingly, for purposes of the U.S. securities laws, all
common shares of 724 Solutions received by Tantau stockholders in the merger
will be freely transferable, except that 724 Solutions' common shares received
by persons who are deemed to be "affiliates," as such term is defined under the
Securities Act, of Tantau prior to the merger may be resold by them in the
U.S. only in transactions permitted by the resale provisions of Rule 145
promulgated under the Securities Act, or Rule 144 in the case of such persons
who become affiliates of 724 Solutions, or as otherwise permitted under the
Securities Act. Persons who may be deemed to be affiliates of Tantau or
724 Solutions generally include individuals or entities that control, are
controlled by, or are under common control with, that party and include
directors and certain officers of that party as well as the principal
stockholders of that party.
724 Solutions' common shares are listed on The Toronto Stock Exchange, which
is based in Toronto, Ontario, Canada. 724 Solutions' common shares received by
Tantau stockholders in the merger will not be transferable in Ontario (including
through the facilities of The Toronto Stock Exchange), except by way of
prospectus exemption, until January 28, 2001, when 724 Solutions will have been
a reporting issuer in Ontario for twelve months. At that time, the shares will
become freely tradeable in Ontario if:
- in the case of shares of a person or company in a "special relationship"
with 724 Solutions, the person or company has reasonable grounds to
believe that 724 Solutions is not in default under the Securities Act
(Ontario) or the related regulations (the "OSA");
- disclosure to the Ontario Securities Commission has been made of the
exempt trade;
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<PAGE>
- no unusual effort is made to prepare the market or to create a demand for
the securities and no extraordinary commission or consideration is paid
for the trade; and
- the shares are not part of the holdings of any person or company or
combination of persons or companies holding a sufficient number of shares
to materially affect control of 724 Solutions.
The definition of a person or company in a special relationship with
724 Solutions under the OSA includes insiders, associates, affiliates,
directors, officers and employees of 724 Solutions and Tantau.
RESALE RESTRICTION AGREEMENTS. As a condition to 724 Solutions' obligation
to complete the merger, substantially all of the stockholders, optionholders and
warrantholders of Tantau owning 100,000 shares or more of Tantau stock,
including shares subject to options and warrants, must enter into a resale
restriction agreement with 724 Solutions. In addition, Tantau has agreed in the
merger agreement to use its best efforts to cause all Tantau stockholders,
optionholders and warrantholders to enter into a resale restriction agreement
prior to the effective time. In connection with the execution of the merger
agreement, stockholders holding shares representing approximately 84.0% of the
combined voting power of Tantau's capital stock outstanding on the date of the
merger agreement (and stockholders and optionholders holding shares of Tantau
capital stock or stock options, as the case may be, representing approximately
79.2% of the shares of Tantau capital stock on a fully diluted basis) entered
into resale restriction agreements.
The resale restriction agreements provide that the holders of capital stock
of Tantau may not transfer or hedge any common shares of 724 Solutions received
in the merger, or any common shares of 724 Solutions issued or issuable upon the
exercise of assumed options or warrants, until the expiration of time periods
set forth in the agreements. Shares issuable upon exercise of permitted interim
period stock options will not be subject to the resale restriction agreements.
The common shares of 724 Solutions issued in the merger, including shares
subject to assumed options or warrants, will be released, on a cumulative basis,
from the resale restrictions in a series of installments as follows:
- 15% of these shares will be released three months after the effective
time;
- 15% of these shares will be released six months after the effective time;
- 15% of these shares will be released nine months after the effective time;
- 15% of these shares will be released twelve months after the effective
time;
- 20% of these shares will be released fifteen months after the effective
time; and
- 20% of these shares will be released eighteen months after the effective
time.
These release installments are subject to "catch-up" provisions that permit
the stockholders and holders of assumed options and warrants subject to a resale
restriction agreement to sell, at any time after the completion of the first
three-month period following consummation of the merger, an amount of
724 Solutions' common shares on an accelerated basis if specified major
shareholders of 724 Solutions sell after the effective time an amount of their
holdings that is greater than the aggregate percentage of 724 Solutions' common
shares issued or issuable in the merger which previously have been released from
the resale restrictions. The resale restriction agreements also provide that, if
724 Solutions elects to conduct an underwritten follow-on public offering of
724 Solutions' common shares at any time during the four-year period commencing
at the closing of the merger, the stockholders who are party to a resale
restriction agreement will enter into lock-up agreements at the same time and on
the same terms as those entered into by the specified major shareholders of
724 Solutions. In addition, those stockholders of Tantau which will be parties
to the registration rights agreement will, under some circumstances, have the
right to accelerate the first 15% installment in order to participate in any
underwritten offering conducted by 724 Solutions during the first three
65
<PAGE>
months after the effective time. See "724 Solutions -- Related Party
Transactions -- Registration Rights Agreement."
REGISTRATION RIGHTS AGREEMENT
In connection with the merger, some of the stockholders of Tantau have
received the right to require 724 Solutions to register the common shares that
they will acquire in the merger for resale under applicable U.S. and Canadian
securities laws. For a description of these rights, please see
"724 Solutions -- Related Party Transactions -- Registration Rights."
INDEMNIFICATION AND ESCROW AGREEMENT
At the closing of the merger, 724 Solutions, Tantau and the representative
of the Tantau stockholders will enter into an indemnification and escrow
agreement with an escrow agent acceptable to the parties. In addition, Tantau
has agreed in the merger agreement to use its best efforts to cause each
stockholder and optionholder of Tantau to consent in writing to be deemed to be
a party to, and to be bound by the terms of, the indemnification and escrow
agreement. The indemnification and escrow agreement will provide that the Tantau
stockholders and optionholders will be obligated to indemnify and compensate
724 Solutions for losses resulting from breaches of Tantau's representations,
warranties, covenants and agreements in the merger agreement and related
documents, from breaches by any such stockholder or optionholder of its
representations, warranties, covenants or agreements in the indemnification and
escrow agreement and other agreements entered into in connection with the
merger, and from other "specified matters." These specified matters include:
- fraud, fraudulent misrepresentation, willful misconduct and willful
concealment;
- breaches of Tantau's capitalization representation and warranty in the
merger agreement;
- breaches of Tantau's pre-closing covenants in the merger agreement;
- breaches of each stockholder's and optionholder's representation and
warranty in the indemnification and escrow agreement relating to ownership
of that stockholder's or optionholder's shares of Tantau stock or Tantau
options, as the case may be;
- legal, accounting and other fees paid by Tantau directly on behalf of any
stockholder or optionholder for services in connection with the merger
that were for the direct benefit of that stockholder or optionholder in
its capacity as such;
- amounts paid by 724 Solutions to indemnify the escrow agent for taxes
imposed on the escrow agent as a result of its custody of 724 Solutions'
common shares in the escrow fund; and
- amounts paid by 724 Solutions to settle or resolve appraisal rights claims
to the extent these amounts exceed the value at the effective time of the
724 Solutions' common shares subject to these appraisal claims.
Under the merger agreement and the indemnification and escrow agreement,
724 Solutions will deposit with the escrow agent a number of the common shares
of 724 Solutions issuable in the merger equal to 1,900,000 less 10% of the
number of common shares of 724 Solutions underlying assumed options, other than
permitted interim period stock options, held by holders of Tantau stock options
that have agreed to be deemed to be a party to the indemnification and escrow
agreement. These escrow shares and 10% of the assumed options held by
optionholders deemed to be a party to the indemnification and escrow agreement
will be available to indemnify and compensate 724 Solutions for losses for which
724 Solutions is entitled to recovery under the indemnification and escrow
agreement. The escrow fund will be available to compensate 724 Solutions for
losses for a period of 15 months after the effective time and will be
724 Solutions' sole and exclusive remedy against the stockholders and
optionholders of Tantau for all losses except for the specified matters. Other
than with respect to
66
<PAGE>
the specified matters, 724 Solutions is not entitled to indemnification until
the aggregate amount of losses suffered by 724 Solutions exceeds $1.0 million,
in which case 724 Solutions is entitled to indemnification for losses in excess
of this $1.0 million deductible. The amount of any losses which 724 Solutions is
entitled to recover under the indemnification and escrow agreement will be
reduced by any amounts actually received by 724 Solutions in respect of a loss,
including insurance recoveries, and will be adjusted for any tax effects
relating to a loss or to the payment of compensation for the loss under the
indemnification and escrow agreement. The indemnification obligations of the
stockholders and optionholders of Tantau with respect to the "specified matters"
are not limited as to time, but are limited as to amount to 70% of any
stockholder's or optionholder's "realized value" as of any date of determination
of the consideration received in the merger, including assumed options, other
than permitted interim period stock options. As of any date of determination,
the "realized value" of the merger consideration received by any stockholder or
optionholder will be equal to the value on that date of the 724 Solutions common
shares (including shares subject to assumed options, but net of the exercise
price of such options) received in the merger and then held by that stockholder
or optionholder, PLUS the proceeds received from the sale of 724 Solutions
common shares sold to a third party prior to such date (net of the exercise
price of any assumed option exercised to obtain such sold shares), LESS the
value on such date of any 724 Solutions common shares (including shares subject
to assumed options, but net of the exercise price of such options) distributed
to, or with respect to assumed options, canceled by, 724 Solutions for
compensation and indemnification of losses under the indemnification and escrow
agreement prior to that date.
STOCKHOLDER REPRESENTATIVE
Joseph Aragona, who is expected to become a director of 724 Solutions upon
completion of the merger, has been recommended by the Tantau board of directors
to serve as the representative of the Tantau stockholders, optionholders and
warrantholders in connection with the indemnification and escrow agreement. By
execution of a resale restriction agreement, each Tantau stockholder,
optionholder and warrantholder will also appoint the stockholder representative
as that person's representative under such resale restriction agreement.
As the representative, Joseph Aragona would act on behalf of the Tantau
stockholders, optionholders and warrantholders on matters under the
indemnification and escrow agreement and the resale restriction agreements.
These matters would include the power to:
- negotiate, settle and/or arbitrate all claims against the escrow fund or
against Tantau stockholders, optionholders and warrantholders under the
indemnification and escrow agreement;
- monitor compliance by 724 Solutions and the specified major shareholders
of 724 Solutions under the resale restriction agreements and negotiate,
settle and/or arbitrate any claims arising under the resale restriction
agreements;
- receive notices and other communications under the indemnification and
escrow agreement and the resale restriction agreements;
- deliver notices, certificates and other required documents on behalf of
the Tantau stockholders, optionholders and warrantholders under the
indemnification and escrow agreement and the resale restriction
agreements; and
- retain professional advisors in connection with the performance of the
representative's duties under the indemnification and escrow agreement and
the resale restriction agreements.
The representative will not have the power to vote on behalf of Tantau
stockholders on matters that require a vote of the shareholders of
724 Solutions, and the representative's powers will otherwise
67
<PAGE>
be limited to those necessary for the purposes of administering the
indemnification and escrow agreement and the resale restriction agreements.
724 Solutions and the escrow agent will have the right to rely upon the acts
taken or omitted to be taken by the stockholder representative on behalf of the
Tantau stockholders. By voting in favor of the merger agreement, the merger and
the appointment of Joseph Aragona as the stockholder representative, each of the
stockholders, optionholders and warrantholders of Tantau is agreeing that any
act or omission by the stockholders representative will be deemed an act or
omission by such stockholder, optionholder and warrantholder and final,
conclusive and binding on that stockholder.
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<PAGE>
MARKET PRICES OF 724 SOLUTIONS' COMMON SHARES
Our common shares are listed on the Nasdaq National Market under the symbol
"SVNX" and on The Toronto Stock Exchange under the symbol "SVN." The following
table sets forth the high and low closing sales prices per share of 724
Solutions' common shares as reported on the Nasdaq National Market and The
Toronto Stock Exchange for each of the quarters during the fiscal year ending
December 31, 2000.
<TABLE>
<CAPTION>
NASDAQ NATIONAL NASDAQ NATIONAL TORONTO STOCK TORONTO STOCK
YEAR ENDED DECEMBER 31, 2000 MARKET: HIGH MARKET: LOW EXCHANGE: HIGH EXCHANGE: LOW
---------------------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
First Quarter (from January 28,
2000)............................... US$ 240.00 US$59 3/4 Cdn.$345.00 Cdn.$ 86.00
Second Quarter........................ US$ 125 3/8 US$30.00 Cdn.$181.50 Cdn.$ 45.50
Third Quarter......................... US$ 55 3/8 US$28 1/4 Cdn.$ 82.50 Cdn.$ 42.00
Fourth Quarter........................ US$ 48 3/4 US$15 13/16 Cdn.$ 73.00 Cdn.$ 25.25
</TABLE>
The following table sets forth the high and low ask and bid prices per share
of 724 Solutions' common shares as reported on the Nasdaq National Market and
The Toronto Stock Exchange for each of the most recent six months.
<TABLE>
<CAPTION>
NASDAQ NATIONAL NASDAQ NATIONAL TORONTO STOCK TORONTO STOCK
MOST RECENT SIX MONTHS MARKET: HIGH MARKET: LOW EXCHANGE: HIGH EXCHANGE: LOW
---------------------- --------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
July 2000............................. US$ 49.00 US$32 1/2 Cdn.$ 72.00 Cdn.$48 21/32
August 2000........................... US$ 49 13/16 US$28 1/4 Cdn.$73 19/64 Cdn.$ 42.00
September 2000........................ US$ 55 3/8 US$42 3/8 Cdn.$82 1/2 Cdn.$62 1/2
October 2000.......................... US$ 48 3/4 US$25 13/16 Cdn.$ 73.00 Cdn.$39 35/64
November 2000......................... US$ 31 1/4 US$15 13/16 Cdn.$48 1/2 Cdn.$24 35/64
December 2000......................... US$ 27 1/8 US$ 16.00 Cdn.$39 3/4 Cdn.$ 25.00
</TABLE>
MARKET PRICES OF TANTAU STOCK
There is no established trading market for any class of Tantau's capital
stock. As of December 15, 2000, there were 120 record holders of Tantau's
capital stock.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common shares. We
currently intend to retain any future earnings to fund the development and
growth of our business and we do not anticipate paying any cash dividends in the
foreseeable future. Similarly, Tantau has never declared a dividend on its
capital stock.
69
<PAGE>
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Our unaudited pro forma consolidated financial statements have been prepared
based, in part, on the historical consolidated financial statements and other
financial statements included elsewhere in this information
statement/prospectus. Our historical consolidated financial statements have been
prepared in accordance with Canadian GAAP. However, for purposes of this
pro forma consolidated financial statement, our information is presented based
on U.S. GAAP as adjusted to reflect the material differences between Canadian
GAAP and U.S. GAAP set out in note 14 to our consolidated financial statements.
The financial statements for the U.S. companies acquired have been prepared in
accordance with U.S. GAAP. Our unaudited pro forma consolidated financial
statements have been adjusted based upon currently available information and
assumptions that we believe are appropriate to give effect to the following
transactions:
- our acquisitions of ezlogin and Spyonit; and
- the proposed acquisition of Tantau.
The unaudited pro forma consolidated financial statements are for
illustrative purposes only and are not necessarily indicative of what actual
results of operations and financial position would have been as at and for the
periods indicated, nor do they purport to represent our future financial
position and results of operations. The pro forma adjustments are based upon
estimates, available information and certain assumptions and may be revised as
additional information becomes available. In particular, the pro forma
adjustments resulting from our proposed acquisition of Tantau are preliminary
only, as we have not completed our assessment of the allocation of the estimated
excess of the fair market value of the consideration to be given over the fair
value of the expected net tangible assets to be acquired. We intend to use the
services of an external evaluator to assist in the allocation of the purchase
price of Tantau's assets and we will also reassess the appropriate amortization
periods of each asset acquired. See note 2 to the pro forma consolidated
financial information below. The following information should be read in
conjunction with "724 Solutions -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" and all of the consolidated
financial statements and accompanying notes included elsewhere in this
information statement/prospectus.
70
<PAGE>
724 SOLUTIONS INC.
PRO FORMA CONSOLIDATED BALANCE SHEET
September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
PRO FORMA
724 TANTAU ADJUSTMENTS
SOLUTIONS INC. SOFTWARE, INC. (NOTE 3(D)) TOTAL
--------------- -------------- ------------ --------
(In thousands of U.S. dollars)
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................ $ 19,915 $ 41,121 $ 1,337 $ 62,373
Short-term investments................... 158,062 -- -- 158,062
Accounts receivable...................... 3,205 2,338 -- 5,543
Prepaid expenses and other receivables... 3,623 271 -- 3,894
Investment in Accrue Software, Inc....... -- 17,094 -- 17,094
-------- -------- -------- --------
Total current assets..................... 184,805 60,824 1,337 246,966
Capital assets............................. 9,776 1,468 -- 11,244
Investments................................ 13,335 -- -- 13,335
Intangible and other assets................ 90,750 618 (397) 361,329
270,358
-------- -------- -------- --------
Total assets............................... $298,666 $ 62,910 $271,298 $632,874
======== ======== ======== --------
LIABILITIES AND SHAREHOLDERS' EQUITY
(DEFICIENCY)
Current liabilities:
Accounts payable......................... $ 1,676 $ 797 $ $ 2,473
Accrued liabilities...................... 8,199 3,164 9,531 20,894
Deferred revenue......................... 4,135 4,936 (4,348) 4,723
Current portion of note payable.......... -- 259 -- 259
Current portion of deferred gain on sale
of assets.............................. -- 23,970 (23,970) --
-------- -------- -------- --------
Total current liabilities................ 14,010 33,126 (18,787) 28,349
Leasehold inducements...................... 398 -- -- 398
Note payable, net of current portion....... -- 3,380 843 4,223
Deferred gain on sale of assets, net of
current portion.......................... -- 17,516 (17,516) --
Series A and B redeemable, convertible
preferred stock.......................... -- 52,472 (52,472) --
Series B preferred stock purchase
warrants................................. -- 1,655 (1,655) --
Shareholders' equity:
Share capital and contributed surplus.... 357,079 18,799 (18,799) 717,630
360,551
Deferred stock-based compensation........ (16,419) (16,041) 16,041 (61,324)
(44,905)
Accumulated other comprehensive income
(loss)................................. 1,400 (280) 280 1,400
Accumulated deficit........................ (57,802) (47,717) 47,717 (57,802)
-------- -------- -------- --------
Total shareholders' equity (deficiency).... 282,858 (45,239) 360,885 598,504
-------- -------- -------- --------
Total liabilities and shareholders'
equity................................... $298,666 $ 62,910 $272,767 $632,874
======== ======== ======== --------
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
71
<PAGE>
724 SOLUTIONS INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Nine months ended September 30, 2000
(Unaudited)
<TABLE>
<CAPTION>
NINE MONTHS NINE MONTHS JANUARY 1,
ENDED ENDED 2000 TO
SEPTEMBER 30, SEPTEMBER 30, JUNE 16,
2000 2000 2000
--------------- --------------- ------------
724 TANTAU PRO FORMA EZLOGIN.COM,
SOLUTIONS INC. SOFTWARE, INC. ADJUSTMENTS NOTE 3 SUB TOTAL INC.
--------------- --------------- ----------- -------- --------- ------------
<S> <C> <C> <C> <C> <C> <C>
(In thousands of U.S. dollars, except shares and per share amounts)
Revenue:
Product.............................. $ 8,835 $ 5,413 $ -- $ 14,248 $--
Stock-based compensation related to
product............................ (248) -- -- (248) --
Services............................. 4,606 1,161 -- 5,767 --
-------- -------- -------- --------- -------
Net revenue............................ 13,193 6,574 -- 19,767 --
Operating expenses:
Cost of net revenue.................. 8,744 1,030 446 (c) 10,220 --
Research and development............. 20,769 5,808 13,454 (c) 40,031 1,543
Sales and marketing.................. 9,748 7,550 8,873 (c) 26,171 248
General and administrative........... 12,797 6,155 1,970 (c) 20,922 2,139
Depreciation......................... 2,314 -- -- 2,314 32
Amortization of goodwill and
intangible assets.................. 9,267 -- 40,554 (c) 49,821 --
-------- -------- -------- --------- -------
63,639 20,543 65,297 149,479 3,962
-------- -------- -------- --------- -------
Loss from operations................... (50,446) (13,969) (65,297) (129,712) (3,962)
Gain on sale of assets................. -- 5,213 -- 5,213 --
Realized loss on investment in Accrue
Software, Inc........................ -- (31,413) -- (31,413) --
Interest income, net................... 8,643 530 -- 9,173 58
Other.................................. 686 -- -- 686 --
-------- -------- -------- --------- -------
Loss for the period.................... $(41,117) $(39,639) $(65,297) $(146,053) $(3,904)
======== ======== ======== ========= =======
Basic loss per share................... $ (1.13) $ (2.74)
Shares used in computing basic loss per
share (in thousands)................. 36,246 53,311
<CAPTION>
JANUARY 1,
2000 TO
SEPTEMBER 12,
2000
--------------
SPYONIT.COM, PRO FORMA
INC. ADJUSTMENTS NOTE 3 TOTAL
-------------- ----------- -------- -----------
<S> <C> <C> <C> <C>
(In thousands of U.S. dollars, except shares and per
share amounts)
Revenue:
Product.............................. $-- $ -- $ 14,248
Stock-based compensation related to
product............................ -- -- (248)
Services............................. 9 -- 5,776
------- -------- -----------
Net revenue............................ 9 -- 19,776
Operating expenses:
Cost of net revenue.................. -- -- 10,220
Research and development............. 481 538 (b) 42,593
Sales and marketing.................. 238 266 (b) 26,923
General and administrative........... 538 602 (b) 24,201
Depreciation......................... -- -- 2,346
Amortization of goodwill and
intangible assets.................. -- 13,143 (a) 68,677
5,713 (b)
------- -------- -----------
1,257 20,262 174,960
------- -------- -----------
Loss from operations................... (1,248) (20,262) (155,184)
Gain on sale of assets................. -- -- 5,213
Realized loss on investment in Accrue
Software, Inc........................ -- -- (31,413)
Interest income, net................... 18 -- 9,249
Other.................................. -- -- 686
------- -------- -----------
Loss for the period.................... $(1,230) $(20,262) $ (171,449)
======= ======== ===========
Basic loss per share................... $ (3.12)
Shares used in computing basic loss per
share (in thousands)................. 54,894
===========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
72
<PAGE>
724 SOLUTIONS INC.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS (CONTINUED)
(In thousands of U.S. dollars, except shares and per share amounts)
Year ended December 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
JANUARY 21,
12 MONTHS 1999
YEAR ENDED ENDED (INCEPTION) TO
DECEMBER 31, MARCH 31, DECEMBER 31,
1999 2000 1999
------------- -------------- --------------
724 SOLUTIONS TANTAU PRO FORMA EZLOGIN.COM,
INC. SOFTWARE, INC. ADJUSTMENTS NOTE 3 SUB TOTAL INC.
------------- -------------- ----------- -------- --------- --------------
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Product.......................... $ 1,697 $ 3,372 -- $ 5,069 $--
Stock-based compensation related
to product..................... (1,644) -- -- (1,644) --
Services......................... 1,169 580 -- 1,749 --
-------- -------- -------- --------- -------
Net revenue........................ 1,222 3,952 -- 5,174 --
Operating expenses:
Cost of net revenue.............. 1,858 1,034 594 (c) 3,486 --
Research and development......... 7,255 4,897 17,939 (c) 30,091 635
Selling and marketing............ 2,598 4,077 11,831 (c) 18,506 348
General and administrative....... 3,634 6,294 2,627 (c) 12,555 211
Depreciation..................... 752 -- -- 752 14
Amortization of goodwill and
intangible assets.............. -- -- 54,072 (c) 54,072 --
-------- -------- -------- --------- -------
16,097 16,302 87,063 119,462 1,208
-------- -------- -------- --------- -------
Loss from operations............... (14,875) (12,350) (87,063) (114,288) (1,208)
Interest income (expense), net..... 1,044 226 -- 1,270 38
-------- -------- -------- --------- -------
Loss for the period................ $(13,831) $(12,124) $(87,063) $(113,018) $(1,170)
======== ======== ======== ========= =======
Basic loss per share............... $ (0.82) (3.33)
Shares used in computing basic loss
per share (in thousands)......... 16,887 33,952
<CAPTION>
NO OPERATIONS
-------------
SPYONIT.COM, PRO FORMA
INC. ADJUSTMENTS NOTE 3 TOTAL
------------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Revenue:
Product.......................... $-- $ -- $ 5,069
Stock-based compensation related
to product..................... -- -- (1,644)
Services......................... -- -- 1,749
-------- -------- -----------
Net revenue........................ -- -- 5,174
Operating expenses:
Cost of net revenue.............. -- -- 3,486
Research and development......... -- -- 30,726
Selling and marketing............ -- -- 18,854
General and administrative....... -- -- 12,766
Depreciation..................... -- -- 766
Amortization of goodwill and
intangible assets.............. -- 28,477 (a) 82,549
-------- -------- -----------
-- 28,477 149,147
-------- -------- -----------
Loss from operations............... -- (28,477) (143,973)
Interest income (expense), net..... -- -- 1,308
-------- -------- -----------
Loss for the period................ -- $(28,477) $ (142,665)
======== ======== ===========
Basic loss per share............... $ (4.08)
Shares used in computing basic loss
per share (in thousands)......... 34,955
===========
</TABLE>
See accompanying notes to pro forma consolidated financial statements.
73
<PAGE>
724 SOLUTIONS INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2000 and the year ended December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
1. BASIS OF PRESENTATION:
Our pro forma consolidated balance sheet and statements of operations are
based upon the historical financial information described below after giving
effect to the transactions and adjustments described in notes 2, 3 and 4.
These pro forma consolidated financial statements are not necessarily
indicative of the results of operations that would have been achieved had
the transactions actually taken place at the dates indicated and do not
purport to be indicative of the effects that may be expected to occur in the
future.
The pro forma consolidated statements of operations have been prepared to
give pro forma effect to our acquisitions of ezlogin, Spyonit, and our
proposed acquisition of Tantau.
The pro forma consolidated balance sheet has been prepared to give effect to
our proposed acquisition of Tantau. As the ezlogin and Spyonit acquisitions
occurred prior to September 30, 2000, their financial positions are
consolidated in our consolidated balance sheet as at September 30, 2000.
Accordingly, no pro forma adjustments are required.
(a) Pro forma statements of operations
The pro forma consolidated statement of operations for the year ended
December 31, 1999 is based on:
(i) our audited financial statements for the year ended December 31, 1999;
(ii) the audited financial statements of ezlogin for the period from
January 21, 1999 (date of inception) to December 31, 1999;
(iii) the audited financial statements of Tantau for the period from
February 11, 1999 (date of inception) to December 31, 1999 combined
with the unaudited statement of operations for the three months ended
March 31, 2000 so as to present a full twelve month period of
operations; and
(iv) the additional information provided in notes 2, 3 and 4.
The pro forma statement of operations for the year ended December 31, 1999
should be read in conjunction with the audited financial statements
described above which are set out separately in this information
statement/prospectus.
Tantau was incorporated on February 11, 1999, but did not commence
commercial operations until April 1, 1999, which was the date that the
business of Tantau was acquired. The statement of operations for the three
months ended March 31, 2000 was, therefore, included in the December 31,
1999 pro forma statement of operations in order to make the operating
results of Tantau represent a twelve month period as required by applicable
securities laws. Therefore, the pro forma consolidated statements of
operations for the periods ended December 31, 1999 and September 30, 2000
both contain the results of operations of Tantau for the three months ended
March 31, 2000. The unaudited statement of operations of Tantau for the
three months ended March 31, 2000 are not included in this information
statement/prospectus. However, summary operating financial information for
this period is:
<TABLE>
<S> <C>
Revenue..................................................... 1,076
Operating expenses.......................................... 5,101
Loss for the period......................................... (4,046)
</TABLE>
The pro forma consolidated statement of operations for the nine month period
ended September 30, 2000 is based on:
(i) our unaudited financial statements for the nine months ended
September 30, 2000;
(ii) the unaudited financial information of ezlogin for the period from
January 1, 2000 to June 16, 2000 (date of acquisition);
(iii) the audited financial statements of Spyonit for the period from
January 1, 2000 to September 12, 2000 (date of acquisition);
(iv) the audited financial statements of Tantau for the nine months ended
September 30, 2000; and
(v) the additional information provided in notes 2, 3 and 4.
The unaudited financial statements of ezlogin for the period from
January 1, 2000 to June 16, 2000 (date of acquisition) are not included in
this information statement/prospectus. The financial information for Spyonit
has been extracted from its
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724 SOLUTIONS INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the year ended December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
1. BASIS OF PRESENTATION: (CONTINUED)
audited financial statements for the period from incorporation on
October 5, 1999 to September 12, 2000. As Spyonit was inactive between
October 5, 1999 and December 31, 1999, the information included in the pro
forma consolidated statement of operations is the same as that set out in
the Spyonit audited financial statements included elsewhere in this
information statement/prospectus. Financial information for the operations
of ezlogin and Spyonit subsequent to their dates of acquisition described in
note 2 are included in our results of operations for the nine month period
ended September 30, 2000.
(b) Pro forma balance sheet
The pro forma consolidated balance sheet as of September 30, 2000 is based
on:
(i) our unaudited financial statements as at September 30, 2000 reconciled
to U.S. GAAP which reflect an adjustment to recognize other
comprehensive income of $1.4 million related to our investment in
Corrillian (see note 14 to our consolidated financial statements);
(ii) the audited financial statements of Tantau as at September 30, 2000;
and
(iii) the additional information provided in notes 2, 3 and 4.
The balance sheets of ezlogin and Spyonit are incorporated in our
consolidated balance sheet as at September 30, 2000, as these acquisitions
occurred prior to September 30, 2000.
2. PRO FORMA TRANSACTIONS:
These pro forma consolidated financial statements give effect to the
acquisitions of ezlogin and Spyonit which occurred on June 16, 2000 and
September 12, 2000, respectively, and the proposed acquisition of Tantau.
Our acquisitions of ezlogin and Spyonit and our proposed acquisition of
Tantau have been accounted for under the purchase method of accounting, with
724 Solutions being identified as the acquirer. These pro forma consolidated
statements of operations have been prepared to give effect to the following:
(a) On June 16, 2000, we acquired all of the outstanding shares of ezlogin,
a privately held company incorporated in California which provides
Internet infrastructure tools for user-driven personalization. We
satisfied the purchase price of approximately $55.8 million by the
issuance of 1,003,594 common shares and the assumption of the existing
ezlogin option plan which, if all options outstanding under the plan are
exercised, would result in our issuance of an additional 91,796 common
shares. In addition, we incurred $3.0 million in costs related to the
acquisition. The excess of the purchase price over the fair value of the
net tangible assets of ezlogin at the date of acquisition of
$56.9 million has been allocated to goodwill and other intangible assets
and is being amortized over 24 months.
(b) On September 12, 2000, we acquired all of the outstanding shares of
Spyonit, a privately held company incorporated in Delaware which develops
software to monitor the Internet and other content sources for items of
interest to end-users. We satisfied the purchase price of approximately
$40.0 million by the issuance of 1,041,616 common shares and the payment
of $2.0 million in cash. As part of the terms of purchase, up to 137,062
common shares of the total common shares issued are subject to repurchase
at a minimum value if the former shareholders of Spyonit do not remain
our employees through September 2003. In addition, we incurred $200,000
in costs related to the acquisition. The excess of the purchase price
over the fair value of the net tangible assets of Spyonit at the date of
acquisition of $39.9 million has been allocated to goodwill and acquired
intangible assets and is being amortized over five years.
(c) On November 29, 2000, we entered into a merger agreement to acquire all
of the issued and outstanding shares of Tantau in exchange for the
issuance of shares. Prior to the acquisition, it is expected that the
existing issued Tantau preferred shares will be converted into common
shares on a one for one basis and the outstanding warrants to acquire
330,880 shares of common stock of Tantau will be exercised for estimated
proceeds of $1,336,600. Upon the completion of these events, the
outstanding share capital of Tantau will include approximately
27.4 million shares of common stock and options to acquire approximately
3.1 million shares of common stock. As consideration for the acquisition,
we will issue in aggregate 19 million shares of common stock and common
share replacement options resulting in an exchange ratio of approximately
0.62 of our common shares (the "exchange ratio") of the Company for every
common share and common share option of Tantau. In addition, Tantau may
issue up to 500,000 Tantau stock options to new hirees and promoted
employees in the period from November 29, 2000 to the closing date. These
stock options will be converted into 724 Solutions stock options using
the exchange ratio. On closing, Tantau will grant and 724 Solutions will
assume
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724 SOLUTIONS INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the year ended December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
2. PRO FORMA TRANSACTIONS: (CONTINUED)
stock options issued to key employees of Tantau with an exercise price
equal to the market value of 724 Solutions' common shares on the closing
date (as adjusted for the exchange ratio). The share and replacement
option consideration, for the purposes of the pro forma, has been
calculated based on the weighted average price of our common shares on
the Nasdaq National Market for the period from November 28, 2000 to
November 30, 2000, inclusive, being $19.15. The actual split of the
purchase price between goodwill and other intangibles and deferred stock-
based compensation will be affected by the closing-price of our common
shares on the closing date of the acquisition. For the purposes of the
pro forma, we have assumed a value of $19.15 in the calculation of the
fair value allocation to the deferred stock-based compensation.
A preliminary Tantau acquisition equation for purposes of these pro forma
consolidated financial statements based on the estimated fair value of
the net assets and liabilities of Tantau at September 30, 2000 has been
set forth below:
<TABLE>
<CAPTION>
BOOK VALUE FAIR VALUE ADJUSTMENTS
---------- ---------- -----------
<S> <C> <C> <C>
Net assets acquired:
Cash and cash equivalents................................. $ 41,121 $ 41,121 $ --
Cash received on the exercise of the warrants prior to
closing................................................. -- 1,337 1,337
Accounts receivable....................................... 2,338 2,338 --
Prepaid expenses and other receivables.................... 271 271 --
Investment in Accrue Software, Inc........................ 17,094 17,094 --
Capital assets............................................ 1,468 1,468 --
Intangible and other assets............................... 618 221 (397)
Accounts payable.......................................... (797) (797) --
Accrued liabilities....................................... (3,164) (1,695) 1,469
Deferred revenue.......................................... (4,936) (588) 4,348
Deferred gain on sale of assets........................... (41,486) -- 41,486
Notes payable............................................. (3,639) (4,482) (843)
-------- -------- --------
8,888 56,288 47,400
Allocation of the net purchase price:
Goodwill.................................................. -- 270,358 270,358
Deferred stock based compensation......................... -- 44,905 44,905
-------- -------- --------
$ 8,888 $371,551 $362,663
======== ======== ========
Consideration paid:
Share and stock option consideration...................... $360,551 $360,551
Costs of acquisition...................................... 11,000 11,000
-------- --------
$371,551 $371,551
======== ========
</TABLE>
As of the date of this information statement/prospectus, we have not
completed our assessment of the allocation of the estimated excess of the
fair value of the consideration to be given, over the fair value of the
expected net tangible assets to be acquired. We intend to use the
services of an external evaluator to assist in the allocation of the
purchase price, which may include an allocation to assets such as
goodwill, patents, acquired technology, workforce and in-process research
and development. In addition to the identification and valuation of the
intangibles, effective as of the date of acquisition we will also reasses
the useful lives of each intangible asset in order to determine the
appropriate amortization periods of each asset acquired. For the purposes
of the pro forma consolidated financial statements, the excess of the
estimated consideration over the fair value of the expected net tangible
assets has been allocated to goodwill and has been amortized at a blended
rate of five years. An increase of one year in the blended amortization
period would result in a reduction to the amortization charge in the pro
forma consolidated statements of operations of approximately
$9.0 million per annum. A reduction of one year in the blended
amortization period would result in an increased charge of approximately
$13.5 million per annum.
Additional information with respect to the accounting for these business
acquisitions is provided in notes 3(b) and (c) and note 16 of our
consolidated financial statements included in this information
statement/prospectus.
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<PAGE>
724 SOLUTIONS INC.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the year ended December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
3. PRO FORMA ADJUSTMENTS:
The pro forma consolidated statements of operations gives effect to the
transactions described in note 2, above, as if they had occurred at the
beginning of the periods presented. The pro forma consolidated financial
statements do not include any material nonrecurring charges that will arise
as a result of the transactions described in note 2. Pro forma transactions
recognized in the consolidated statements of operations are as follows:
(a) To give effect to the additional amortization of the ezlogin intangible
assets arising on the acquisition of $13.1 million and $28.5 million for
the periods ended September 30, 2000 and December 31, 1999, respectively.
Our operating results for the period ended September 30, 2000 include
$7.9 million of actual amortization from the ezlogin intangible assets.
(b) To give effect to the additional amortization of the Spyonit intangible
assets arising on the acquisition of $5.7 million for the period ended
September 30, 2000 and the stock-based compensation of approximately
$1.4 million for the period ended September 30, 2000. The amortization of
the deferred stock-based compensation arising on the acquisition is being
amortized on a straight-line basis over the future service period in
which the related stock options vest. Our operating results for the
period ended September 30, 2000 include $400,000 of amortization for the
Spyonit intangible assets and $99,000 for the amortization of the Spyonit
stock-based compensation.
(c) To give effect to the amortization of the Tantau goodwill and other
intangible assets arising on the acquisition over a period of five years,
which amortization is in the amount of $40.6 and $54.1 million for the
periods ended September 30, 2000 and December 31, 1999, respectively, and
the compensation expense of approximately $24.7 and $33.0 million for the
periods ended September 30, 2000 and December 31, 1999, respectively. The
deferred stock-based compensation arising on the acquisition is being
amortized on a straight-line basis over the future service period in
which the related stock options vest.
(d) The pro forma consolidated balance sheet as of September 30, 2000 gives
effect to the acquisition of Tantau described in note 2(c), above, as if
it had occurred on September 30, 2000, including the effect of the
recognition of the conversion of the Tantau preferred shares into common
shares, the exercise of the 330,945 purchase warrants for cash
consideration of approximately $1.3 million and recording of the
consideration paid and the fair value of the identified intangible assets
acquired as set out in note 2(c), above.
4. LOSS PER SHARE:
Basic loss per share has been presented based on our historical consolidated
financial statements after giving pro forma effect to the proposed
acquisition of Tantau and also after giving effect to the acquisitions of
ezlogin and Spyonit as if they had occurred at the later of commencement of
their operations or the beginning of the periods presented.
Basic loss per share has been calculated by dividing the pro forma
consolidated losses for the period by the pro forma weighted average number
of shares as calculated in the table below:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- ------------------
(In thousands)
<S> <C> <C>
Our actual weighted average number of shares outstanding.... 36,246 16,887
Estimated number of shares to be issued on proposed Tantau
acquisition............................................... 17,065 17,065
Pro forma weighted average number of shares in calculating
loss per share after giving effect to the proposed Tantau
acquisition............................................... 53,311 33,952
Additional shares that would have been outstanding if the
ezlogin and Spyonit acquisitions had occurred at the
beginning of the periods presented........................ 1,583 1,003
Total pro forma weighted average number of shares
outstanding............................................... 54,894 34,955
====== ======
</TABLE>
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<PAGE>
724 SOLUTIONS -- SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following selected 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 14 to our consolidated
financial statements. The following selected consolidated financial data should
be read with the "724 Solutions -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" section, and our 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,
1998 and 1999, are derived from our consolidated financial statements, which
have been audited by KPMG LLP. The consolidated statements of operations data
for the nine months ended September 30, 2000 and September 30, 1999 and the
consolidated balance sheet data as of September 30, 2000 were derived from the
unaudited interim consolidated financial statements for these periods and have
been prepared on the same basis as the audited consolidated financial statements
and, in the opinion of management, contain all adjustments necessary for the
fair presentation of the results of operations for such periods. Please note
that our operating results for these nine-month periods are not necessarily
indicative of the results of operations for a full year.
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEARS ENDED PERIOD FROM
SEPTEMBER 30, DECEMBER 31, JULY 28, 1997
------------------------- ------------------- (INCEPTION) TO
2000 1999 1999 1998 DECEMBER 31, 1997
----------- ----------- -------- -------- ------------------
(Unaudited) (Unaudited)
(In thousands of U.S. dollars, except shares and per share amounts)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENTS OF
OPERATIONS DATA:
Revenue:
Product........................... $ 8,835 $ 1,314 $ 1,697 $ 1,678 $ --
Less: Stock-based compensation
related to software
development..................... (248) (1,273) (1,644) (1,395) --
Services.......................... 4,606 788 1,169 208 --
-------- ------- -------- ------- ------
Net revenue......................... 13,193 829 1,222 491 --
Operating expenses(1):
Cost of net revenue............... 8,744 816 1,858 82 --
Research and development.......... 20,769 4,433 7,255 2,194 44
Sales and marketing............... 9,748 1,124 2,598 405 39
General and administrative........ 12,797 1,902 3,634 528 82
Depreciation...................... 2,314 445 752 88 --
Amortization of intangibles....... 9,267 -- -- -- --
-------- ------- -------- ------- ------
Total operating expenses.......... 63,639 8,720 16,097 3,297 165
-------- ------- -------- ------- ------
Loss from operations................ (50,446) (7,891) (14,875) (2,806) (165)
Interest income..................... 8,643 341 1,044 107 10
Equity in loss of affiliate......... (543) -- -- -- --
Dilution gain....................... 1,229 -- -- -- --
-------- ------- -------- ------- ------
Loss for the period................. $(41,117) $(7,550) $(13,831) $(2,699) $ (155)
======== ======= ======== ======= ======
Basic and diluted loss per share.... $ (1.13) $ (0.57) $ (0.82) $ (0.47) $(0.06)
======== ======= ======== ======= ======
Weighted-average number of shares
used in computing basic and
diluted loss per share
(in thousands).................... 36,246 13,301 16,887 5,784 2,752
======== ======= ======== ======= ======
(1) Included in the operating
expenses are non-cash
stock-based compensation
expenses for the following
amounts......................... $ 3,854 $ 124 $ 165 $ 181 $ --
======== ======= ======== ======= ======
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
SEPTEMBER 30, 2000 1999 1998
------------------- -------- --------
(Unaudited)
(In thousands of U.S. dollars)
<S> <C> <C> <C>
CONSOLIDATED BALANCE SHEETS DATA:
Cash and cash equivalents........................... $ 19,915 $65,287 $2,976
Short-term investments.............................. 158,062 -- --
Working capital..................................... 170,795 58,805 2,333
Intangible and other assets......................... 90,750 1,100 --
Total assets........................................ 297,266 73,242 3,892
Total shareholders' equity.......................... 282,858 62,168 3,193
======== ======= ======
</TABLE>
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724 SOLUTIONS -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
We were established in July 1997 to conceive, design and distribute Internet
infrastructure software solutions that enable financial institutions to deliver
financial information and services using a broad range of Internet-enabled
devices. For the period from July 1997 to May 1999, we were in a development
phase, conducting research and developing our products. In May 1999, we launched
our initial product, for use in connection with financial services, on a trial
basis with a limited number of customers of the Bank of Montreal. During the
trial, these 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 1999 through December 1999, we filled key management
positions in our sales and marketing departments, attracted Bank of America,
Citigroup and Sonera Corporation as investors, entered into license agreements
with Bank of America, Wells Fargo and Citigroup, and continued to develop our
product. Our headcount has grown to 460 employees as of September 30, 2000.
In the third quarter of 2000, we introduced an enhancement to our product
offering. This release focuses on providing our customers with more flexibility
in reaching consumers using devices that are gaining substantial consumer
adoption, such as Wireless Application Protocol (WAP) phones and two-way pagers.
This enhancement of our platform also features multi-byte character support,
which enables it to deliver financial services in virtually any language.
Our consolidated financial statements are prepared in accordance with
Canadian generally accepted accounting principles. These principles conform in
all material respects with U.S. generally accepted accounting principles, except
as disclosed in note 14 to our consolidated financial statements.
RECENT ACQUISITIONS
YRLESS. In March 2000, we acquired Internet messaging gateway developer
YRLess Internet Corporation of Oakville, Ontario. YRLess developed the YMG-2000,
a scaleable, platform-independent carrier-grade short messaging service gateway
for wireless carriers. Prior to the acquisition, YRLess had licensed its
technology to network operators Bell Mobility and Telus Mobility. We plan to use
this gateway to enhance our ability to quickly connect to carriers. In this
transaction, we paid total cash consideration of approximately $1.3 million,
including acquisition costs of approximately $34,000. In addition, we are
committed to pay approximately $4.5 million in our common shares, valued at
their then current market prices, in three annual installments over the next
three years.
EZLOGIN. In June 2000, we completed our acquisition of ezlogin. ezlogin is
a leading provider of Internet software infrastructure tools for user directed
personalization. Using the technologies that we acquired in this transaction, we
introduced LiveClips, a comprehensive aggregation tool designed to enable our
customers to provide consumers with a consolidated view of their online accounts
and other items of personal interest. LiveClips also enables consumers to select
other Internet content for display on their personalized web pages. In this
transaction, we issued 1,003,594 of our common shares at the closing. In
addition, we assumed the options that were outstanding under ezlogin's stock
option plan, and, at the closing, these options were converted into options to
purchase 91,796 of our common shares.
SPYONIT. In September 2000, we completed our acquisition of Chicago-based
Spyonit. Spyonit's intelligent alerting infrastructure software monitors the
Internet for items of interest such as stock prices, product sales, or auction
bids. When appropriate content is detected, the Spyonit system delivers smart
notifications to the user through a variety of Internet-access devices. Spyonit
allows us to
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<PAGE>
broaden the range of alert services that our 724 platform supports, complements
our LiveClips aggregation tool, and adds an attractive standalone offering to
our product portfolio. In this transaction, the purchase price of approximately
$40.0 million was satisfied by the issuance of 1,041,616 of our common shares
and $2.0 million in cash. As part of the terms of the purchase, up to 137,062 of
the total common shares issued are subject to repurchase at a minimum value if
the vendors do not remain our employees through September 2003.
SOURCES OF REVENUE
Our primary sources of revenue are revenues generated under our license
agreements and services revenue. Historically, our services revenue has
consisted primarily of implementation, customer service and maintenance fees. We
are incurring upfront implementation costs to enable customers to implement our
solution more quickly. In the future, we expect our services revenue to also
include amounts derived from the operation of our application hosting services,
revenue sharing arrangements and commissions on e-commerce and m-commerce
transactions. We have recently commenced providing application hosting services
to our customers; revenues from these services will be included in our services
revenue. We expect to increase our application hosting revenue once customers
have commenced signing up subscribers to use services based on our products and
the services have begun to operate from our data center.
As our application hosting services expand, we believe that the portion of
our revenues derived from hosting and maintenance services will increase in
future periods. Over the long term, we are seeking to achieve targets for our
product revenues, hosting and maintenance revenues, and other service revenues
of 50%, 30% and 20%, respectively.
LICENSE FEES
Our two initial license agreements were with Bank of Montreal and Bank of
America, and used a fixed fee license model. Under this model, a customer pays
us a fixed annual license fee in whole or part upon execution of the license
agreement, and periodically thereafter during the term of the agreement. The use
of this model helped provide the initial cash flow that was necessary to fund
our development and start-up costs.
After raising additional capital in August 1999 through the issuance of
common shares, we had the financial resources to forego this fixed fee license
model in favor of a variable fee license model. Our agreements with several of
our customers, including Citigroup, Wells Fargo, Wachovia and Claritybank.com,
utilize this model. The variable fee license model is based on a per user fee.
The transition of our revenue model from fixed fee to variable fee is expected
to have two significant consequences: first, we will no longer receive large
initial payments under our license agreements; and secondly, we expect our
revenue stream will vary with the number of our customers' end users. We expect
that these variable fees will be subject to a minimum quarterly payment, and
expect to provide incentive discounts to our customers based on the number of
their customers using our platform.
Under the fixed fee license model, we recognize revenue when we have
executed an agreement with a customer, when delivery and acceptance have
occurred, and when the collection of the related receivable is deemed probable.
Under the variable fee license model, we commence the recognition of revenue
when those same conditions have been satisfied. Under the variable fee license
model, revenue from the minimum payments is recognized on a monthly basis.
Revenue associated with user fees in excess of any minimum payments is
recognized on a quarterly basis when the amount is determined.
IMPLEMENTATION AND CUSTOMER SERVICE FEES
Revenue from implementation and customer services includes fees for
implementation of our product offerings, consulting and training services. We
currently rely, and expect to continue to rely, on
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a combination of our own resources and third-party consulting organizations to
deliver these services to our customers. Customers are charged a fee based on
time and expenses. Revenue from implementation and customer service fees is
recognized as the services are performed.
MAINTENANCE FEES
We receive revenue from maintaining and servicing our products for
customers. The maintenance fee is typically equal to a specified percentage of
the customer's license fee. If associated with the fixed fee license model, the
maintenance revenues received will be deferred and recognized on a straight-line
basis over the contract period. When associated with the variable fee license
model, any minimum payments will be recognized on a monthly basis. Maintenance
revenue in excess of any minimum payments will be recognized on a quarterly
basis when the amount is determined.
APPLICATION HOSTING SERVICES FEES
Some of our existing customers require us, and we expect that many of our
potential customers would require us, to host and manage the server
infrastructure and software platform as part of the implementation of our
products. In fiscal 2000, we commenced providing this service to our customers.
RESULTS OF OPERATIONS
Our unaudited condensed consolidated financial statements are prepared in
accordance with Canadian generally accepted accounting principles which, in our
case, conform in all material respects with U.S. generally accepted accounting
principles.
NINE MONTHS AND THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS
ENDED SEPTEMBER 30, 1999 AND THREE MONTHS ENDED JUNE 30, 2000
REVENUE
Our revenue, before the offset of stock-based compensation, increased to
$6.1 million for the three months ended September 30, 2000 from $4.0 million for
the three months ended June 30, 2000 and increased to $13.4 million for the nine
months ended September 30, 2000 from $2.1 million for the nine months ended
September 30, 1999. These increases resulted primarily from service revenue
derived from our consulting services relating to our customers' deployment of
our platform and the implementation of our aggregation technology. In addition,
we derived increased product revenue, reflecting new customers licensing our
platform.
PRODUCT REVENUE. Our product revenue, before the offset of stock-based
compensation, increased to $3.5 million in the third quarter of fiscal 2000
compared to $2.6 million for the three months ended June 30, 2000. Our product
revenue, before the offset of stock-based compensation, increased to
$8.8 million for the nine months ended September 30, 2000 from $1.3 million for
the nine months ended September 30, 1999. The increase in the nine months ended
September 30, 2000 from the same period in the prior year primarily resulted
from the addition of new customers from which we began to recognize revenue in
fiscal 2000.
SERVICE REVENUE. Our service revenue increased to $2.6 million for the
three months ended September 30, 2000 from $1.4 million for the three months
ended June 30, 2000. Service revenue was $4.6 million compared to $788,000 for
the nine months ended September 30, 2000 and September 30, 1999, respectively.
The quarter over quarter growth was due primarily to the increase in consulting
work performed for our new and current customers as they deployed our
724 platform and applications. In addition, in the third quarter of fiscal 2000,
we received revenue for consulting work related to the implementation and
customization of our LiveClips product. We anticipate that consulting revenue
from this source will continue as financial services providers seek to obtain
services
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<PAGE>
that we have made available as a result of our June 2000 acquisition of ezlogin.
In addition, the increase for the nine months ended September 30, 2000 over the
nine months ended September 30, 1999 in our revenue from consulting services
resulted from our customers seeking additional services of this kind as they
deploy our 724 platform and applications and other products.
STOCK-BASED COMPENSATION RELATED TO SOFTWARE DEVELOPMENT REVENUE
Under our subscription agreement with Bank of Montreal (BMO) dated
April 30, 1998, we granted an option to BMO to subscribe for 2,428,570 common
shares for Cdn. $1.0 million. This option was only exercisable in the event that
BMO extended its technology license agreement for a second year and paid the
second year's license fee. In October 1998, following BMO's extension of the
license agreement, BMO exercised the option. On the date of exercise, the fair
value of the 2,428,570 common shares was determined to be Cdn. $6.1 million,
resulting in a stock-based compensation charge related to software development
revenue of Cdn. $5.1 million, or U.S. $3.3 million. This stock-based
compensation was attributed to our software development revenue over the term of
the agreement in proportion to the revenue recognized in the first and second
years. Stock-based compensation related to software development revenue
decreased to $248,000 for the nine months ended September 30, 2000 from
$1.3 million for the nine months ended September 30, 1999. The decrease in
stock-based compensation related to software development revenue in the nine
months ended September 30, 2000 compared to the nine months ended September 30,
1999 resulted from the fact that the second year of this agreement ended in the
first quarter of fiscal 2000. This deferred stock-based compensation charge has
now been fully expensed.
OPERATING EXPENSES
COST OF NET REVENUE. Cost of net revenue consists primarily of personnel
costs associated with customer support, training, implementation, consulting and
hosting services, as well as amounts paid to third-party consulting firms for
those services and an allocation of expenses for our facilities and
administration. It also includes software licensing expenses paid for
integration of third-party software into our products.
Cost of net revenue was $3.9 million for the three months ended
September 30, 2000 compared to $2.7 million for the three months ended June 30,
2000. The increase in the most recent quarter over the prior quarter was
primarily related to startup and implementation costs required to establish our
application hosting infrastructure. Cost of net revenue was $8.7 million for the
nine months ended September 30, 2000, compared to $816,000 for the nine months
ended September 30, 1999. This increase was primarily related to the addition of
implementation and customer service personnel to support our increase in
customers. The increase in cost of net revenue also reflects amounts paid to
third-party consultants and software providers. We expect cost of net revenue to
increase in the near future as we expand our application hosting personnel and
establish hosting centers worldwide.
RESEARCH AND DEVELOPMENT. Research and development expenses relate to the
compensation of software developers in connection with the continuing
enhancement of our products and our quality assurance and testing activities.
These expenses also include independent contractors and consultants, software
licensing expenses, and allocated operating expenses.
Research and development expenses increased to $8.8 million for the three
months ended September 30, 2000 from $7.2 million for the three months ended
June 30, 2000. Research and development expenses were $20.8 million for the nine
months ended September 30, 2000 compared to $4.4 million for the nine months
ended September 30, 1999. These increases are attributed to the expansion of the
functionality of our platform and costs associated with integrating ezlogin and
other acquired technology, as well as the continued development of our LiveClips
product and the inclusion of stock-based compensation of $1.7 million in the
nine months ended September 30, 2000. We
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anticipate that our research and development expenses will increase in the
future as we continue to expand the functionality of our platform and enhance
the technologies that we purchased in connection with our previous acquisitions.
SALES AND MARKETING. Sales and marketing expenses include compensation,
public relations and advertising, trade shows, marketing materials and allocated
operating expenses. Sales and marketing expenses were $3.8 million compared to
$3.5 million for the three months ended September 30, 2000, and June 30, 2000,
respectively. For the nine months ended September 30, 2000, sales and marketing
expenses were $9.7 million compared to $1.1 million for the nine months ended
September 30, 1999. These increases were primarily the result of costs
associated with the hiring and training of our sales and marketing personnel,
both domestically and internationally, as well as the cost of additional
marketing programs designed to build brand awareness. We have increased the
number of sales personnel to manage our relationships with our major customers
and to expand our business.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
salaries and benefits for corporate personnel and other general and
administrative expenses such as professional fees, facilities and travel, net of
any allocation to our research and development and sales and marketing
departments. Our corporate staff includes several of our executive officers and
our business development, financial planning and control, legal, human resources
and corporate administration staff. Our general and administrative expenses
decreased to $4.4 million for the three months ended September 30, 2000 from
$5.9 million for the three months ended June 30, 2000. The decrease was mainly
attributed to the fact that in the second quarter of 2000, we incurred
non-recurring costs due to the integration of, and professional fees related to,
acquisitions and corporate development activities.
Our general and administrative expenses increased to $12.8 million for the
nine months ended September 30, 2000 from $1.9 million for the nine months ended
September 30, 1999. The increase in general and administrative expenses
reflected our continued investment in increased staffing and related expenses
for the enhancement of the international infrastructure necessary to support our
growing business, including improved management information systems and our
increased utilization of outside professional service firms. The remainder of
the increase was due to stock-based compensation of $1.3 million and
non-recurring integration and professional fees related to our acquisitions and
corporate development activities.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization expense
was $9.2 million for the three months ended September 30, 2000 compared to
$2.0 million for the three months ended June 30, 2000. Total depreciation and
amortization expense was $11.6 million for the nine months ended September 30,
2000 compared to $445,000 for the nine months ended September 30, 1999. These
increases were mainly due to the amortization expense of $7.8 million for the
three months ended September 30, 2000, and $9.0 million for the nine months
ended September 30, 2000, of goodwill and acquired intangibles relating to the
ezlogin acquisition completed in June 2000 and the Spyonit acquisition completed
in September 2000. We are amortizing goodwill related to the ezlogin and Spyonit
acquisitions over 24 months and 60 months, respectively. Additional depreciation
relating to computer hardware purchased for our application hosting facilities
accounted for the remainder of the change.
AMORTIZATION OF DEFERRED STOCK-BASED COMPENSATION RELATED TO STOCK
OPTIONS. Amortization of employee stock-based compensation has been allocated
to the operating expense line items based on the nature of the services provided
by the grantee. Amortization of employee stock-based compensation was
$3.9 million for the nine months ended September 30, 2000 compared to $124,000
for the nine months ended September 30, 1999. The deferred stock-based
compensation mainly represents the difference between the exercise prices of
options granted to acquire our common shares and the deemed market value, for
financial reporting purposes, of our common shares on their respective grant
dates. This deferred stock-based compensation is being amortized on a
straight-line basis over the
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vesting periods of these options, which is generally three years. The increases
are largely attributed to the amortization of deferred stock-based compensation
related to options that were granted between October 1, 1999 and March 31, 2000.
See "Management -- 724 Solutions Executive Compensation -- Stock Option Plans".
INTEREST INCOME
Interest income increased to $3.6 million for the three months ended
September 30, 2000 from $2.8 million for the three months ended June 30, 2000.
Interest income increased to $8.6 million for the nine months ended
September 30, 2000 from $341,000 for the nine months ended September 30, 1999.
Interest was derived from cash and cash equivalent balances and short-term
investments, representing primarily the unused portion of the proceeds from our
issuances of common shares, including, in particular, the proceeds from our
initial public offering in the first quarter of 2000.
EQUITY IN LOSSES OF AFFILIATE
In the third quarter, our ownership in Maptuit decreased from 33.4% to 27.5%
due to additional financing that Maptuit received from other investors. Our
investment in Maptuit is accounted for using the equity method. Under this
method, we recognized a net gain of $965,000 for the three months ended
September 30, 2000, compared to a charge of $213,000 for the three months ended
June 30, 2000 and a net gain of $686,000 for the nine months ended
September 30, 2000. These amounts reflect our share of Maptuit's losses for the
period since our investment net of amortization of deemed goodwill, which was a
loss of $543,000, the dilution gain as a result of Maptuit's additional
financing, which was $1.2 million.
NET LOSS
We recorded a net loss of $19.4 million for the three months ended
September 30, 2000 compared to a net loss of $14.8 million for the three months
ended June 30, 2000. Our net loss per share, calculated using the weighted
average number of shares outstanding, was $0.51 for the three months ended
September 30, 2000 compared to a net loss per share of $0.40 for the three
months ended June 30, 2000. For the nine months ended September 30, 2000 our net
loss was $41.1 million or $1.13 per share, compared to a net loss of
$7.6 million or $0.57 per share in the same period last year. Our loss increased
as we invested heavily in building our infrastructure, and we expect our net
loss to continue to increase as we expand our application hosting services and
continue to invest in developing our products. In particular, our research and
development expenses and our sales and marketing expenses increased to meet
required product delivery schedules and to gain market share. We continue to
focus on our general and administrative expenses as an area to gain efficiencies
and economies of scale as we grow.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUE
Our revenue, before the offset of stock-based compensation, increased to
$2.9 million for the year ended December 31, 1999 from $1.9 million for the year
ended December 31, 1998.
PRODUCT REVENUE. Our software development revenue, before the offset of
stock-based compensation, remained approximately the same at $1.7 million for
the years ended December 31, 1999 and 1998. All software development revenue
realized in 1999 and 1998 related to our contract with Bank of Montreal.
SERVICE REVENUE. Our service revenue increased to $1.2 million for the year
ended December 31, 1999 from $208,000 for the year ended December 31, 1998. This
increase resulted from our entry into
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additional contracts for consulting and software design services for
implementations at Bank of Montreal, Bank of America and Wells Fargo.
STOCK-BASED COMPENSATION RELATED TO SOFTWARE DEVELOPMENT REVENUE
Stock-based compensation related to software development revenue increased
to $1.6 million for the year ended December 31, 1999 from $1.4 million for the
year ended December 31, 1998, as we recognized a greater portion of the revenue
associated with Bank of Montreal's license agreement in 1999 than in 1998.
OPERATING EXPENSES
COST OF NET REVENUE. Our cost of net revenue increased to $1.9 million for
the year ended December 31, 1999 from $82,000 for the year ended December 31,
1998. This increase was primarily related to the addition of implementation and
customer service personnel to support additional customers in 1999. The increase
in cost of services revenue also reflects amounts paid to third party
consultants and software providers.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$7.3 million for the year ended December 31, 1999 from $2.2 million for the year
ended December 31, 1998. This increase largely reflects the addition of
personnel to our research and development department, primarily to support the
second release of our software.
SALES AND MARKETING. Sales and marketing expenses increased to
$2.6 million for the year ended December 31, 1999 from $405,000 for the year
ended December 31, 1998. This increase is primarily attributable to the hiring
of additional sales and marketing personnel, together with increased travel and
related expenses. This increase reflects the opening of sales offices in San
Francisco and London in 1999. We expect that our sales and marketing expenses
will continue to increase as we expand internationally.
GENERAL AND ADMINISTRATIVE. Our general and administrative expenses
increased to $3.6 million for the year ended December 31, 1999 from $528,000 for
the year ended December 31, 1998, which reflects the increase in our corporate
staff.
DEPRECIATION AND AMORTIZATION. Total depreciation and amortization expense
(excluding amortization of deferred stock-based compensation) increased to
$752,000 for the year ended December 31, 1999 from $88,000 for the year ended
December 31, 1998, reflecting the capital spending in computer workstations and
software development tools used for research and development purposes.
AMORTIZATION OF DEFERRED EMPLOYEE STOCK-BASED COMPENSATION. In 1999, we
accrued a $5.8 million deferred stock compensation charge related to employee
stock options granted prior to our initial public offering. Amortization of
employee stock-based compensation was $165,000 for the year ended December 31,
1999 compared to $181,000 for the year ended December 31, 1998, and has been
included in the operating expense line items in which it relates. In 1998, we
recognized $414,000 for deferred stock based compensation related to options
that were granted to purchase 1,227,000 common shares under our stock option
plans at a weighted average exercise price of $0.34 per share.
INTEREST INCOME
Interest income, which increased to $1.0 million for the year ended
December 31, 1999 from $107,000 for the year ended December 31, 1998, was
derived from cash and cash equivalent balances, representing primarily the
unused portion of the proceeds from our issuances of common shares.
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NET LOSS
We recorded a net loss of $13.8 million for the year ended December 31, 1999
compared to $2.7 million for the year ended December 31, 1998. The loss per
share, calculated using the weighted average number of shares outstanding, was
$0.82 for the year ended December 31, 1999 compared to a loss per share of $0.47
for the year ended December 31, 1998. Our losses increased as we invested
heavily in building our infrastructure. Research and development, along with
sales and marketing activities, increased to meet the required delivery
schedules for our products and to establish customer relationships.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO PERIOD FROM JULY 28, 1997 (INCEPTION)
TO DECEMBER 31, 1997
We were established in July 1997 and therefore have a limited operating
history for the period ended December 31, 1997. During this period, we commenced
a market research study to develop strategies for financial institutions with
respect to the use of the Internet and wireless services.
REVENUE
We did not have any revenue for the period ended December 31, 1997. We
recognized $1.9 million of revenue, before the offset of stock-based
compensation, for the year ended December 31, 1998, which included $1.7 million
of software development revenue and $208,000 of services revenue. Our software
development revenue consisted of fees under our agreement with Bank of Montreal,
while our services revenue consisted of payments from Bank of Montreal for our
consulting work.
STOCK-BASED COMPENSATION RELATED TO SOFTWARE DEVELOPMENT REVENUE
Stock-based compensation related to software development revenue was
$1.4 million for the year ended December 30, 1998 and consisted of the ratable
allocation of deferred stock-based compensation arising upon the exercise of the
Bank of Montreal option.
OPERATING EXPENSES
COST OF NET REVENUE. Cost of net revenue was $82,000 for the year ended
December 31, 1998 and consisted of salaries and related expenses for our
consulting work.
RESEARCH AND DEVELOPMENT. Research and development expenses increased from
$44,000 for the period ended December 31, 1997 to $2.2 million for the year
ended December 31, 1998, as we hired 33 employees in connection with the initial
release of our software.
SALES AND MARKETING. Sales and marketing expenses increased from $39,000
for the period ended December 31, 1997 to $405,000 for the year ended
December 31, 1998, reflecting the establishment of our sales and marketing
department.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
from $82,000 for the period ended December 31, 1997 to $528,000 for the year
ended December 31, 1998, primarily as a result of the increase in the size of
our corporate infrastructure.
INTEREST INCOME
Interest income, which increased from $10,000 for the period ended
December 31, 1997 to $107,000 for the year ended December 31, 1998, was derived
from cash and cash equivalent balances, representing primarily the unused
portion of the proceeds from our issuances of common shares.
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QUARTERLY RESULTS OF OPERATIONS
The following tables set forth certain unaudited consolidated statements of
operations data for each of the eleven most recent quarters ended September 30,
2000, as well as the period from inception through December 31, 1997. The
information has been derived from our unaudited consolidated financial
statements that, in management's opinion, have been prepared on a basis
consistent with the audited consolidated financial statements contained
elsewhere in this information statement/prospectus and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of information presented. These operating results are not
necessarily indicative of results for any future period. You should not rely on
them to predict our future performance.
<TABLE>
<CAPTION>
QUARTER ENDED
----------------------------------------
2000 MAR. 31 JUN. 30 SEPT. 30
---- --------- --------- ----------
(In thousands of U.S. dollars,
except for shares and per share amounts)
<S> <C> <C> <C>
Revenue:
Product............................................... $ 2,762 $ 2,591 $ 3,482
Services.............................................. 597 1,377 2,632
Less: Stock-based compensation related to software
development revenue................................. (248) -- --
------- -------- --------
Net revenue............................................. 3,111 3,968 6,114
------- -------- --------
Operating expenses:
Cost of net revenue................................... 2,039 2,675 3,902
Research and development.............................. 4,864 7,186 8,805
Sales and marketing................................... 2,559 3,475 3,792
General and administrative............................ 2,424 5,925 4,409
Depreciation.......................................... 317 684 1,313
Amortization of intangibles........................... -- 1,350 7,917
------- -------- --------
Total operating expenses................................ 12,203 21,295 30,138
Loss from operations.................................... (9,092) (17,327) (24,024)
Interest income......................................... 2,237 2,772 3,631
Equity in losses of affiliate........................... (66) (213) 965
------- -------- --------
Net loss................................................ $(6,921) $(14,768) $(19,428)
------- -------- --------
Basic and diluted net loss per share.................... $ (0.20) $ (0.40) $ (0.51)
Shares used in computing basic and diluted net loss per
share (in thousands).................................. 34,037 36,717 37,961
======= ======== ========
</TABLE>
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<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------ TOTAL YEAR
1999 MAR. 31 JUN. 30 SEPT. 30 DEC. 31 1999
---- -------- -------- --------- -------- ----------
(In thousands of U.S. dollars, except for shares and
per share amounts)
<S> <C> <C> <C> <C> <C>
Revenue:
Product.................................... $ 548 $ 383 $ 383 $ 383 $ 1,697
Services................................... 34 -- 754 381 1,169
Less: Stock-based compensation related to
software development revenue............. (531) (371) (371) (371) (1,644)
------- ------- ------- ------- --------
Net revenue.................................. 51 12 766 393 1,222
------- ------- ------- ------- --------
Operating expenses:
Cost of net revenue........................ -- 20 811 1,076 1,907
Research and development................... 1,185 1,421 2,051 2,968 7,625
Sales and marketing........................ 210 307 634 1,560 2,711
General and administrative................. 315 606 1,160 1,773 3,854
------- ------- ------- ------- --------
Total operating expenses..................... 1,710 2,354 4,656 7,377 16,097
------- ------- ------- ------- --------
Loss from operations......................... (1,659) (2,342) (3,890) (6,984) (14,875)
Interest income.............................. 61 28 252 703 1,044
------- ------- ------- ------- --------
Net loss..................................... $(1,598) $(2,314) $(3,638) $(6,281) $(13,831)
------- ------- ------- ------- --------
Basic and diluted net loss per share......... $ (0.14) $ (0.20) $ (0.22) $ (0.23) $ (0.82)
Shares used in computing basic and diluted
net loss per share (in thousands).......... 11,429 11,609 16,870 27,557 16,887
======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM QUARTER ENDED
JUL. 28 ---------------------------------------------
(INCEPTION) TO MAR. 31, JUN. 30, SEPT. 30, DEC. 31, TOTAL YEAR
1997-1998 DEC. 31, 1997 1998 1998 1998 1998 1998
--------- -------------- --------- -------- ---------- --------- ----------
(In thousands of U.S. dollars, except for shares and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Revenue:
Software development.............. $-- $-- $ 419 $ 630 $ 629 $ 1,678
Services.......................... -- 208 -- -- -- 208
Less: Stock-based compensation
related to software development
revenue......................... -- -- (91) (694) (610) (1,395)
------ ------ ------ ------ ------- -------
Net revenue......................... -- 208 328 (64) 19 491
------ ------ ------ ------ ------- -------
Operating expenses:
Cost of net revenue............... -- 61 -- -- -- 61
Research and development.......... 44 124 397 687 1,198 2,406
Sales and marketing............... 39 27 86 109 213 435
General and administrative........ 82 41 74 53 227 395
------ ------ ------ ------ ------- -------
Total operating expenses............ 165 253 557 849 1,638 3,297
------ ------ ------ ------ ------- -------
Loss from operations................ (165) (45) (229) (913) (1,619) (2,806)
Interest income..................... 10 18 20 31 38 107
------ ------ ------ ------ ------- -------
Net loss............................ $ (155) $ (27) $ (209) $ (882) $(1,581) $(2,699)
------ ------ ------ ------ ------- -------
Basic and diluted net loss per
share............................. $(0.06) $(0.01) $(0.04) $(0.18) $ (0.17) $ (0.47)
------ ------ ------ ------ ------- -------
Shares used in computing basic and
diluted net loss per share (in
thousands)........................ 2,752 4,000 4,667 5,000 9,286 5,784
====== ====== ====== ====== ======= =======
</TABLE>
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LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations through issuances of common
shares, together with revenue from operations. During the year ended
December 31, 1999, we received aggregate proceeds of $71.2 million from the
issuance of common shares. In February 2000, we completed our initial public
offering of an aggregate of 6,900,000 common shares, raising net proceeds of
approximately $165.7 million. We believe that the proceeds from our initial
public offering and our private placement of securities, together with cash
generated from our operations, will be sufficient to support our needs for at
least the next 12 months.
Net cash used in operating activities was $15.9 million for the three months
ended September 30, 2000 compared to $7.8 million for the three months ended
June 30, 2000. For the nine months ended September 30, 2000 net cash used in
operating activities was $25.2 million compared to $3.8 million for the same
period ended September 30, 1999. Net cash used in operating activities for the
nine months ended September 30, 2000 reflects our net operating loss of
$41.1 million and our net gain in equity of affiliate of $686,000 offset by
depreciation and amortization of $11.6 million, amortization of stock-based
compensation of $4.1 million and net changes in working capital of $350,000.
Cash provided from financing activities was $165.7 million for the nine
months ended September 30, 2000, compared to $30.1 million for the nine months
ended September 30, 1999. Cash provided from financing activities in 2000
reflects the net proceeds of our initial public offering.
Cash used in investing activities, before the purchase of short-term
investments, was $5.1 million for the three months ended September 30, 2000
compared to $17.3 million for the three months ended June 30, 2000. Cash used in
investing activities, before the purchase of short-term investments, for the
nine months ended September 30, 2000 was $27.2 million compared to $1.2 million
for the nine months ended September 30, 1999. At September 30, 2000, short-term
investments mainly consist of government debt and commercial paper with a term
to maturity of no greater than one year. Cash used in investing activities,
excluding the purchase of short-term investments, for the first nine months of
2000 reflects our investments in Corillian, Neomar and Maptuit, our acquisitions
of YRLess, ezlogin and Spyonit, as well as purchases of capital and other
assets. Capital expenditures for the nine months ended September 30, 2000 were
$8.8 million. We anticipate capital expenditures to continue to increase as we
invest heavily in our products and implement our application hosting services.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, we had approximately $178 million in cash, cash
equivalents and short-term investments, of which over $158 million was
short-term investments. A significant portion of the cash earns interest at
variable rates. In addition, although our short-term investments are fixed-rate
instruments, the average term is short. Accordingly, our interest income is
effectively sensitive to changes in the level of prevailing interest rates. This
is partially mitigated by the fact that we generally hold our short-term
investments until their maturity date.
Substantially all of our revenue from our customers to date has been earned
in U.S. dollars. A significant portion of our expenses is incurred in Canadian
dollars. Changes in the value of the Canadian dollar relative to the
U.S. dollar may result in currency translation gains and losses and could
adversely affect our operating results. In the future, we intend to hedge all or
a significant portion of our annual estimated Canadian dollar expenses to
minimize our Canadian dollar exposure.
We also deal in foreign currencies other than the U.S. dollar and the
Canadian dollar. We feel that their impact on foreign exchange is negligible, as
only a small portion of our expenses are incurred in those foreign currencies.
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724 SOLUTIONS -- BUSINESS
GENERAL
We were established in July 1997 to conceive, design and deliver Internet
infrastructure software solutions that enable our customers to deliver secure
transactions services using a broad range of Internet-enabled devices. Our
platform and applications currently enable consumers to access on-line banking
and brokerage services through network service providers using digital mobile
phones, personal digital assistants, two-way pagers and personal computers. With
critical security features built in, our products can be quickly implemented and
integrated with existing systems, and scaled or expanded to accommodate future
growth. Our platform and other products may be adapted for use by other types of
customers and for other applications. Although our customer base currently
consists of large financial institutions, we believe that in the future, we will
sell our products to large enterprises in other industries. We believe that the
merger with Tantau will help us move more quickly and efficiently to address
these new opportunities.
For the period from July 1997 to May 1999, we were in a development phase,
conducting research and developing our product. In May 1999, we launched our
product on a trial basis. During this trial, a limited number of Bank of
Montreal's customers were able to access banking and brokerage services and
lifestyle content, including news, stock quotes, weather, lottery results and
horoscopes, through Internet-enabled devices, specifically PalmPilot connected
organizers and mobile phones. This trial was completed in September 1999, and
was followed by a commercial launch during the summer of 2000.
During the period from May through December 1999, we filled key management
positions in our 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 our product. Since December 31, 1999, we have entered into license
agreements with affiliates of Citigroup to provide services in Asia and
Australia under our license agreement with Citicorp Strategic Technology
Corporation. We have also entered into license agreements with Hanvit Bank,
Wachovia Corporation, KeyCorp and Claritybank.com.
In September 2000, we introduced our LiveClips product, which is based upon
the technology acquired in our purchase of ezlogin. LiveClips is a comprehensive
aggregation tool designed to enable our customers to provide consumers with
wired or wireless access to a full suite of online accounts and other items of
personal interest. LiveClips enables users to access a variety of these accounts
by using a single user ID and password to sign-in to a secure and easy-to-access
location. MsMoney.com, a women's financial portal, has licensed LiveClips in
order to offer its customers a consolidated view of their Web-based accounts
through its MyMsMoney online financial management service, and Bank of Montreal
has announced the addition of LiveClips to its Veev service. Hanvit Bank and
KeyCorp have also announced plans to offer services based on LiveClips. Parker's
Edge, a provider of financial portal solutions based in New Zealand, has entered
into a distributor agreement with us in which they will provide aggregation
services related to our LiveClips product to its clients in Asia, Australia and
New Zealand.
Since our September 2000 acquisition of Spyonit, we have been offering
advanced notification services that enable our customers to provide consumers
with personalized intelligent alerts. In the summer of 2000, Morningstar.com
became the first customer of Spyonit to launch an alert service based upon
Spyonit technology. Since our acquisition of Spyonit, Hanvit Bank and KeyCorp
have also announced plans to offer the service to consumers. Our 724 alerts
platform will use the carrier-grade short messaging service gateway that we
acquired in our acquisition of YRLess to provide a more reliable way of
delivering alerts and notifications to end users.
Mobile access to the Internet is having a significant effect on the delivery
of financial services to consumers, and enables consumers to effect transactions
in new ways. As a group, we believe that
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on-line consumers generally 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 and other companies that seek to use the Internet to reach
consumers. Using our products to enable secure mobile transactions, we believe
that financial institutions and other companies can differentiate their services
to retain and strengthen their existing customer relationships and attract new
customers.
INDUSTRY OVERVIEW
GROWTH OF THE INTERNET
The Internet has emerged as a global communications medium to deliver and
share information and conduct business electronically. The dramatic growth in
the number of Internet users has led to a proliferation of information and
services on the Internet, including financial services, e-mail, e-commerce, news
and lifestyle content. We believe that consumers are increasingly seeking
personalized and practical Internet applications that they can use in their
daily activities.
GROWTH OF DIGITAL WIRELESS COMMUNICATIONS
Digital wireless communications have grown rapidly due to declining consumer
costs, expanding network coverage, the availability of extended service features
such as voice and text messaging and the proliferation of wireless devices.
These wireless devices include personal digital assistants such as PalmPilot
connected organizers, 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. 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. Cahners In-Stat Group
estimates that the number of wireless Internet subscribers worldwide will grow
from approximately 3.8 million at the end of 1999 to approximately 742 million
at the end of 2004. We expect that the convergence of wireless communications
and the Internet will enable the delivery of wireless multimedia applications,
including voice, data, image and video. International wireless technology
groups, such as the Wireless Application Protocol Forum and the Symbian
Alliance, have created global standards for the transmission of wireless
applications, which we believe will help lead to increased penetration of the
market for wireless devices and services.
GROWTH OF E-COMMERCE
With the emergence of the Internet as a globally accessible, fully
interactive medium, many individuals and companies that have traditionally
conducted business in person, through the mail or over the telephone now
increasingly conduct business electronically. We expect that consumer use of
e-commerce will accelerate as more individuals gain access to the Internet, as
the cost of Internet access decreases and as security concerns are alleviated.
In some parts of the world, particularly in a number of European and Asian
countries, e-commerce opportunities have been limited because credit cards,
which are currently the only secure form of on-line payment, are not widely
used. We expect these consumers to embrace e-commerce once a direct payment
system is available. International Data Corporation (IDC) estimates that
Internet users worldwide purchased more than $131 billion in goods and services
in 1999, increasing to $2.6 trillion in 2004.
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GROWTH OF SECURE MOBILE TRANSACTIONS
As the mobile Internet continues to grow and evolve, the focus of user
activity is expanding beyond basic content delivery applications. E-mail and
other forms of messaging that facilitate mobile person-to-person communications
have begun to drive accelerated adoption of wireless data devices and services.
We expect that the next major type of functionality this market will demand is
the ability to conduct secure mobile transactions, with a particular emphasis on
banking, brokerage and m-commerce. According to IDC, m-commerce in the
U.S. would generate $29 million in transactions in 2000 and grow to
$20.8 billion in transactions in 2004. ARC Group estimates that after personal
information management and entertainment, financial services is the most popular
category for wireless data users. With convenient access, mobile transactions
can be faster, less expensive and easier than transactions conducted through a
broker, teller, ATM or bricks-and-mortar storefront. In addition, the
location-based capabilities made possible by wireless network and device
technology facilitate the creation of a personalized, context sensitive user
experience that is unique to the mobile environment.
As in the on-line context, however, consumer concerns about the security of
their sensitive financial and payment information is a key hurdle to be overcome
for mass adoption of mobile transaction technology to occur. Traditional
financial institutions are well positioned to respond with strategies that build
on their unique trust relationship with consumers and the strengths of their
traditional channels and services to overcome these security concerns. We
believe that the increasing popularity of new Internet-enabled devices will help
generate greater demand for mobile financial services and provide an opportunity
for financial institutions to drive adoption of banking, brokerage, m-commerce
and other secure transaction services to their large and attractive customer
base.
To execute these strategies, large financial institutions will require a
solution that enables their existing systems, which we believe were generally
not designed to facilitate mobile transactions, 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 fault-tolerant 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.
BUSINESS STRATEGY
Our objective is to become the leading provider of Internet infrastructure
software that permits secure transactions using a broad range of
Internet-enabled devices. Our strategy is to:
EXPAND OUR REACH: Our initial focus has been to provide our products to
large financial institutions worldwide, particularly banks and brokerage firms.
We believe that large financial institutions have both the scale and global
consumer base to maximize the adoption of services based on our products.
Citigroup, Bank of America, Wells Fargo, Hanvit Bank, Bank of Montreal, Wachovia
Corporation, KeyCorp and Claritybank.com are in various stages of implementing
our solution. We believe that the trust relationship these institutions have
with consumers, combined with our secure payment infrastructure, will accelerate
consumer adoption of mobile transactions. Once we have established a significant
presence in the financial services sector, we expect to use many of the
components of our architecture in other markets such as insurance, sales force
management and logistics.
ACCELERATE WORLDWIDE ADOPTION OF OUR SOLUTION: In an effort to encourage
rapid deployment of our solution by financial institutions and other customers,
we are:
- Establishing relationships worldwide with wireless and other network
service providers, device manufacturers and content and technology
providers;
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- Providing a compelling consumer experience through a consistent,
user-friendly interface on a variety of Internet-enabled devices;
- Building worldwide application hosting services for our customers, which
will help allow for quick delivery of services to consumers, as well as a
managed contact center service, which will help ensure a rich initial
consumer experience; and
- Reducing our customers' initial cost of using our solution by charging a
variable license fee based on the number of users per month, subject to
specific minimum fees.
EXPAND THE FUNCTIONALITY OF OUR PLATFORM: Our architecture is designed to
be extendable, enabling our customers to continue to offer additional on-line
services across a variety of protocols, operating systems, networks and devices
to maximize consumer reach. We expect to further expand our reach by supporting
additional devices and broadening our functionality by introducing new
applications, content and services. For example, we plan to integrate into our
solution public key infrastructure (PKI) technology, which facilitates the
management of the tools necessary to ensure authentication of user identity and
the non-repudiation of transactions. We believe that this security feature is
essential for the widespread adoption of e-commerce and m-commerce transactions.
Additionally, we work with developers of new technologies to, among other
things, gain early access to device, wireless and network advancements.
PURSUE SELECTIVE ACQUISITIONS TO EXPAND OUR CAPABILITIES: We intend to
continue to pursue acquisitions of companies and technologies that we believe
will allow us to quickly increase the scale and scope of our operations, such as
expanding our research and development team, expanding into new geographical
markets and industry sectors and providing new services.
724 SOLUTIONS -- CUSTOMER BENEFITS
We believe that our products enable customers to maintain and deepen
consumer relationships and accelerate the adoption of Internet-based financial
services and other transactions. Our products can be rapidly implemented,
integrate easily with existing systems, address security issues, are scalable
and provide a robust platform for future growth. Key benefits of our products
include:
- SPEED TO MARKET: Our products, whether installed in a customer's
operations center or operated as a service through our application hosting
group, can be rapidly deployed by a new customer, branded and offered to
consumers.
- EASE OF INTEGRATION WITH EXISTING SYSTEMS: Our 724 platform and other
products link to a customer's existing systems, enabling customers to
preserve their existing investment, and to extend the productivity and
functionality of their existing infrastructure to new electronic channels.
- SECURITY: The security framework of our 724 product offerings address the
stringent security standards of financial institutions, creating an
environment of trust for consumers and allowing our customers to offer
transactions and other services with reduced fraud-related concerns.
- SCALABILITY AND MANAGEABILITY: Our 724 platform and other products are
designed to add users efficiently and effectively. We believe that our
products can support significant growth in users with little increase in
infrastructure. Our 724 platform has a built-in set of tools to easily
manage recovery, redundancy and deployment.
- ABILITY TO EXPAND FUNCTIONALITY: Our 724 platform is designed to
facilitate the addition of new applications, devices, content and
services. It provides a robust basis for the growth of electronic
financial services and e-commerce.
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- MAINTAIN AND DEEPEN CONSUMER RELATIONSHIPS: Our product offerings allow
financial institutions and other customers to connect directly with
consumers wherever they can obtain wired or wireless Internet access. Our
products also allow consumers to set up their own personal preferences and
alerts for an easy-to-use experience. The information contained in the
personalization and notification databases provides our customers with a
competitive advantage in building consumer loyalty through the delivery of
value-added services.
We believe that our products benefit our customers and the companies with
which we have relationships by enabling the delivery of differentiated wireless
and wireline financial services, and other types of m-commerce transactions.
These services help increase consumer loyalty and drive wireless airtime usage,
consumer electronic device sales, and the purchase of other products and
services.
THE 724 SOLUTIONS PRODUCT OFFERING
Our products enable 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. This technology is
extendable across a variety of protocols, operating systems and networks,
enabling our customers to deliver personalized transactions, services and
information to consumers over a wide range of communications networks.
Our product offering consists of two categories of components: a base
technology layer called the 724 platform, and a suite of features and functions
for consumers, the 724 applications, which can be used together with the
underlying platform infrastructure.
724 PLATFORM
The 724 platform enables connectivity to the back-end systems of financial
institutions, merchants, content providers and other types of enterprises. The
724 platform facilitates communications with various wireless and wireline
networks and devices, manages a user's session and network security, provides
system administration tools, and provides a broad set of application services in
support of the 724 applications.
NETWORK AND DEVICE GATEWAY. The network gateway transforms enterprise data
into formats suitable for use in a wide variety of wired and wireless networks,
including Code Division Multiple Access (CDMA), Global System for Mobile
Communication (GSM), Time Division Multiple Access (TDMA), Cellular Digital
Packet Data (CDPD), Mobitex and Internet Protocol. Almost all digital mobile
systems worldwide use one of these major types of wireless access formats for
voice and data communications. This gateway enables our customers to quickly
deploy their services through multiple network service providers and allows for
new protocols to be supported without changes to their existing architecture.
The device gateway supports the presentation of our applications on multiple
devices. It recognizes the type of device a consumer is using and optimizes the
format of the information for the characteristics of that particular device
type. Our software automatically formats information delivered to a device using
style sheets programmed in Extensible Markup Language (XML) or Extensible Style
Language (XSL), which are widely used languages in Internet communications. This
approach enables our customers to deliver services over many types of access
devices, and allows new devices to be supported without changes to our
architecture. The network and device gateway ensures consumers receive a
consistent and user-friendly experience regardless of the device used.
PERSONALIZATION. Our solution enables consumers to customize their services
through a single set-up procedure. Once completed, a consumer's preferences are
stored in a unique profile on the network rather than on a specific device.
Thereafter, a consumer may use any Internet-enabled device to access his or her
account to retrieve information and conduct transactions without repeating the
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set-up procedure. Changes in preferences made by a consumer on one device will
automatically be reflected on all other devices used by that consumer.
TARGETED MARKETING SERVICES. Using data generated from personalized
profiles, our customers have the ability to gain a better understanding of their
consumers' needs and interests. Our targeted marketing service can be used to
allow the distribution of information directly to their consumers with
personalized messages or services based on their preferences.
SESSION MANAGEMENT. Our 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 our products to be
managed within a customer's existing computer infrastructure. Through this
function, 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 capabilities can be integrated with popular systems management
tools, allowing our products to be monitored as part of a customer's overall
computing environment. We provide a feed into a data warehouse of all
transactions recorded by the system.
TRANSACTION AND CONTENT GATEWAY. The 724 platform interfaces with the
existing systems of our customers through the transaction and content gateway.
This connection is typically 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 through an
Extensible Markup Language (XML) interface. If a customer does not support OFX
or XML, however, the 724 platform link toolkit can facilitate message mapping to
different data sources and/or systems, with minimal impact on our customers' IT
infrastructures.
SECURITY. Our security framework is based on a strict methodology of threat
evaluation, risk analysis and policy creation, designed to address
authentication, authorization, privacy, integrity and non-repudiation. A
conventional user ID/password mechanism provides user identification and
authentication. Our software incorporates standard cryptography protocols that
ensure the confidentiality of communications between servers, including Secure
Socket Layer (SSL) and Transport Layer Security (TLS), enhanced with Elliptical
Curve Cryptography (ECC) cypher-suites from Certicom, to ensure the privacy of
transactions and communications. These security technologies require minimal
computing power for encrypting and decrypting messages, making them well suited
for secure communications to wireless handheld devices. We are currently working
to incorporate Public Key Infrastructure (PKI) technology into our applications
to provide additional support for user authentication and non-repudiation. Use
of PKI technology, which supports digital signatures, is expected to grow as a
means of creating a secure e-commerce and m-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 and m-commerce
services with reduced fraud-related concerns.
724 APPLICATIONS
FINANCIAL SERVICES APPLICATIONS. Our financial services applications enable
our customers to offer consumers the ability to execute a variety of banking and
brokerage inquiries and transactions, using a wide range of Internet access
devices. Our banking functionality includes account information and statements,
credit card statements, intra-bank transfers, bill payment and commercial cash
management. We also expect to offer bill presentment during 2001 based upon
technology developed through our relationship with CheckFree. Our brokerage and
security functionality includes order placement and
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confirmation, balances and open orders, holdings and transaction records,
investment statements, trading data and charting, detailed stock quotes and
watch lists.
LIVECLIPS. Our LiveClips product, based on the technology obtained through
our ezlogin acquisition, enables our customers to offer consumers services with
which they can create personalized summaries of information gathered from
different websites. This information can include financial data gathered from
the websites of financial institutions, as well as almost any other type of
informational content. LiveClips delivers this customized information by
automatically logging in to different sites using credentials such as passwords
made available by the consumer during the registration process. Once logged-in
to the service, LiveClips is able to, through a series of software programs,
automatically retrieve and display key pieces of data, such as a consumer's bank
account balance, in a personalized display that can be accessed from a PC or
different types of wireless Internet-enabled devices.
We believe that customers may use our LiveClips product to establish
personalized services for consumers that offer enhanced value by aggregating
information from multiple websites and making them available in a single secure
and convenient location. Value-added services such as financial advice may also
be offered based upon analysis of the aggregated data.
724 ALERTS PLATFORM. The 724 alerts platform, which is being enhanced
through the addition of the technology obtained in the Spyonit acquisition,
allows users to be alerted when specific events occur, through a wide variety of
PCs and other Internet-enabled devices. Messages may be delivered through
e-mail, mobile phone text messages, pagers and Internet instant messaging
services. Users may set triggers as to different types of information or events
of interest through a menu of alert options that can be accessed using a
personal computer. The architecture supports a wide variety of alert types
including those that are based upon the information on a website, such as sport
scores, stock prices or merchandise prices, or proprietary data such as
financial information feeds. The 724 alerts platform provides tools for creating
many different types of alerts and alert options which can be used by our
customers to build a more personalized experience for consumers, particularly
for consumers who prefer to be notified of an event, rather than checking for
information on an ongoing basis.
M-COMMERCE APPLICATIONS. We are developing technologies that will enable
financial institutions and other customers to offer consumers and merchants the
ability to conveniently and securely engage in mobile commerce. These
applications will complement our LiveClips product and 724 alerts platform by
providing a secure means to transact in response to the purchasing information
provided by these personalized tools. In addition, we believe that the PKI
technology we are developing will enable us to add strong authentication
capabilities as an enhancement to the current encryption-based security
solution.
Our initial focus in m-commerce will be on developing shopping applications,
establishing the ability to connect to the key participants in a commerce
transaction, and facilitating secure payments between these parties. Our
shopping applications will provide consumers with different types of tools for
identifying and selecting the desired product or service. For example, consumers
will have the ability to make an immediate purchase in response to an alert
about event tickets going on sale. Our open connectivity initiative will build
on our ability to connect to financial institution systems by establishing
interfaces to merchant systems and gateways to the digital wallet services that
enable online payments, such as the wallet gateway we are currently developing
with Brodia. In their position as trusted m-commerce intermediaries facilitating
secure mobile transactions, our customers will be better able to strengthen
relationships with their clients and gain access to additional revenue streams.
CONTENT APPLICATIONS. Our content applications enable our customers to
offer consumers lifestyle content such as news, weather, horoscopes and lottery
results sourced from a variety of content providers. This content complements
the other 724 applications and helps to create a more personalized and
compelling experience for the consumer.
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APPLICATION HOSTING SERVICES
In order to enable our customers to implement our platform rapidly, we
provide secure application hosting services. These services enable our customers
to operate the software upon which our 724 platform and our applications are
based, using equipment maintained and supported by us or by one or more third
parties. Some of our existing and potential customers are also seeking that we
host other third party applications, in addition to having us remotely manage,
administer and support their services that are based upon our platform and which
are operated in their own data centers.
We seek to provide these services on a worldwide basis, using facilities
based in Europe, Asia and North America. We already have two facilities
established in North America. Our hosting services are designed to be
implemented using a co-location model, which involves our obtaining network
connections to servers that are housed together by a provider in one or more
related facilities. We believe that this model allows us to offer consistent and
standardized service across multiple continents utilizing the services of any
major provider of hosting services.
We have chosen Exodus Communications, a leader in providing complex Internet
data center facilities and managed services, as the initial provider of hosting
services for our application operations. We may also obtain the services of
additional providers. We have established a North American application
management center that became operational in June 2000. This center is comprised
of experienced professionals who manage our hosting services. From the center,
we remotely manage, monitor and support all hosted operations of our
applications, regardless of their location. Most of the services delivered by
our current customers are hosted through this service.
Our customers may also elect to not use our application hosting services, in
order to host services based upon our solution in their own facilities or
through a third party. Through the experience that we have acquired in making
the services based upon our platform operational, we also offer these customers
consulting services relating to data center operations implementation.
In the summer of 2000, in connection with the roll-out of our application
hosting services, we established our network operations center in Toronto. The
center is designed to monitor and manage our applications that run on the
computer systems which are located at, and managed by, the companies that
provide us with hosting services. Through these arrangements, we believe that we
are able to obtain reliable services such as physical security, power and
communications from providers such as Exodus, while using our own personnel to
manage our proprietary advanced applications which run on these hosted computer
systems.
CONTACT CENTER SERVICES
We offer contact center services to our customers which allow them to
support the end users of our 724 product offerings. We believe that these
services help enhance consumer satisfaction with the wireless services that our
platform enables.
We can provide two main levels of service through these centers:
- an enabling solution, designed to operate from our customers' own call
centers; and
- an outsourced solution, which we manage in a facility staffed by SITEL, a
leading provider of customer relationship services.
We also can provide a range of professional services supporting our
customers' call center operations.
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CUSTOMERS
We currently market our product and services to large financial institutions
such as banks and brokerages. Citigroup, Bank of America, Wells Fargo, Hanvit
Bank, Bank of Montreal, Wachovia Corporation, KeyCorp and Claritybank.com. In
addition, we believe that in the future, a substantial portion of our customer
base will consist of large enterprises in other industries.
CITIGROUP
In August 1999, Citigroup announced its intention to implement our solution
worldwide under the leadership of its e-Citi division. In December 1999, we
entered into a master technology license agreement with Citicorp Strategic
Technology Corporation, a subsidiary of Citigroup, which will enable us to
license our technology to Citigroup's subsidiaries. To date, we have entered
into an agreement under the master technology license agreement with a Citigroup
affiliate in Singapore, and we have entered into a similar agreement with
Salomon Smith Barney in Australia. We also expect to enter into one or more
additional agreements with these and other Citigroup affiliates that will enable
us to deliver our solution to their customers.
BANK OF AMERICA
In the third quarter of 2000, Bank of America launched its first wireless
banking and brokerage offering in the United States. Based on our 724 platform,
the Bank of America wireless service will allow consumers to conduct a variety
of secure, real-time banking transactions and access financial markets and
investment information on a range of mobile phones and Palm handheld devices and
organizers. The initial roll-out of this service will be available to Bank of
America Private Bank clients in Dallas and Fort Worth, Texas, Baltimore,
Maryland and Washington, D.C. Bank of America has announced that it plans to
roll out its wireless service to its customers in other U.S. markets over the
next 12 to 18 months.
WELLS FARGO
In September 1999, Wells Fargo entered into a licensing agreement with us
that will enable it to begin to deliver on-line banking services via wireless
devices to its customers during 2000. Wells Fargo introduced these services in a
trial to 1,000 consumers in the summer of 2000.
HANVIT BANK
In November 2000, we announced a new customer relationship with Hanvit Bank,
a leading financial institution in South Korea. Hanvit plans to use our products
to provide wireless banking and investment services, as well as aggregation and
alerts. We believe that Hanvit is the first Korean financial institution to
announce plans to offer aggregation and personalized alerts services to its
customers. Hanvit's offering is currently scheduled to be introduced in the
first half of 2001 in both the Korean and English languages.
BANK OF MONTREAL
In May 1999, our 724 platform enabled Bank of Montreal to become the first
financial institution in North America to launch an integrated wireless banking
and brokerage application in a market trial with approximately 350 users. As of
September 30, 2000, there were 6,000 subscribers to the service. 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
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service for customers of Investorline, its discount brokerage service. In
October 2000, Bank of Montreal began a test market trial of our LiveClips
aggregation product. LiveClips is designed to enable the Veev service to offer
customers single sign-on access to a consolidated view of financial information
from multiple websites.
In March 2000, Harris Bank, a U.S. subsidiary of Bank of Montreal, commenced
a trial of the Veev service to its customers in the Chicago, Illinois area, and
in July 2000, began to roll out wireless banking and investment services to its
customers generally.
WACHOVIA CORPORATION
Wachovia has licensed our technology and subscribed to our application
hosting services, to extend its real-time, 24-hour electronic banking and
financial services to a broad range of popular wireless and consumer electronic
devices. We plan to work with Wachovia to develop and deploy separate retail and
commercial wireless financial services offerings, each specially designed to
meet the needs of Wachovia's retail and corporate customers. Wachovia has also
licensed our technology for retail brokerage services.
In November 2000, Wachovia launched wireless commercial banking services
enabled by our 724 platform. Wachovia, one of the first U.S. banks to offer
wireless commercial financial services, is using our application hosting and
contact center services to support its rollout. Wireless access to Wachovia
Connection Plus, an Internet-based cash management product, allows corporate
customers to access real-time account information through Internet-enabled
phones. The 724 platform enables Wachovia's treasury clients to securely and
conveniently view, pay, issue or return positive pay exceptions, to retrieve an
intraday position report, to view summary account information, and to view,
approve or cancel payments through wireless access to Wachovia Connection Plus.
KEYCORP
In September 2000, we entered into a pilot agreement with KeyCorp which will
enable KeyCorp to introduce interactive wireless banking services to its
Internet banking customers. KeyCorp's wireless banking services, based on our
724 platform, will allow customers to access real-time account information,
transfer funds between accounts, pay bills and access stock-market information
on a variety of Internet-enabled wireless devices, such as digital mobile
phones, pagers and personal digital assistants.
In November 2000, we entered into a licensing and consulting services
agreement with KeyCorp relating to our LiveClips and alerts technology.
LiveClips will enable KeyCorp to offer consumers secure, single sign-on access
to all of their Internet-based accounts and content in one consolidated view.
BBVA BANCOMER
In July 2000, we announced an agreement with BBVA Bancomer, under which BBVA
Bancomer may use our products to enable mobile wireless banking for its
customers throughout Mexico and Spanish-speaking communities in the U.S. Our
724 platform would enable BBVA Bancomer customers to use a wide range of
Internet-enabled devices such as mobile phones, personal digital assistants and
pagers to gain access to their real-time financial information, including
account information and statements, transaction details, intra-bank transfers
and bill payments, along with value-added content such as news, weather and
financial market updates. This service can be offered in both Spanish and
English.
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CLARITYBANK.COM
Claritybank.com 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 to offer wireless service to
its entire customer base. In February 2000, we entered into an agreement to
license our solution to Claritybank.com. In November 2000, Claritybank.com
launched its first offering of wireless banking services to its entire customer
base. Claritybank.com is the first Internet-only financial institution to deploy
our technology, and one of the first national banks to deliver wireless services
to its customer base across the U.S.
TECHNOLOGY
Our open-architecture platform communicates with our customers' systems
primarily using an industry standard called Open Financial Exchange (OFX). Our
services support connectivity with a variety of protocols, including Internet
protocol. Our services run on the Windows NT and the Sun Solaris operating
systems. We believe that our open architecture allows us to rapidly integrate a
wide range of new technologies, in order to enhance the functionality and
reliability of our solution.
Our architecture complies with Common Object Request Broker Architecture
(CORBA), a standard for application software design used widely in the software
industry. We also use other widely accepted standards in developing our product,
including:
- 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.
We are 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.
Our programs are written in C++ and Java, widely accepted standard
programming languages for developing object-oriented applications. We also make
extensive use in our software applications of Extensible Markup Language (XML),
which was completed by the World Wide Web Consortium in 1998, and Extensible
Style Language (XSL).
RESEARCH AND DEVELOPMENT
As of September 30, 2000, our research and development department consisted
of 244 employees. These units are responsible for assessing new technologies,
new release schedules, product architecture, security, performance engineering,
product requirements, quality assurance and product support.
Our research and development expenditures were $2.2 million for the year
ended December 31, 1998, $7.3 million for the year ended December 31, 1999, and
$20.8 million for the nine months ended September 30, 2000.
In August 1999, we established an advanced technology center. Our advanced
technology center is primarily a research center focused on rapidly developing
innovative technologies from the concept stage to the prototype stage. The
advanced technology center's main objectives are to gain early access to
emerging technologies, improve our products and services, expedite deployment to
our customers
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and create mutually beneficial relationships with customers, network service
providers and device manufacturers. As of September 30, 2000, the advanced
technology center employed seven individuals with expertise in specialized areas
such as carrier, database and encryption technologies.
In July 1999, we established a performance engineering group. The objective
of this group is to establish benchmarks for our technology, to recommend and
validate reference architectures and to provide feedback to the architecture and
product groups. We invest heavily in performance engineering to ensure that our
products will be scalable for large numbers of users and transaction volumes.
SALES, MARKETING AND CUSTOMER SUPPORT
As of September 30, 2000, we employed 32 people in sales in North America,
Europe and Asia Pacific. In addition, as of September 30, 2000, we employed 16
people in our marketing department. Our sales employees generally receive
incentive compensation based on individual sales volume. Deloitte & Touche,
through a strategic relationship, assists us in implementing our products with
large financial institutions worldwide.
We offer our customers consulting services to assist in the installation and
deployment of our products, as well as ongoing product support. Services offered
during installation include training, configuration, and connectivity to
existing systems. We believe that our customer support and consulting services
result in improved customer satisfaction and loyalty, a shorter sales process,
faster implementation and an increase in the sales of our product.
Our personnel typically work directly with our customers' in-house personnel
to implement our solution. We bring together and coordinate the technology and
resources needed to deliver a single solution to customers who do not wish to
use their in-house resources to implement our products.
STRATEGIC RELATIONSHIPS
We are establishing worldwide relationships with wireless and other network
service providers, content portals, device manufacturers, technology companies
and content providers to facilitate the adoption of our customers' 724-enabled
products and services. We anticipate that some of these relationships will lead
to formal arrangements in which we will incorporate new technologies into our
platform, or in which we will adapt our solution to support new types of
devices. Through strategic relationships, we seek to gain technological
leadership, worldwide access and positioning and an early awareness of emerging
Internet technologies. We believe that our participation in the development of
these technologies at an early stage provides us with a competitive advantage to
bring new products and services to our customers.
We are working with network service providers, such as AT&T Wireless, Bell
Mobility and Sprint; data center service providers, such as Exodus
Communications and Singapore Telecom; device manufacturers, such as 3Com,
Ericsson, Motorola, Neopoint, Nokia, Qualcomm and Research In Motion; software
and technology companies, such as Sonera SmartTrust, Neomar, Edge Matrix,
Baltimore Technologies, Certicom, Sun Microsystems, CheckFree and Brodia;
financial services firms, such as MasterCard; channel/distribution companies,
such as Corillian Corporation, Parker's Edge, CrossMar, Inc. and Politzer &
Haney; system integrators, such as Deloitte & Touche; strategy consultants, such
as McKinsey & Co.; and content providers, such as Maptuit, Bridge, Reuters,
Morningstar and Sina.com. We believe that our solution benefits each of these
types of companies, as greater demand for digital wireless financial services
helps increase consumer loyalty and drive wireless airtime usage, consumer
electronic device sales and the consumption of other products and services.
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COMPETITION
The market for our products and services is becoming increasingly
competitive. The widespread adoption of open standards may make it easier for
new market entrants and existing competitors to introduce products that compete
against ours. We believe that we will compete primarily on the basis of the
quality, functionality and ease of integration of our products, as well as on
the basis of the price. As a provider of a comprehensive Internet solution to
financial institutions, we assess potential competitors based primarily on their
management, functionality and range of services, the security and scalability of
their architecture, their client base and geographic focus and their
capitalization and other resources.
Our current and potential competitors include:
- FINANCIAL INSTITUTIONS WITH IN-HOUSE SOLUTIONS: Financial institutions
that develop their own in-house solution with internal expertise and
outsourced service providers and products are a primary source of
competition. These include Celestial Securities Limited's wireless trading
service in Hong Kong; the wireless trading capability developed by
Fidelity using Research In Motion's two-way pagers; the wireless trading
service offered by DLJ Direct (a subsidiary of Credit Suisse First Boston)
in the U.S.; and the wireless brokerage service provided by the on-line
broker Fimatex in France.
- SOFTWARE VENDORS FOCUSED ON FINANCIAL INSTITUTIONS AND OTHER LARGE
COMPANIES: Competitors include Aether Systems and w-Technologies. 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. Tantau
was a potential competitor to us in this category, and will continue to be
one if our merger is not completed.
- 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
i-Mode service. Other network service providers with advanced wireless
data service initiatives include US West, Bell Atlantic, AT&T Wireless
Data Services, Nextel, VodafoneAirtouch and Voicestream in the U.S.,
Vodafone, British Telecom, Cellnet, Orange and One 2 One in the U.K.,
Deutsche Telecom in continental Europe, J-Phone, DDI and IDO in Japan,
SingTel, MobileOne and StarHub in Singapore, and Telstra, Optus and
Vodafone in Australia.
- DEVICE MANUFACTURERS: Ericsson, Nokia, Motorola and other large wireless
device manufacturers are attempting to sell their technology to financial
institutions and other enterprises in our primary markets. These
manufacturers may market to these potential customers their own technology
and technology of our competitors in a manner that may reduce our sales.
- 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 Openwave and
Microsoft, are positioning themselves to provide 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 also potential competitors, including Qualcomm Wireless
Business Systems, Broadbeam, Dynamic Mobile Data and Mobimagic Co., a
newly formed joint venture between Microsoft and NTT Mobile.
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INTELLECTUAL PROPERTY
We protect our proprietary technology through a combination of contractual
confidentiality provisions, trade secrets, and patent, copyright and trademark
laws. We have applied for registration of several trademarks, including
"724 Solutions," "724 Solutions & Arrows Design," "724 Solutions Financial
Services Platform," "Tellmewhen," "Tellmewhen.com," "Secureofx," "Poet,"
"E-Anywhere," "724 Solutions & Design," "Your Customer is in Motion,"
"PartnerExpress," "Liveclips," "Clip and Paste," "EZLogin," "JumpPage,"
"Login.com," "Surfroom," "Dimecuando" and "Dimecuando.com." To protect our
trademarks throughout the world, we have applied for registration of some or all
of our trademarks in Europe, Canada, the United States, the United Kingdom,
Japan, Australia and Mexico. Besides "724 Solutions," which has been registered
in the U.K., none of these trademarks has yet been issued.
We have also applied for patents for applications relating to our mobile
commerce technology, our 724 platform and our LiveClips product. We have applied
for patent protection in Canada, the United States, Taiwan, Malaysia, the
Philippines and through the Patent Cooperation Treaty, which is an international
patent application designating multiple countries. To date, none of these
patents has been issued.
There can be no assurance that the confidentiality provisions in our
contracts will be adequate to prevent the infringement or misappropriation of
our 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 our trade secrets, software or other
technology. Moreover, the laws of some foreign countries may not protect our
proprietary rights to the same extent as do the laws of Canada and the United
States. Therefore, the measures taken by us may not adequately protect our
proprietary rights.
We rely heavily on technology and other intellectual property licensed to us
by third parties. For example, we have entered into license agreements with
Certicom and Consensus for use of their encryption technology. In addition, we
use certain third party software that may not be available to us on commercially
reasonable terms or prices or at all in the future. Moreover, some of our third
party license agreements are non-exclusive and, therefore, our competitors may
have access to some of the same technology.
To date, we have not been notified that our product infringes on the
proprietary rights of third parties, but third parties could claim infringement
by us with respect to our existing or future products. Any claim of this kind,
whether or not it has merit, could result in costly litigation, divert
management's attention, cause delays in product installation, or cause us to
enter into royalty or licensing agreements on terms that may not be acceptable
to us.
In October 2000, we received a letter from Tellme Networks, Inc., a
developer of Internet-related telecommunications services, claiming that our use
of our "TellMeWhen" mark relating to our notification services in the U.S. will
infringe that company's rights. To date, we have not received notice of any
litigation with respect to this issue, and believe that we have meritorious
defenses to this claim.
EMPLOYEES
As of September 30, 2000, we had a total of 460 employees. None of our
employees are covered by any collective bargaining agreements.
PROPERTIES
Our principal offices are located in Toronto, Ontario. We have also rented
offices in New York, New York; San Francisco, California; Cupertino, California;
Concord, California; Chicago, Illinois; London, U.K.; Paris, France; Sydney,
Australia; Tokyo, Japan; Hong Kong and Barbados. We believe that we will need to
obtain additional facilities as we expand our international operations, and
increase the size of our organization.
LEGAL PROCEEDINGS
We are not currently a party to any material legal proceedings.
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724 SOLUTIONS -- MANAGEMENT
The following table sets forth information about our directors and executive
officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
---- -------- ------------------------------------------------------
<S> <C> <C>
Gregory Wolfond...................... 39 Chairman, Chief Executive Officer and Director
Christopher E. Erickson.............. 35 President and General Counsel
Andre Boysen......................... 36 Chief Technology Officer
Karen Basian......................... 38 Chief Financial Officer
Mina Wallace......................... 45 Executive Vice-President of Field Operations
Alistair Rennie...................... 35 Executive Vice-President of Marketing
Christopher Jarman................... 41 Executive Vice-President, Mobile Commerce
David Pasieka........................ 43 Senior Vice-President, Application Hosting
Richard Costolo...................... 37 Senior Vice-President, Notification Services Spyonit
Lloyd F. Darlington.................. 55 Director
Martin A. Stein...................... 60 Director
James D. Dixon....................... 57 Director
Harri Vatanen........................ 38 Director
Alan Young........................... 34 Director
Heather Reisman...................... 52 Director
Barry J. Reiter...................... 52 Director
Holger Kluge......................... 58 Director
J. Robert S. Prichard................ 51 Director
</TABLE>
GREGORY WOLFOND. Mr. Wolfond co-founded our company in July 1997 and has
served as Chief Executive Officer and a director since September 1997 and
Chairman since April 1998. In 1987, Mr. Wolfond founded Footprint
Software Inc., a financial services software company specializing in
object-oriented agent and sales technologies with an emphasis on branch
automation. At Footprint, Mr. Wolfond helped to develop systems designed for
ease of use across large financial institutions. IBM purchased Footprint in
May 1995, and Mr. Wolfond continued to serve as Chief Executive Officer of
Footprint until July 1997. While at IBM, Mr. Wolfond helped develop IBM's
network computing technology for the financial services industry. Mr. Wolfond
has a BA in Computer Science from the University of Western Ontario. After the
completion of the merger, Mr. Wolfond will resign from his position as Chief
Executive Officer, but will retain his position as Chairman.
CHRISTOPHER ERICKSON. Mr. Erickson co-founded our company with
Mr. Wolfond. He has served as President and General Counsel since our inception
and as a director between July 1998 and July 2000. Mr. Erickson also served as
corporate secretary until July 2000. In 1989, he founded Cygnus Computer
Associates Ltd., a software engineering firm that specialized in developing
client-server applications. While continuing to act as President of Cygnus he
joined Fasken Campbell Godfrey, a Canadian law firm, as a corporate/commercial
technology lawyer in 1994. In July 1997 he sold his interest in Cygnus and left
Fasken Campbell Godfrey to start our company. He is a director of the
Washington, D.C. based Computer Law Association and Chairman of the E-Commerce
Subcommittee of the Investment Funds Institute of Canada. He has also served as
a director of the Foundation for Responsible Computing and as a director and
general counsel to the Interactive Multimedia Arts and Technologies Association.
Mr. Erickson is a graduate of the computer engineering program (B.Sc.) at the
University of Waterloo and of the University of Toronto Law School (LLB). He is
a licensed professional engineer (P.Eng.) and a lawyer qualified to practice in
Ontario.
ANDRE BOYSEN. Mr. Boysen has served as our Chief Technology Officer since
March 1998, and served as a director between July 1998 and July 2000. He has
extensive experience in the financial software and telecommunications industry.
Mr. Boysen acted as Chief Technology Officer for Footprint between March 1996
and March 1998. As CEO of Footprint's Asia Pacific operations between 1994
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and 1996, he established its operations in Australia, New Zealand, Hong Kong,
Singapore and Thailand. Between 1990 and 1994, he served as CEO of Open Systems
Limited, which developed turnkey client-server systems for several large
companies. He sold his interest in Open Systems when he joined Footprint.
Mr. Boysen has a B.Sc. in Computer Engineering from the University of Ottawa and
an MBA from the Richard Ivey School of Business at the University of Western
Ontario.
KAREN BASIAN. Ms. Basian joined our company as Chief Financial Officer in
February 1999. In September 1994, she joined Frito-Lay as Finance Director of
Hostess Frito-Lay, and became Director of Strategic Planning for Frito Lay North
America in July 1995. She served as Chief Financial Officer and Vice-President,
Finance at Hostess Frito-Lay from September 1996 to February 1999. She has also
held positions with Bain & Company, from March 1989 to August 1994, where she
served as a consultant, and with Deloitte & Touche, from September 1984 to
December 1987, where she specialized in international tax. Ms. Basian has an
Honors degree in Business Administration from the University of Western Ontario,
an MBA from IMD, Lausanne, Switzerland and is a Chartered Accountant.
MINA WALLACE. Ms. Wallace joined our company in April 1999 as Executive
Vice President of Field Operations. In 1991, she joined PeopleSoft Canada as
Vice President of Sales, and became General Manager of Sales in 1996. Between
1986 and 1991, she held an executive sales position at Dun & Bradstreet
Software. Ms. Wallace has a Bachelor of Education and an MBA from the University
of Manitoba.
ALISTAIR RENNIE. Mr. Rennie joined our company in April 1999 as Senior Vice
President of Marketing, and was promoted to Executive Vice President of
Marketing in July 2000. In 1989, Mr. Rennie joined IBM as a business analyst and
held various product management and marketing positions with IBM until
April 1999, becoming Program Director, Applications Server Marketing, in 1997.
Mr. Rennie has a BA in Economics and an Honors degree in Business Administration
from the University of Western Ontario.
CHRISTOPHER JARMAN. Mr. Jarman has served as our Executive Vice President,
Mobile Commerce, since August 2000. Between 1995 and July 2000, Mr. Jarman
served as MasterCard International's Senior Vice President of Global Mobile
Commerce. Between 1991 and 1994, Mr. Jarman served as Vice President of
International Business Development of the ORGA Group of Companies, and between
1987 and 1991, he served as Manager -- Smart Cards of TSB Bank.
DAVID PASIEKA. Mr. Pasieka has served as our Senior Vice President,
Application Hosting, since January 2000. Mr. Pasieka served as Senior
Vice-President -- Local Services of AT&T Canada from July 1999 to January 2000,
and served as Vice-President and General Manager of MetroNet Communications, a
telecommunications company, from December 1996 to June 1999. Mr. Pasieka also
served as 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. Mr. Pasieka has a B.Sc. degree
from the University of Waterloo and an MBA from the University of Toronto.
RICHARD COSTOLO. Mr. Costolo has served as our Senior Vice President,
Notification Services, since our acquisition of Spyonit in September 2000.
Mr. Costolo served previously as Chief Executive Officer of Spyonit, which he
co-founded in 1999. Prior to that time, from 1998 through 1999, Mr. Costolo
formed Burning Door, a web consulting company. From 1995 through 1996,
Mr. Costolo served as Vice President of Product Development for Digital
Knowledge Assets, a provider of web-based consulting services. Mr. Costolo also
spent eight years with Andersen Consulting, from 1987 through 1995, where he
served as a Senior Manager. Mr. Costolo holds a B.Sc. in Computer Science from
the University of Michigan.
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LLOYD F. DARLINGTON. Mr. Darlington has served as a director since
July 1998. Mr. Darlington was originally appointed to our board as a nominee of
Bank of Montreal under a shareholders' agreement with our strategic investors,
which terminated in January 2000. In May 1996, he was appointed as Chief
Technology Officer and General Manager of Bank of Montreal and, since
November 2000, he has acted as President and Chief Executive Officer, Emfisys
(Bank of Montreal's technology division) and Head, E-Business, of Bank of
Montreal. He is a director of Cebra Inc., Bank of Montreal's wholly-owned
electronic commerce subsidiary, and of Symcor Inc., a payment processing
corporation owned and operated by three of Canada's major financial
institutions. He began his career with Bank of Montreal in 1967 and, since 1980,
has held a variety of executive positions. Most recently, he served as Executive
Vice President, Operations from 1989 to 1996. Mr. Darlington received a BA in
English and Psychology from McGill University and an MBA from Concordia
University.
MARTIN A. STEIN. Mr. Stein has served as a director since September 1998.
He is the President of Sonoma Mountain Ventures, a company he founded in
October 1998. Prior to founding Sonoma Mountain Ventures, Mr. Stein served as
Vice-Chairman of Technology and Operations of Bank America Corporation, was a
member of the bank's Office of the Chairman and served as Vice-Chairman of the
capital budget committee. Mr. Stein joined Bank America in June 1990 as
Executive Vice-President. Before joining Bank America, Mr. Stein served as
Executive Vice President and Chief Information Officer of PaineWebber in New
York. Mr. Stein is a member of the board of several companies in the financial
services and technology industries, including Bank of Hawaii, LYNX Photonic
Networks and Wall Street Access. Mr. Stein has also served as a director of
Sequent Computer Systems, Payment Net and FICS, a Belgian software company.
Mr. Stein received a BA from Saint John's University, attended New York
University's Graduate School of Business, and received an Honorary Doctorate in
Commercial Science from Saint John's University.
JAMES D. DIXON. Mr. Dixon has served as a director since June 1999.
Mr. Dixon was originally appointed to our board as a nominee of Bank of America
under a shareholders' agreement with our strategic investors, which terminated
in January 2000. He has served as President of bankofamerica.com since February
2000, where he is responsible for Internet business development and the
exploration of strategic alliances and joint ventures. He previously served as
Group Executive of Bank of America Technology and Operations, a subsidiary of
Bank of America Corporation, between September 1998 and February 2000. From 1991
until the merger of NationsBank Corporation and Bank America Corporation,
Mr. Dixon served as President of NationsBank Services, Inc. Prior to that, he
served as Chief Financial Officer of C&S/Sovran Corporation, a predecessor to
NationsBank.
HARRI VATANEN. Mr. Vatanen has served as a director since August 1999.
Mr. Vatanen was originally appointed to our board as a nominee of Sonera under a
shareholders' agreement with our strategic investors, which terminated in
January 2000. Mr. Vatanen served as the President of Sonera SmartTrust and
Senior Vice President of Sonera Corporation, formerly Telecom Finland Ltd., and
in October 2000, he was appointed Senior Vice President of Business Development,
focusing on enabling technologies. Mr. Vatanen has worked in the
telecommunications industry for more than 15 years. Prior to joining Sonera,
Mr. Vatanen worked at a communications services management consulting company.
Prior to working as a consultant, he worked for Nokia Datacommunications in the
product development and international sales and marketing departments as a
development manager of future projects. Mr. Vatanen has a Master of Science in
telecommunications, information technology, and economics from Helsinki
University of Technology.
ALAN YOUNG. Mr. Young has served as a director since August 1999.
Mr. Young was originally appointed to our board as a nominee of Citigroup under
a shareholders' agreement with our strategic investors, which terminated in
January 2000. Since March 1998, he has served as Vice-President and Senior
Director, Access Devices and Distribution Technologies for e-Citi, a division of
Citigroup. From March 1995 to March 1998, Mr. Young served as Vice President of
Engineering of Viacom Inc., where he had responsibility for implementing
Viacom's worldwide satellite distribution strategy. From
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September 1991 to March 1995, he served as a Technical Manager for MTV Europe,
where he had responsibility for developing MTV Europe's satellite distribution
strategy. Mr. Young graduated from the University of York with a Masters degree
in Engineering. From August 1988 to September 1991, Mr. Young worked for British
Telecom, developing service specifications for television satellite uplink
facilities.
HEATHER REISMAN. Ms. Reisman has served as a director since May 2000.
Ms. Reisman is President, Chair and Chief Executive Officer of Indigo Books and
Music, a leading Canadian retailer. Prior to founding Indigo Books and Music in
1996, Ms. Reisman served as President of Cott Corporation, a leading supplier of
retailer-branded beverages. Ms. Reisman, a past Governor of The Toronto Stock
Exchange and of McGill University, is currently a member of the board of Rogers
Cable Inc., an entertainment, information and communication services company,
Chair of the board of Vincor International, an international wine company, and
an Officer and member of the Executive Committee of Mount Sinai Hospital in
Toronto, Ontario.
BARRY J. REITER. Mr. Reiter has served as a director since May 2000.
Mr. Reiter has been a corporate/commercial and technology lawyer at Torys, an
international law firm, since 1982, and serves as Chairman of the Torys
Technology Group. He currently serves as Chairman of Algorithmics, Inc. and
Battery Technologies Inc., and a director of Alliance Atlantis
Communications Inc., Efos Inc., Eco Waste Solutions Inc., Lorus
Therapeutics Inc., Royal Bank Ventures Inc. and Telepanel Systems Inc. Prior to
joining Torys, Mr. Reiter served as a law professor at the Faculty of Law,
University of Toronto.
HOLGER KLUGE. Mr. Kluge has served as a director since May 2000. Mr. Kluge
served as President, Personal and Commercial Bank, CIBC from 1990 until he
retired in May 1999. Mr. Kluge joined CIBC in 1959 and held various management
positions in the CIBC branch system in Canada and in corporate and international
banking in Singapore, Japan and Hong Kong. In 1990, Mr. Kluge was appointed as
CIBC's President, Individual Bank, where he was responsible for retail and
private banking operations worldwide. CIBC's Individual Bank division was
renamed Personal and Commercial Bank in 1993 to more accurately reflect the
unit's responsibilities. Mr. Kluge is a director of T.A.L. Global Asset
Management Inc., Husky Energy Inc., Hutchison Telecommunications (Australia)
Ltd., Vlinx.com, Tom.com Limited, Polyphalt Inc., Prologic Corp, Hong Kong
Electric Group and Covenant House Toronto.
J. ROBERT S. PRICHARD. Mr. Prichard has served as a director since
August 2000. Mr. Prichard has served as a Professor of Law and Public Policy and
President Emeritus at the University of Toronto since July 2000, and served as
President of the University of Toronto between 1990 and 2000. Currently,
Mr. Prichard serves as director to a number of corporations including Bank of
Montreal, Onex Corporation, Four Seasons Hotels, and Biochem Pharma Inc. He is
also a member of the advisory board of the World Bank Institute, a national
trustee of the NeuroScience Canada Foundation, chair of the Advisory Council of
the Centre for Comprehensive Research in Childhood Cancer of the Pediatric
Oncology Group of Ontario, and a director of Historica. He was appointed an
officer of the Order of Canada in 1994 and received the Order of Ontario in
2000. Mr. Prichard studied economics at Swarthmore College, and received an
M.B.A. in finance and international business from the University of Chicago's
Graduate School of Business, an L.L.B. from the University of Toronto and an
L.L.M. from Yale Law School.
COMMITTEES. We have an audit committee that oversees the retention,
performance and compensation of our independent auditors, and the establishment
and oversight of its systems of internal accounting and auditing control. The
members of the Audit Committee are Holger Kluge, James Dixon and J. Robert S.
Prichard. We also have the following committees:
- THE COMPENSATION COMMITTEE, which is comprised of Gregory Wolfond, Lloyd
Darlington, James Dixon, Alan Young and Heather Reisman;
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- THE STOCK OPTION COMMITTEE, which is comprised of Gregory Wolfond; and
- THE CORPORATE GOVERNANCE COMMITTEE, which is comprised of Barry Reiter,
Holger Kluge, Lloyd F. Darlington, Martin A. Stein and Alan Young.
MANAGEMENT OF 724 SOLUTIONS AFTER THE MERGER
Following the merger, several changes will take place with respect to our
management. First, subject to the approval of The Toronto Stock Exchange, which
we have agreed to diligently pursue, three members of Tantau's board of
directors and one advisory director of Tantau will become members of our board
of directors: John Sims, Ted White, Joseph Aragona and Charles Goldman.
In addition, the following officers of Tantau will become executive officers
of 724 Solutions after completion of the merger:
<TABLE>
<CAPTION>
NAME CURRENT POSITION WITH TANTAU NEW POSITION WITH 724 SOLUTIONS
---- ------------------------------------- -------------------------------
<S> <C> <C>
John Sims.................... President and Chief Executive Officer Chief Executive Officer
Harald Sammer................ Executive Vice President and Chief Chief Technology Officer
Technology Officer
Peter Klante................. Vice President of Marketing General Manager of
Infrastructure -- Business Unit
</TABLE>
Mr. Wolfond will resign from his position as Chief Executive Officer at the
effective time of the merger and Mr. Sims will be appointed as the Chief
Executive Officer at that time. In addition, after the effective time of the
merger, Messrs. Sammer and Klante will be appointed to their respective
positions set forth in the above table. Christopher Erickson, our current
President and General Counsel, will become our Executive Vice President,
Corporate Development and General Counsel, and Andre Boysen, our current Chief
Technology Officer, will become our Chief of Strategic Initiatives. John Reece,
currently Tantau's Chief Financial Officer, will become a Vice President of
724 Solutions, a non-executive officer position.
Tantau has furnished the following information with respect to these
individuals:
JOHN SIMS. Mr. Sims, Tantau's co-founder, has served as Tantau's President
and Chief Executive Officer since inception. From November 1995 until Tantau's
founding in February of 1999, Mr. Sims served as Chief Operating Officer of SCC
Communications. From November 1985 until November 1995, Mr. Sims served in
several management positions at Tandem Computers, including Vice President and
General Manager of Tandem's worldwide telecommunications business. Mr. Sims also
served in various financial and general management positions with the Burroughs
Corporation from June 1977 until November 1985. Mr. Sims holds an Accounting
degree from the University of Glasgow, Scotland.
HARALD SAMMER. Mr. Sammer, also a Tantau co-founder, has served as Tantau's
Executive Vice President and Chief Technology Officer since inception. Beginning
in June 1996, Mr. Sammer served as Vice President and General Manager of the
Tektonic Business Unit for Tandem Computers and Mr. Sammer continued to serve in
that position after Tandem was acquired by Compaq until Tantau's founding in
February 1999. Mr. Sammer also held the position of Director of Tandem's High
Performance Research Center between June 1986 and June 1996. Mr. Sammer holds an
Engineering degree in Communications Technology from Hohere Technische
Bundeslehr und Versuchsanstalt in Modling, near Vienna, Austria.
PETER KLANTE. Mr. Klante has served as Tantau's Vice President of Marketing
since inception, where he was responsible for all of Tantau's worldwide
marketing initiatives. Between April 1998 until
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October 1999, Mr. Klante served as Vice President of Marketing for Vignette
Corporation. Mr. Klante served as Vice President of Marketing for Fulcrum
Technologies between May 1996 and March 1998. Between January 1994 and
April 1996, Mr. Klante was Senior Director of Notes Products for Lotus
Development. Mr. Klante holds a Business Mathematics degree in Computer Science
and Business Administration from the University of Waterloo in Waterloo,
Ontario, Canada.
TED WHITE. Mr. White has served as an advisory director to Tantau's board
of directors since February 2000. Since 1985, Mr. White has served as the
President of Frederick T. White & Associates Inc., a technology marketing and
investment company. From December 1985 to February 1991, Mr. White was a General
Partner of Ventures West Management. In addition, from August 1986 to
December 1997, Mr. White was a director of Tandem Computers (Canada) and served
as Chairman from September 1995 until the merger of Tandem and Compaq Computers
in December 1997. Mr. White holds a Bachelor of Applied Science and an MBA from
the University of Toronto.
JOSEPH ARAGONA. Mr. Aragona, a General Partner of Austin Ventures, has
served on Tantau's board of directors since April 1999. Mr. Aragona joined
Austin Ventures in 1982. In addition, Mr. Aragona has served as a director of
Pervasive Software Inc. since June 1995. Mr. Aragona has a BA in Economics from
Harvard University and an MBA degree from the Harvard University School of
Business Administration.
CHARLES GOLDMAN. Mr. Goldman, a Principal of Chase Capital Partners, has
served on Tantau's board of directors since June 2000, and also currently sits
on the board of directors of USA.net, which is a global e-messaging service
provider, Informio Corporation, an Internet infrastructure provider, and iWon,
an Internet portal and cash sweepstakes website. From 1990 to 1992, Mr. Goldman
worked with the Global Finance Department of Dillon, Read & Co. Mr. Goldman also
worked with the Consumer Long Distance Division of Sprint in 1995. Mr. Goldman
holds a B.A. from the University of Pennsylvania, a B.S. from the Wharton School
of the University of Pennsylvania and an M.B.A. from the Harvard Business
School.
In the year ended December 31, 1999, Tantau accrued aggregate compensation
to these individuals, including Mr. Reece, of $585,211, for services rendered in
all capacities. In that year, these individuals, including Mr. Reece, were also
awarded options to purchase an aggregate of 528,000 shares of Tantau's common
stock, at a weighted average exercise price of $0.10 per share. These options
had expiration dates of 10 years.
724 SOLUTIONS EXECUTIVE COMPENSATION
AGGREGATE COMPENSATION
During the year ended December 31, 1999, we paid aggregate compensation of
approximately US$1.0 million to all of our executive officers and directors for
services rendered in all capacities. In addition, we issued to these individuals
in that year options to purchase an aggregate of 448,000 common shares, with a
weighted average exercise price of US$6.57. Each of these options was granted
with a term of 10 years.
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SUMMARY COMPENSATION TABLE
The following table sets forth the remuneration paid to our Chief Executive
Officer and to our four highest paid executive officers whose total salary and
bonus exceeded Cdn. $100,000 (approximately US$65,000) for the year ended
December 31, 1999.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
OTHER SECURITIES
ANNUAL UNDER OPTIONS ALL OTHER
NAME AND PRINCIPAL POSITION SALARY BONUS COMPENSATION GRANTED COMPENSATION
Gregory Wolfond, $218,434 $126,768 $ 1,162 -- Cdn.$2,467
Chairman and Chief Executive
Officer
Christopher Erickson, $116,280 -- -- -- Cdn.$2,393
President and General Counsel
Andre Boysen, $116,280 -- -- -- Cdn.$2,013
Chief Technology Officer
Kerry McLellan, $181,863 -- $30,238 -- Cdn.$2,299
Chief Operating Officer(1)
Karen Basian, $100,365(2) -- -- 200,000 Cdn.$1,603
Chief Financial Officer
</TABLE>
(1) Mr. McLellan served as our Chief Operating Officer until August 2000.
(2) Represents the total salary earned by Ms. Basian in 1999. Ms. Basian
commenced her employment as our Chief Financial Officer in February 1999.
Ms. Basian's annual salary was Cdn.$178,000 in 1999.
OPTION GRANTS IN 1999
The following table sets forth the options to purchase common shares granted
to the executive officers named in the summary compensation table set forth
above under our stock option plans in fiscal 1999.
<TABLE>
<CAPTION>
SECURITIES UNDER PERCENTAGE OF TOTAL
OPTIONS EMPLOYEE OPTIONS
NAME GRANTED GRANTED IN 1999 EXERCISE PRICE EXPIRATION DATE
---- ---------------- ------------------- -------------- ---------------
<S> <C> <C> <C> <C>
Karen Basian..................... 60,000 7.1% $ 1.71 February 2009
20,000 2.4% $ 3.75 October 2009
120,000 14.2% $10.00 December 2009
</TABLE>
OPTION EXERCISES IN 1999 AND FINANCIAL YEAR-END OPTION VALUES
The following table sets forth the aggregate number of outstanding options
to purchase our common shares held by the executive officers set forth in the
summary compensation table above as of December 31, 1999, together with the
value of such options at the end of the fiscal period. None of these officers
exercised any options in 1999.
Since there was no public market for our common shares as of December 31,
1999, the value of an "in-the-money" option represents the difference between
the aggregate estimated fair market value of our common shares issuable upon
exercise of the option and the aggregate exercise price of the option.
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The estimated fair market value of a common share as of December 31, 1999, as
determined by management, was $10.00.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT FISCAL YEAR-END IN-THE-MONEY OPTIONS AT
EXERCISABLE/UNEXERCISABLE FISCAL YEAR END
NAME (NUMBER OF SHARES) EXERCISABLE/UNEXERCISABLE ($)
---- -------------------------------------- ------------------------------
<S> <C> <C>
Gregory Wolfond...................... -- --
Christopher Erickson................. 333,332/66,668 3,219,987/644,013
Andre Boysen......................... 333,332/66,668 3,219,987/644,013
Kerry McLellan....................... 233,332/166,668 2,253,987/1,610,013
Karen Basian......................... 40,000/160,000 331,600/290,800
</TABLE>
EMPLOYMENT CONTRACTS
Each of the executive officers named in the summary compensation table set
forth above has an employment agreement with us. Each employment agreement
provides the executive officer with a compensation package which includes
salary, benefits and options to purchase common shares under our stock option
plans. We retain all proprietary and intellectual property rights in everything
created, developed or conceived of by any of our employees while employed with
us or our affiliates. So long as any employee, including executive officers, is
employed with us, they are typically bound by non-competition and
non-solicitation covenants during their term of employment and for one year
thereafter.
COMPENSATION OF DIRECTORS
We do not presently pay any cash compensation to directors for serving on
the Board of Directors, but do reimburse directors for out-of-pocket expenses
for attending board and committee meetings. In 2000, we also granted options to
purchase our common shares to all of our directors who are not also executive
officers. In addition, in August 1999, Martin Stein entered into a consulting
arrangement with us under which he received consulting fees and options to
purchase 48,000 common shares at US$3.75 per share. This agreement has been
terminated. See "724 Solutions -- Related Party Transactions" for details
regarding the consulting arrangement between us and Mr. Stein.
STOCK OPTION PLANS
Since inception, as we have increased our presence in different geographic
regions, and effected acquisitions of other companies, we have adopted or
assumed a total of four stock option plans:
- the 2000 Stock Option Plan;
- the Canadian Option Plan;
- the U.S. Option Plan; and
- the ezlogin Option Plan.
As of September 30, 2000, options to purchase 3,876,137 of our common shares
were outstanding under these plans, at a weighted average exercise price of
$27.08 per share.
A large percentage of our outstanding options have exercise prices that are
significantly higher than the current prices at which our common shares trade on
the Nasdaq National Market and The Toronto Stock Exchange. We believe that this
factor is likely to increase the difficulties that we may encounter in retaining
the officers and employees upon whom we depend for our future success. Although
we have not yet determined how we will address this issue, members of our
management team are currently considering a variety of strategies. These
strategies include issuing additional options, lowering the exercise prices of
our outstanding options, issuing additional options to personnel
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who agree to rescind all or a portion of their options, and/or paying additional
cash compensation to our personnel. We may undertake a combination of these
strategies, or develop new plans for compensating our personnel.
Some of these strategies could have a substantial adverse impact upon our
financial results in future periods, in that we could be required to record very
large cash or non-cash compensation expenses, which would cause our losses to
increase. However, because we have not yet determined the strategy or strategies
that we will pursue, we cannot estimate at this time the precise impact that
these actions will have on our financial condition and results of operations.
2000 STOCK OPTION PLAN. In December 1999, we approved our new 2000 Stock
Option Plan, which was implemented upon completion of our initial public
offering. As a result of amendments subsequently approved by our board and
shareholders, an aggregate of 3,800,000 shares are currently reserved for
issuance under this plan, of which 2,174,750 remained available as of
September 30, 2000 for future grants. Options granted under the Canadian Option
Plan and the U.S. Option Plan were unaffected by the adoption of the 2000 Stock
Option Plan. Our Stock Option Committee administers the 2000 Stock Option Plan,
subject to the guidelines determined by our Compensation Committee. Any grants
outside of these guidelines will require the prior approval or subsequent
ratification of the Compensation Committee. The 2000 Stock Option Plan provides
for the grant of options to our employees, officers, directors and consultants
and those of our affiliates worldwide. Both incentive stock options and
non-qualified stock options are available to U.S. residents that receive awards
under the 2000 Stock Option Plan. Options held by any person under the 2000
Stock Option Plan together with any other options or other share compensation
arrangements granted to that person may not, at any time, exceed 5% of the
aggregate number of our common shares outstanding from time to time. The options
granted under the 2000 Stock Option Plan will have a maximum term of 10 years
and an exercise price of no less than the fair market value of the common shares
on the date of the grant, or 110% of fair market value in the case of an
incentive stock option granted to an employee who owns common shares having more
than 10% of the aggregate voting power of our outstanding equity securities. If
a change of control of our company occurs, all options granted under the 2000
Stock Option Plan become automatically vested and exercisable in full.
CANADIAN STOCK OPTION PLAN. We adopted this plan in September 1997. The
Canadian Stock Option Plan provides for the grant of options to our employees,
officers, directors, consultants and advisors, as well as those of our
affiliates. All options granted under the plan have a maximum term of 10 years
and have an exercise price per share of no less than the fair market value of
our common shares on the date of the option grant, as determined by the Board of
Directors or a duly authorized committee. If an optionee's employment,
directorship or consulting relationship with us is terminated without cause, the
vested portion of any grant will remain exercisable until the expiration date of
the stock option. In the event of termination for cause, the vested portion of
any grant will remain exercisable for a period of 30 days after the date of
termination. Unvested options will expire on termination unless the options
would have vested within six months or within the required notice period under
applicable law following a termination without cause, whichever is earlier, or
within one year if termination is due to death or disability. If a change of
control of 724 Solutions occurs, all options become immediately vested and
exercisable. If an optionee under the Canadian Stock Option Plan ceases to be an
employee or consultant of ours or of one of our affiliates, we are entitled to
exercise a call right to repurchase all options beneficially owned by the
optionee.
We will not grant additional options under this plan.
U.S. STOCK OPTION PLAN. We adopted this plan in October 1999. The
U.S. Stock Option Plan provides for the grant of options and restricted shares
to our employees, officers, directors and consultants, and those of our
affiliates. The plan provides for the grant of both incentive stock options and
non-qualified stock options.
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Non-qualified stock options granted under the plan have a maximum term of
10 years and an exercise price of no less than 85% of the fair market value of
our common shares on the date of the grant, as determined by the Board of
Directors or a duly authorized committee, or 110% of the fair market value for
those optionees who own common shares representing more than 10% of the
aggregate voting power of our outstanding securities. The rights of an optionee
upon the termination of his or her employment, directorship or consulting
relationship with us and upon a change of control of 724 Solutions are similar
to those rights discussed in the Canadian Stock Option Plan above. We are
entitled to exercise a call right to repurchase all options beneficially owned
by an optionee under the U.S. Stock Option Plan if an optionee ceases to be an
employee or consultant of ours or of one of our affiliates.
We will not grant additional options under this plan.
EZLOGIN STOCK OPTION PLAN. We assumed the ezlogin Stock Option Plan in
June 2000, in connection with our acquisition of ezlogin. An aggregate of
approximately 92,000 of our common shares were initially subject to grant under
the plan. We will not issue any options under this plan in the future. Instead,
any of the former directors, officers, employees and consultants of ezlogin that
have continued to have a professional relationship with us and who receive
equity compensation awards will do so under our 2000 Stock Option plan, or any
other plans that we may adopt in the future.
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PRINCIPAL SHAREHOLDERS OF 724 SOLUTIONS
To our knowledge, except as noted below, as of November 15, 2000, our only
shareholders beneficially owning or exercising control or direction over more
than 5% of our common shares are as set forth in the table below. In addition,
the table sets forth the beneficial ownership of each of our directors and
executive officers, as well as our directors and executive officers as a group.
Percentage ownership before the merger is based upon 39,083,867 common shares
outstanding as of November 15, 2000. Percentage ownership after the merger is
based upon the issuance of an estimated 17.0 million additional common shares on
the closing date of the merger.
For purposes of this table, the term "beneficial ownership" includes
outstanding shares, as well as shares issuable upon exercise of vested options,
and options that vest within 60 days.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF PERCENT OF
NAME OF SHAREHOLDER COMMON SHARES CLASS BEFORE MERGER CLASS AFTER MERGER
------------------- ------------- ------------------- ------------------
<S> <C> <C> <C>
Sonera Corporation(1)........................ 6,400,000 16.4% 11.4%
Citigroup Inc.(2)............................ 5,450,000 14.0% 9.7%
Bank of Montreal(3).......................... 3,938,570 10.1% 7.0%
Gregory Wolfond(3)(4)........................ 3,750,000 9.6% 6.7%
1319079 Ontario Inc.(3)(5)................... 3,740,000 9.6% 6.7%
Bank of America Corporation.................. 3,200,000 8.2% 5.7%
Christopher E. Erickson(6)................... 401,000 1.0% *
Andre Boysen(7).............................. 273,332 * *
Karen Basian(8).............................. 80,800 * *
Mina Wallace(9).............................. 41,400 * *
Alistair Rennie(10).......................... 27,666 * *
David Pasieka(11)............................ 9,600 * *
Christopher Jarman........................... 1,000 * *
Richard Costolo.............................. 240,464 * *
Lloyd F. Darlington.......................... -- -- --
Martin A. Stein(12).......................... 90,000 * *
James D. Dixon............................... 5,000 * *
Harri Vatanen................................ -- -- --
Alan Young................................... 3,846 * *
Heather Reisman.............................. -- -- --
Barry J. Reiter.............................. -- -- --
Holger Kluge................................. -- -- --
J. Robert S. Prichard........................ -- -- --
Directors and executive officers as a group
(18 persons)(13)........................... 4,924,108 12.3% 8.6%
</TABLE>
------------
* Less than 1%.
(1) These shares are held beneficially and of record by Sonera SmartTrust Ltd.,
a wholly-owned subsidiary of Sonera Corporation.
(2) These shares are held of record by Citicorp Strategic Technology
Corporation, a subsidiary of Citigroup Inc. In December 2000, Citigroup
filed a Form 144 with the SEC indicating that it would sell up to 1,300,000
of these shares.
(3) Gives effect to the transactions described under "-Blue Sky Capital/1319079
Ontario/Bank of Montreal."
(4) Consists of shares held by Blue Sky Capital Corporation, a corporation of
which Mr. Wolfond is the sole director and shareholder.
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(5) 1319079 Ontario is a privately-held Ontario corporation, a majority of the
shares of which are currently owned by two discretionary trusts, being The
Melvyn Wolfond Family Trust and The Arthur Wolfond Family Trust. The
potential beneficiaries of The Melvyn Wolfond Family Trust include, among
others, Gregory Wolfond. However, Gregory Wolfond has not been allocated any
beneficial interest and does not exercise management, control or direction
in respect of the shares of 724 Solutions held by either of these trusts.
These amounts give effect to the transactions described under "-Blue Sky
Capital/1319079 Ontario/Bank of Montreal."
(6) Includes 400,000 common shares issuable upon exercise of presently vested
options or options that vest within 60 days.
(7) Consists of common shares issuable upon exercise of presently vested
options, or options that vest within 60 days.
(8) Includes 80,000 common shares issuable upon exercise of presently vested
options or options that vest within 60 days.
(9) Includes 40,000 common shares issuable upon exercise of presently vested
options or options that vest within 60 days.
(10) Includes 26,666 common shares issuable upon exercise of presently vested
options or options that vest within 60 days.
(11) Includes 6,000 common shares issuable upon exercise of presently vested
options or options that vest within 60 days.
(12) Includes 88,000 common shares issuable upon exercise of presently vested
options or options that vest within 60 days.
(13) Includes 913,998 common shares issuable upon exercise of presently vested
options or options that vest within 60 days.
BLUE SKY CAPITAL/1319079 ONTARIO/BANK OF MONTREAL. Before December 2000,
each of Blue Sky Capital and 1319079 Ontario held 4,000,000 of our common
shares. Mr. Gregory Wolfond is the sole director and shareholder of Blue Sky
Capital. Until December 2000, Mr. Wolfond also had the power to vote and dispose
of the shares held by 1319079 Ontario, although he did not hold any equity
interest in 1319079 Ontario other than nominal value voting shares. Several
parties, including the trusts described in note 5 above, held non-voting
fully-participating equity interests in 1319079 Ontario. This arrangement was
adopted by these parties due to the restrictions set forth in the shareholders'
agreement in place among our initial investors prior to our initial public
offering, which did not permit Mr. Wolfond to otherwise allow his extended
family and his business associates to directly invest in our shares.
On December 21, Bank of Montreal purchased 250,000 of our common shares from
Blue Sky Capital and 260,000 of our shares from 1319079 Ontario. Bank of
Montreal has indicated that it acquired these shares for investment purposes.
As a consequence of our initial public offering, the provisions of our
shareholders' agreement which prohibited other direct investments were
terminated. In July 2000, the lock-up agreements executed by Blue Sky Capital
and 1319079 in connection with our initial public offering expired. Mr. Wolfond
and the shareholders of 1319079 therefore concluded that it is appropriate for
the shareholders of 1319079 Ontario to assume the management, control and
direction of that entity, including, in particular, investment decisions with
respect to the shares of 724 Solutions held by that entity. Therefore, on
December 22, Mr. Wolfond surrendered his voting control of 1319079 Ontario and
resigned from its board of directors in favor of appointees of its shareholders.
Mr. Wolfond therefore disclaims beneficial ownership or control over 1319079
Ontario's investment in 724 Solutions.
1319079 Ontario continues to own the 3,740,000 common shares. The Melvyn
Wolfond Family Trust described in note 5 above, as the holder of the majority of
its voting securities, may be deemed to have the ability to control
1319079 Ontario, including the power to vote or to dispose of the common shares
held by this corporation. However, under the registration rights agreement
described under "724 Solutions -- Related Party Transactions -- Registration
Rights," Mr. Wolfond will retain the ability to exercise the right to require us
to register common shares held by 1319079 Ontario and Blue Sky Capital.
ADDITIONAL INFORMATION. We are not aware of any arrangements, the operation
of which may at a subsequent date result in a change of control of 724
Solutions.
To our knowledge, we are not directly or indirectly owned or controlled by
any other corporation or foreign government.
As of December 15, 2000, approximately 130 of the recordholders of our
common shares had addresses in the U.S. These holders owned 17,778,999, or
approximately 45.5% of our total issued and outstanding common shares.
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724 SOLUTIONS -- RELATED PARTY TRANSACTIONS
BANK OF MONTREAL
In April 1998, we entered into a share subscription agreement and a
technology licensing agreement with the Bank of Montreal (BMO), which holds
3,938,510 of our common shares. Under the share subscription agreement, on
April 30, 1998, BMO subscribed for 1,000,000 common shares for Cdn. $1,000,000
and received an option to subscribe for 2,428,570 additional common shares for
Cdn. $1,000,000 exercisable in the event that BMO extended its technology
licensing agreement with us for a second year and paid the second year's
technology licensing fee. In October 1998, following BMO's extension of the
technology license agreement, BMO exercised its option and subscribed for the
2,428,570 additional common shares.
Under the technology licensing agreement, BMO has agreed, for a term
currently expiring on February 28, 2001, to license all of our technology that
is now, or that during the term of the agreement will be, available to our
customers generally. BMO has extended the term of the agreement through
February 28, 2002. Under this agreement, we have also agreed to provide BMO
related support and maintenance services. The license fee for the first two
years of the agreement was Cdn. $3,000,000 annually. The license is extendable
annually at the option of the Bank of Montreal. With each extension, the BMO
license will include any upgrades developed and generally provided to or
intended to be generally provided to our customers during that extension period.
BMO will retain the right to use all of the technology previously licensed under
the agreement, whether or not the license is extended.
If BMO does not extend the general license, it may specifically license
additional technology from us that is made generally available to our customers.
The fee for this additional technology will be equal to the lowest price at
which this technology is made available to our other customers that process
similar volumes of business with our 724 platform.
Initially, BMO had the right to be the exclusive Canadian financial
institution to which we would license our technology. In November 1998, BMO
agreed to waive this right in return for our agreement to pay to it an amount
equal to a percentage of the license fees paid to us by any other Canadian
financial institution customers that we may have, if any, up to a maximum of
Cdn.$700,000 per year, so long as BMO's general license is in effect. BMO will
not be entitled to receive this payment if it does not annually extend its
general license. As of September 30, 2000, no amounts have been subject to
payment under this provision.
In December 2000, we entered into an agreement with BMO which amended the
original technology licensing agreement to authorize BMO to act as a service
bureau, including sublicensing and hosting, in relation to our products. The
agreement is limited to financial institutions in North America having a total
global asset value of less than $20.0 billion. We have also agreed to offer to
BMO the opportunity to present to financial institutions that have a total
global asset value between $20.0 billion and $30.0 billion an offer to provide
hosting services in connection with our products. BMO has agreed to pay to us
royalty fees and maintenance fees with respect to any customers that are
provided with these services under the agreement. We have agreed to provide
maintenance, support and other services to BMO for the benefit of these
customers. Where the opportunity arises to provide our services to the targeted
customers under the agreement, we will promote BMO as the preferred service
provider. In addition, we will promote BMO as the preferred hosting services
partner for third parties that seek to be appointed by us as a hosting services
partner.
BANK OF AMERICA
In June 1999, we entered into a subscription agreement with Bank of America
and a technology licensing agreement with Bank of America National Trust &
Savings Association, an affiliate of Bank of America and a predecessor of Bank
of America, N.A. Under the subscription agreement, on June 1, 1999 Bank of
America subscribed for 541,790 common shares at a price of $3.69 per share for
gross
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proceeds of $2,000,000 and committed to subscribe for 541,790 additional common
shares for $2,000,000, which it completed in October 1999. On August 2, 1999, an
option and subscription amending agreement was entered into, which granted Bank
of America the option to acquire a further 2,116,420 common shares for an
aggregate subscription price of $8,243,456, which was exercised in
October 1999.
Under the license agreement, Bank of America has agreed, through
February 1, 2001, to license all of our technology that is now, or that during
the term of the agreement will be, generally available to our customers. The
technology license agreement provides for a fixed license fee to be paid by Bank
of America to us over a twenty-month period commencing on June 1, 1999, in
exchange for the delivery of specific products over the term of the agreement
and for a license of all technology generally available to our customers and
developed during the license period. If these products are not delivered, or do
not satisfy the required specifications, a portion of the license fee payable
under this arrangement is refundable. The license is extendable annually at the
option of Bank of America. With each extension, Bank of America's license will
include any upgrades developed and generally provided or intended to be
generally provided to our customers during that extension period. Bank of
America will retain the right to use all of the technology previously licensed
under the agreement, whether or not the license is extended.
If Bank of America does not subscribe for an extension of its general
license in February 2001 or at the end of any renewal term thereafter, it will
have the right, exercisable for four years after it ceases to subscribe to the
general license, to specifically license additional technology from us that is
made generally available to our customers. For two years after it ceases to
subscribe to the general license, Bank of America will retain the right to
reinstate the license by making a catch-up payment equal to the aggregate amount
of fees that would otherwise have been paid had the license been renewed each
year.
In June 1999, we also entered into a software maintenance and support
agreement with Bank of America under which Bank of America pays an annual
maintenance fee for maintenance and support relating to the technology provided
under the technology license agreement. In addition, under the agreement, we
charge Bank of America on a time and materials basis in connection with
installation, implementation and modification of customized code and
enhancements. This agreement has an initial term of two years and is renewable
annually at the option of the parties.
In 2000, we entered into additional agreements in connection with the
technology license agreement to provide Bank of America with application hosting
services and implementation consulting services including a master services
agreement under which we will provide services to Bank of America and its
affiliates. These services will be provided under separate statements of
services that will incorporate all the terms and provisions of the master
services agreement and detail the services to be performed, the price to be paid
for the services, the designated project managers and any other additional
provisions the parties may agree upon. The master services agreement will
continue through November 2004 unless either party terminates the agreement upon
six months prior written notice. In 2000, we have also provided Bank of America
with consulting services related to our LiveClips offering. During the nine
months ended September 30, 2000, we recognized an aggregate of $5.6 million for
license fees and other services from Bank of America.
CITIGROUP
In August 1999, we issued to Citicorp Strategic Technology Corporation, a
subsidiary of Citigroup, 950,000 common shares at a price of $3.83 per share,
for gross proceeds of $3,633,750. Citicorp Strategic Technology Corporation also
contracted at the time to subscribe for 5,450,000 additional common shares at a
price of $3.83 per share upon the satisfaction of specific conditions, including
the receipt of applicable regulatory approvals. These additional shares were
purchased in October 1999 for gross proceeds of $20,846,250.
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Citigroup has announced its intention to implement our 724 platform
worldwide under the leadership of its e-Citi division. In December 1999, we
entered into a master technology license agreement with Citicorp Strategic
Technology Corporation. The initial term of the master agreement is five years.
The agreement enables Citigroup and its affiliates to license our technology by
entering into separate agreements which will incorporate the terms of the master
agreement. The specific terms of any agreement of this type, including the
specific technology to be licensed, the license fees to be paid to us, the term
of the license, and other material terms, may vary. We are working with a number
of Citigroup subsidiaries to deliver our 724 platform to their banking and
brokerage customers. To date, we have entered into agreements under the master
technology license agreement with an affiliate of Citigroup in Singapore, and
with Salomon Smith Barney in Australia.
Citicorp Strategic Technology Corporation is required to pay to us a
specified minimum amount during each year that the master agreement is in
effect, whether or not Citigroup or any Citigroup affiliates actually enter into
agreements under the master agreement to license our technology. These required
payments to us will increase each year of the agreement, up to specified maximum
levels, based on specified targets relating to the number of world-wide
Citigroup customers that use services based upon our 724 platform, the number of
Citigroup affiliates that license our technology and the amount of revenue
generated under this agreement. Our revenues under the master license agreement
will remain at the minimum amounts if we do not enter into additional agreements
under the master agreement.
We have agreed to provide to each Citigroup licensee maintenance services
relating to the technology that we license under the master agreement. These
maintenance services will include, among other things, the provision of updates
and upgrades to our technology that are generally made available to our
customers. The master agreement also provides that we will perform services for
Citigroup affiliates that license our technology under the agreement, including
consulting, development, implementation and other services. The terms of any
services of this type, including the fees to be paid to us for these services,
will be set forth in a separate agreement that will be entered into by us and
the applicable Citigroup affiliate.
In the nine months ended September 30, 2000, we recognized an aggregate of
$2.4 million in license fees and fees for other services from Citigroup's
affiliates.
We agreed to purchase from Citicorp Strategic Technology Corporation a range
of consulting services that are described in the master agreement. These
services will include consulting services relating to the promotion of our
technology for adoption by Citigroup's affiliates. We agreed to pay, for these
services, a fee that will be calculated based upon the number of Citigroup
affiliates that enter into agreements to license our technology during the first
year of the master agreement, which ends in December 2000. In the nine months
ended September 30, 2000, we paid approximately $400,000 for these services.
In connection with the merger, we received financial advisory services from
Salomon Smith Barney, an affiliate of Citigroup. We have agreed to pay to
Salomon Smith Barney $1.5 million for these services.
SONERA CORPORATION
In August 1999, we issued 6,400,000 common shares to Sonera Corporation for
a price of $3.83 per share for gross proceeds of $24,480,000. Sonera has since
caused these shares to be transferred to a wholly-owned subsidiary, Sonera
SmartTrust Ltd.
MARTIN A. STEIN
Beginning in August 1999, we received consulting services from Martin A.
Stein, one of our directors. Mr. Stein provided strategic planning advice in
connection with our business. The consulting arrangement for a two-year term
ending in August 2001, but has been terminated by the parties.
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Mr. Stein received a monthly fee of approximately $34,000 during the term of the
contract, and has been issued a stock option under our Canadian Stock Option
Plan to purchase 48,000 common shares, with an exercise price of $3.75 per
share.
MCLELLAN PATENT APPLICATION
In July 1999, we entered into an agreement with Dr. Kerry McLellan, a former
director and our former chief operating officer, under which we purchased his
rights under patent applications filed in the U.S. and Canada relating to a
security system for electronic transactions. We paid Dr. McLellan a nominal
purchase price for these rights and agreed to reimburse him for the expenses
that he incurred in filing these applications. The applications cover a security
system that we do not expect to incorporate into our products in the near
future. Under our agreement, we have agreed to pay Dr. McLellan a portion of any
licensing fees that we receive from any license of the rights covered by these
patent applications and a portion of the proceeds of any sale of these rights.
Dr. McLellan also has the right to repurchase the rights covered by the patent
applications from us until the earlier of May 2001 or the date on which a
U.S. patent governing the technology is issued. We have the right to terminate
Dr. McLellan's royalty rights, rights to receive a portion of any sale proceeds
and right to buy back these rights until July 2003.
BLUE SKY CAPITAL CORPORATION AND 1319079 ONTARIO INC.
In September 1997, we issued 3,999,800 common shares, together with an
option to purchase an additional 4,000,000 common shares, to Blue Sky Capital
Corporation, an entity controlled by our Chairman and Chief Executive Officer,
for an aggregate purchase price of approximately Cdn. $2.0 million. Blue Sky had
earlier subscribed for 200 common shares upon our formation. The option was
transferred to 1319079 Ontario, and was exercised in October 1998 at an exercise
price of Cdn. $0.50 per share. See "Principal Shareholders of 724 Solutions."
REGISTRATION RIGHTS
In connection with our merger agreement with Tantau, we have agreed to
terminate a registration rights agreement that we previously had with several of
our initial investors, and agreed to enter into a new registration rights
agreement before the closing of the merger. After the completion of the merger,
these revisions will provide some of Tantau's stockholders with some of the
piggy-back rights that existed in the original agreement. Three groups of our
shareholders will receive registration rights under this agreement:
- our founder, Greg Wolfond, Blue Sky Capital and 1319079 Ontario, who in
the aggregate hold approximately 7,490,000 of our common shares;
- several of our initial strategic investors, including Bank of America,
Bank of Montreal, Citigroup and Sonera, who in the aggregate hold more
than 20.0 million of our common shares; and
- several of Tantau's shareholders, including Austin Ventures and Chase
Capital Investments, who own, in aggregate, approximately 12,840,000
shares of Tantau's Series A preferred stock, 6,446,112 shares of Tantau's
Series B preferred stock, and warrants to purchase 310,880 additional
shares of Tantau's Series B preferred stock, which will be exchanged in
the merger for approximately 12.2 million common shares of 724 Solutions
in the aggregate.
Under this agreement, each of the three groups of shareholders described
above will receive rights to require us to register their holdings of our common
shares under the applicable securities laws of the U.S. and/or Canada. Our
founder, together with Blue Sky Capital and 1319079 Ontario, acting as a group,
and our strategic investors, acting as a group, will each obtain the right to
demand us to effect such a registration. A demand from either our founder, Blue
Sky Capital and 1319079 Ontario, on the one hand, or the strategic investors, on
the other hand, will enable the other two groups of shareholders to include
their shares in that registration. In addition, if we commence the registration
of
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our shares under specified circumstances other than as a result of a demand
under the agreement, each of these three groups of shareholders will also have
the right to include their shares in that registration.
Each of Mr. Wolfond, Blue Sky Capital and 1319079 Ontario, on the one hand,
and the strategic investors, on the other hand, will receive the right to demand
us to register shares on two separate occasions per group. A demand
registration, together with the other shares included in that registration under
the agreement, must provide for the resale of at least US$20.0 million of our
shares.
SHORT FORM REGISTRATIONS. Once we become eligible to file a short form
registration statement in the U.S. on Form F-3 or S-3 (and/or the equivalent
short-form prospectus rules of Canada), which we expect to occur in
February 2001, Mr. Wolfond, Blue Sky Capital, and 1319079 Ontario, acting as a
group, and the strategic investors, acting as a group, may require us to file a
registration statement to enable them to resell all or a portion of their
shares. These registrations are unlimited in number, but we cannot be required
to effect such a registration if we have registered shares after a demand under
the agreement during the 180 day period before the new demand. A short-form
registration of this kind must cover common shares amounting to at least
US$15.0 million.
TANTAU SHARES SUBJECT TO RESALE LIMITATIONS. The Tantau shareholders that
are parties to the agreement will not be able to require us to register any
shares that are subject to the resale restrictions described in "The Merger."
However, if we effect a registration of our shares before the expiration of the
first three months after the effective date of the merger, these Tantau
shareholders may request us to include up to 15% of their shares in that
registration. Including these shares in that registration will reduce, by the
same number, the number of shares that they would otherwise be permitted to sell
under the resale restrictions following that three month period.
TERMINATION OF REGISTRATION RIGHTS. The registration rights granted under
the agreement will terminate as follows:
- in the case of our founder, Blue Sky Capital and 1319079 Ontario, and in
the case of our strategic investors:
- in January 2004, or
- if earlier, the time at which their shares are generally freely
tradable under U.S. and Canadian securities laws, and the aggregate
ownership of the relevant shareholder is less than specified minimum
amounts; and
- in the case of the Tantau shareholders:
- in January 2004, or
- upon the transfer by that shareholder of our shares to another party,
or
- if the relevant shareholder holds less than specified minimum amounts.
PRIORITY IN UNDERWRITTEN OFFERINGS. If shares are registered under the
agreement in an underwritten offering in which the managing underwriter advises
us that market conditions require us to limit the number of shares that may be
sold in that offering, the agreement provides for an allocation of the shares to
be sold between any shares that we seek to sell, the shareholders that are
parties to the agreement, and any other shareholders that are including shares
in that registration.
EXPENSES AND INDEMNIFICATION. We are generally required to pay the expenses
of any registration required to be made under the agreement, although the
shareholders will be responsible for the payment of their own brokerage fees or
underwriting expenses in connection with any sale. Under some circumstances, we
will be required to indemnify the shareholders that are parties to the agreement
for any liabilities arising under applicable securities laws in connection with
a registration of their shares.
ADDITIONAL REGISTRATION RIGHTS. The agreement limits our ability to grant
specified types of registration rights deemed to be superior to, or greater
than, some of the rights provided in the agreement.
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TANTAU SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
Tantau's consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the U.S. The following selected
historical consolidated financial data of Tantau has been derived from Tantau's
historical consolidated financial statements, which have been audited by
KPMG LLP. The selected consolidated financial data presented below should be
read in conjunction with "Tantau -- Management's Discussion and Analysis of
Financial Conditional Results of Operations" and Tantau's consolidated financial
statements and the notes thereto contained elsewhere in this information
statement/prospectus.
<TABLE>
<CAPTION>
PERIOD FROM
FEBRUARY 11, 1999
NINE MONTHS ENDED (INCEPTION) TO
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- ------------------
(In thousands of U.S. dollars)
<S> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Revenue:
Software license revenue............................. $ 5,413 $ 2,296
Professional services revenue........................ 1,161 580
-------- -------
Total revenue........................................ 6,574 2,876
-------- -------
Cost of revenue:
Software license..................................... 133 155
Professional services................................ 897 601
-------- -------
Total cost of revenue................................ 1,030 756
-------- -------
Gross profit............................................. 5,544 2,120
-------- -------
Operating expenses:
Research and development............................. 5,808 3,328
Sales and marketing.................................. 7,550 2,637
General and administrative........................... 6,155 4,480
-------- -------
Total operating expenses............................. 19,513 10,445
-------- -------
Loss from operations..................................... (13,969) (8,325)
-------- -------
Other income (expense):
Gain on sales of assets.............................. 5,213 --
Realized loss on investment in Accrue
Software, Inc...................................... (31,413) --
Interest expense..................................... (550) --
Interest income...................................... 1,080 247
-------- -------
Net other income (expense)........................... (25,670) 247
-------- -------
Net loss................................................. $(39,639) $(8,078)
======== =======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------- ------------------
(In thousands of U.S. dollars)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital..................................... $ 27,698 $ 3,259
Total assets........................................ 62,910 7,529
Note payable, net of current portion and discount... 3,380 --
Deferred gain on sales of assets, net of current
portion........................................... 17,516 --
Series A redeemable, convertible preferred stock.... 12,533 12,533
Series B redeemable, convertible preferred stock.... 39,939 --
Series B redeemable, convertible preferred stock
purchase warrants................................. 1,655 --
Stockholders' deficit............................... $(45,239) $(7,255)
</TABLE>
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TANTAU -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Tantau was incorporated in February 1999 to develop, design and deliver
software and related services that enable enterprises to conduct high-volume,
secure, m-commerce transactions. The founders of Tantau were previously employed
within the High Performance Research Center at the Tandem Division of Compaq
Computer, developing software for facilitating the processing of e-commerce
transactions. Under an asset transfer agreement entered into in March 1999
between Compaq Computer and the newly formed Tantau, Compaq transferred
substantially all of the assets relating to this High Performance Research
Center to Tantau in exchange for shares of Tantau's Series A preferred stock.
Shortly thereafter, Tantau raised working capital funds through the sale of
additional shares of its Series A preferred stock to a group of venture capital
investors.
During the 12-month period following the February 1999 inception of Tantau,
its operations were primarily devoted to the development of technologies central
to its business, recruiting key personnel and raising capital. With the launch
of Tantau's Wireless Internet Platform in February 2000, Tantau expanded its
operations by increasing the size of its infrastructure to support expected
growth as a result of this launch.
The Wireless Internet Platform was initially marketed to end-point
customers, such as banks, brokerage firms and retailers, that require the
ability to process transactions from multiple locations 24 hours a day, seven
days a week. To date, purchasers of the Wireless Internet Platform have included
Chase Manhattan Bank, Commerzbank, Credit Suisse Group, MeritaNordenbanken, the
New Zealand Stock Exchange, Rabobank International and SE Banken. Tantau's
customers are located throughout the world, with 45%, 51% and 4% of Tantau's
total revenues in the nine months ended September 30, 2000 derived from
customers with their principal offices in North America, Europe and the Pacific
Rim (including Australia), respectively.
SOURCES OF REVENUE
Tantau derives revenues primarily under license agreements with its
customers and related professional services.
SOFTWARE LICENSE REVENUE
Tantau's software license revenue is generated principally from the
licensing of its products, including the Wireless Internet Platform, directly to
enterprises and indirectly through value-added resellers and original equipment
manufacturers.
Tantau recognizes revenue in accordance with the American Institute of
Certified Public Accountants Statement of Position 97-2, "Software Revenue
Recognition" (SOP 97-2), as modified by SOP 98-9. SOP 97-2, as modified,
generally requires revenue earned on software arrangements involving multiple
elements to be allocated to each element based on the relative fair values of
the elements. These elements include items such as software products, upgrades,
enhancements, post-contract customer support, installation and training. The
fair value of an element must be based on evidence that is specific to the
vendor. If evidence of fair value does not exist for all elements of a license
agreement and post-contract customer support is the only undelivered element,
then all revenue for the license arrangement is recognized ratably over the term
of the agreement. If evidence of fair value of all undelivered elements exists
but evidence does not exist for one or more delivered elements, then revenue is
recognized using the residual method. Under the residual method, the fair value
of the undelivered elements is deferred, and the remaining portion of the
arrangement fee is recognized as revenue.
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Tantau licenses its products to end users primarily under perpetual
licenses. Tantau's standard perpetual license agreement includes post-contract
customer support for a specified period of time. Thereafter, post-contract
customer support can be renewed annually for an additional fee. Tantau uses the
post-contract customer support renewal rate as evidence of fair value of this
service. Since post-contract customer support is the only undelivered element in
these arrangements, revenue is recognized using the residual method. The fair
value of post-contract customer support is recognized over the term of support
and the remaining portion of the arrangement fee is recognized after the
execution of a license agreement and the delivery of the product to the
customer, provided that there are no uncertainties surrounding the product
acceptance, fees are fixed and determinable, collectibility is probable, and
Tantau has no remaining obligations other than the delivery of the support.
Tantau has entered into arrangements with original equipment manufacturers
(OEMs) and resellers. Under these arrangements, Tantau grants the OEM or
reseller rights to sell products which incorporate Tantau's products for a
specified period of time. Tantau's primary obligation to the OEM or reseller is
to deliver a product master and any bug fixes under warranty provisions to
maintain the product master in accordance with published specifications. In some
arrangements, Tantau receives prepaid, non-refundable minimum license fees from
the OEM or reseller. Because Tantau's primary obligations to an OEM or reseller
have been fulfilled upon delivery of the product master, Tantau recognizes the
prepaid, non-refundable minimum license fees as revenue as the fees become due
and payable or upon delivery of the product master, whichever is later.
PROFESSIONAL SERVICES REVENUE
Professional services revenue consists primarily of fees for training,
consulting, software maintenance and support. Tantau currently relies, and
expects to continue to rely, on a combination of its internal professional
services organization and third-party consulting firms to provide training and
consulting services to its customers. Fees for these services are charged on a
time-and-materials basis and are recognized as the services are performed.
Maintenance fees are derived under annual maintenance agreements with customers,
which enable customers to receive service and support from Tantau as well as
product updates. Maintenance fees typically are set as a specified percentage of
the customer's license fee and paid in advance for the maintenance period.
Revenues under maintenance agreements are deferred and recognized on a
straight-line basis over the contract period.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE PERIOD FROM FEBRUARY 11,
1999 (INCEPTION) TO DECEMBER 31, 2000
THE FOLLOWING PRESENTS A COMPARISON OF THE RESULTS OF OPERATIONS FOR TANTAU
FOR THE PERIOD FROM FEBRUARY 11, 1999 (INCEPTION) TO DECEMBER 31, 1999 TO THE
RESULTS FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2000. WHILE THESE ARE NOT
IDENTICAL CALENDAR PERIODS, TANTAU BELIEVES THAT THE COMPARISONS PROVIDE A
MEANINGFUL BASIS FOR AN EVALUATION OF THE RESULTS OF OPERATION OF TANTAU OVER
THE RELATIVELY SHORT DURATION OF ITS OPERATIONS SINCE INCEPTION.
REVENUES
SOFTWARE LICENSE. Software license revenue increased 136% to $5.4 million
for the nine months ended September 30, 2000 from $2.3 million for the period
from inception to December 31, 1999. This increase primarily resulted from the
introduction of the Wireless Internet Platform in February 2000 and the initial
licensing of this product to customers in the 2000 period.
PROFESSIONAL SERVICES. Professional services revenue increased 100% to
$1.2 million for the nine months ended September 30, 2000 from $580,000 for the
period from inception to December 31, 1999.
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The increase was primarily attributable to training and consulting services
requested by customers as they deployed the Wireless Internet Platform within
their operations.
COST OF REVENUE. Cost of revenue primarily is composed of personnel costs
associated with Tantau's customer support, training and professional services
operations, as well as royalty fees paid to third parties and amounts paid to
third-party consulting firms for consulting and implementation services. Cost of
revenue was $1.0 million for the nine months ended September 30, 2000, as
compared to $756,000 for the period from inception to December 31, 1999. As a
percentage of total revenues, cost of revenue represented 16% and 26% in these
respective periods. The increase in the dollar amount of cost of revenue was
primarily related to the higher software license revenue in the 2000 period as
well as an increase in personnel needed to support Tantau's larger customer base
in 2000.
OPERATING EXPENSES
RESEARCH AND DEVELOPMENT. Research and development expenses primarily
consist of compensation for Tantau's software development teams that are engaged
in the enhancement of the Wireless Internet Platform and quality assurance and
testing activities, as well as expenses for the services of independent
consultants.
Research and development expenses increased to $5.8 million for the nine
months ended September 30, 2000 from $3.3 million for the period from inception
to December 31, 1999. The increase in research and development expense was
attributable to the addition of personnel in Tantau's research and development
organization to expand product development activities. Tantau expects to
continue to make substantial investments in research and development and,
therefore, anticipates that research and development expenses will continue to
increase as Tantau broadens the functionality of the Wireless Internet Platform.
SALES AND MARKETING. Sales and marketing expenses include compensation for
sales and marketing personnel and costs associated with advertising, trade show
participation and preparation of marketing materials. Sales and marketing
expenses increased to $7.5 million for the nine months ended September 30, 2000
from $2.6 million for the period from inception to December 31, 1999. The
increase in sales and marketing expenses was primarily attributable to costs
incurred in connection with the hiring and training of sales and marketing
personnel, both domestically and internationally, as well as the cost of
additional marketing programs designed to build awareness of the Tantau brand.
In addition, in the period ended September 30, 2000 Tantau increased the number
of sales personnel in order to manage effectively its relationships with major
customers. Tantau anticipates that sales and marketing expenses will increase in
future periods as Tantau expands its sales and marketing activities and
increases its investment in its international sales and marketing
infrastructure.
GENERAL AND ADMINISTRATIVE. General and administrative expenses consist
primarily of compensation for personnel in corporate and administrative
positions as well as general and corporate expenses such as accounting and legal
fees and expenses. General and administrative expenses increased to
$6.2 million for the nine months ended September 30, 2000 from $4.5 million for
the period from inception to December 31, 1999. The increase in general and
administrative expenses primarily was attributable to costs incurred in
connection with hiring additional personnel. Tantau expects that general and
administrative expenses will increase in future periods as Tantau adds personnel
in general and administrative functions to support the expansion of its
international operations.
STOCK COMPENSATION RELATED TO STOCK OPTIONS. During the nine months ended
September 30, 2000, and the period from inception to December 31, 1999, Tantau
recorded $12.4 million and $3.6 million, respectively, of deferred stock
compensation related to employee stock options. These deferred stock
compensation charges represent the difference between the exercise prices of
options to purchase
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shares of Tantau's common stock that were granted and the deemed fair value, for
financial reporting purposes, of the shares of Tantau's common stock underlying
these option grants on their respective dates of grant. The deferred stock
compensation amount is being amortized on a straight-line basis over the related
vesting periods of these options, which is generally four years. In addition,
Tantau incurred $500,000 of stock compensation charge in the nine months ended
September 30, 2000 related to options granted to contractors in exchange for
services. The total stock compensation incurred has been recorded in the
statements of operations in the following categories, based upon the function of
the respective grantees:
<TABLE>
<CAPTION>
2000 1999
---------- --------
<S> <C> <C>
Cost of revenues................................... $ 338,000 $120,000
Research and development........................... 499,000 177,000
Sales and marketing................................ 1,027,000 217,000
General and administrative......................... 247,000 58,000
---------- --------
$2,111,000 $572,000
========== ========
</TABLE>
GAIN ON SALES OF ASSETS. During the nine-months ended September 30, 2000,
Tantau sold substantially all of the assets related to its InfoCharger
technology and J-product technology. The InfoCharger technology was sold to
Accrue Software, Inc. in exchange for 1,666,667 shares of Accrue's common stock.
The InfoCharger product provided an embedded data analysis engine for e-commerce
applications, and was designed to automate the analysis and management of large
volumes of data. Of the shares issued, 234,722 shares are held in escrow and
will be released during the 12 months following the transaction in accordance
with the indemnification provisions of the sale agreement. In addition, Tantau
licensed certain software products and related post-contract support to Accrue
for a two-year period in exchange for a payment of $5.0 million. These products
will be sold by Accrue in conjunction with the InfoCharger technology. Tantau is
recognizing the entire arrangement over the two-year term of the post-contract
support. Tantau has allocated the stock proceeds to the sale of the InfoCharger
assets and the cash proceeds to license revenue. The net gain on the sale of
these assets, excluding the value of the shares in escrow, totalled
$46.1 million, of which $4.8 million has been recognized as gain on sale of
assets in the period ended September 30, 2000. The balance is being amortized
over the two-year period of post-contract support.
The J-Product technology was sold to a third party in exchange for $900,000
in cash, payable in three equal installments. As part of the sale, Tantau
licensed to the buyer certain technology rights including support through
December 31, 2000. Tantau is recognizing the entire arrangment over the term of
the technology rights and support. Of the proceeds received, Tantau has
allocated $600,000 to the sale of the assets and $300,000 to the license and
support. As of September 30, 2000, Tantau has recognized $412,000 as gain on
sale of assets. The balance is being amortized over the license and support
period ending December 31, 2000.
REALIZED LOSS ON INVESTMENT IN ACCRUE SOFTWARE, INC. In September 2000,
Tantau adopted a plan to dispose of the Accrue common stock that it received
from the sale of the InfoCharger assets. At the time this plan was adopted, the
value of Accrue's stock had declined significantly and, in the estimation of
Tantau's management, the decline in the value of the Accrue stock was determined
to be other than temporary. Tantau recorded a loss in the statement of
operations of $31.0 million on its investment in Accrue based upon the fair
value of Accrue's stock as of September 30, 2000. The fair value of the common
stock of Accrue has continued to decline subsequent to September 30, 2000.
INTEREST EXPENSE. Interest expense was $550,000 during the nine months
ended September 30, 2000 under a note payable issued by Tantau. The note payable
has a principal amount of $5.0 million and bears interest at a stated rate of
10%. In conjunction with the note payable, Tantau issued the lender
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warrants to purchase Tantau's Series B preferred stock. The value of the
warrants has been recorded as a discount on the note payable and is being
amortized to interest expense over the term of the note, resulting in an
effective interest rate of approximately 16%.
INTEREST INCOME. In the nine months ended September 30, 2000, Tantau
recognized interest income of $1.1 million, as compared to $247,000 for the
period from inception to December 31, 1999. This interest income was derived
from cash and cash equivalent balances resulting from the unused portion of the
proceeds from its private placement of Series B preferred stock completed in
2000 and the private placement of Series A preferred stock completed in the
1999.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, Tantau has financed its operations through private sales of
its Series A and Series B preferred stock, together with revenues derived from
operations. During the period ended December 31, 1999, Tantau raised net
proceeds of $10.9 million from the issuance and sale of shares of its Series A
preferred stock. In June 2000, Tantau completed the sale of its Series B
preferred stock in a private placement offering that provided approximately
$40.0 million in net proceeds. Tantau believes that the proceeds from the
June 2000 private placement, together with cash generated from its operations,
will be sufficient to support Tantau's needs for at least the next 12 months.
Net cash used in operating activities was $7.1 million for the nine months
ended September 30, 2000 and $6.7 million for the period from inception to
December 31, 1999. Net cash used in operating activities for the nine months
ended September 30, 2000 reflected Tantau's net operating loss of
$39.6 million, adjusted by the $31.4 million non-cash loss on investment in
shares of Accrue stock that were received by Tantau from the sale of the assets
of its InfoCharger technology to Accrue, gains of $5.2 million that resulted
from the sales of the InfoCharger and J-Product technologies, $2.1 million of
stock compensation charge, $680,000 of depreciation and amortization and changes
in operating assets and liabilities.
Cash used in investing activities was $327,000 for the nine months ended
September 30, 2000 and $616,000 for the period from inception to December 31,
1999. Cash used in investing activities for the first nine months of 2000
reflected Tantau's purchases of capital equipment and other capitalized assets,
offset by proceeds from the sale of J-Product technology. Tantau anticipates
that capital expenditures will continue to increase as Tantau intends to devote
significant resources to enhance the design and development of its Wireless
Internet Platform.
Cash provided from financing activities was $45.2 million for the nine
months ended September 30, 2000, and $10.9 million for the period from inception
to December 31, 1999. Cash provided from financing activities in 2000 reflected
the net proceeds received from the private placement of Tantau's Series B
preferred stock as well as indebtedness incurred under a subordinated note
issued in February 2000.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As of September 30, 2000, Tantau had approximately $41.1 million in
investments with maturities of less than three months, a portion of which bears
interest at variable rates. As a result, Tantau's interest income under variable
rate instruments is sensitive to changes in the level of prevailing interest
rates. However, due to the short-term nature of Tantau's investments, Tantau
does not believe that it is subject to any material risks as a result of this
exposure.
Tantau transacts business in a variety of foreign currencies, and
accordingly is subject to exposure from adverse movements in foreign currency
exchange rates. Substantially all of Tantau's revenues are expected to be earned
in U.S. dollars. A portion of Tantau's expenses is incurred in foreign
currencies. Changes in the value of the foreign currencies relative to the
U.S. dollar may result in currency translation gains and losses that could
adversely affect Tantau's operating results. To date, foreign currency exchange
rate exposure has been minimal.
Tantau currently does not use financial instruments to hedge operating
expenses denominated in foreign currencies. However, Tantau intends to assess
the need to utilize financial instruments to hedge currency exposure on an
on-going basis.
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TANTAU -- BUSINESS
OVERVIEW
Tantau is a global provider of software and services that enable enterprises
to conduct high-volume, secure, m-commerce transactions while maintaining direct
access to their customers. Tantau's primary product, the Wireless Internet
Platform, creates a link for a variety of wireless and wired
devices -- including cellular telephones, personal digital assistants, pagers
and web browsers -- to interact with enterprise applications and data sources.
The Wireless Internet Platform enables Tantau's customers, including banks,
brokerage firms and retailers, to offer consumers the ability to conduct
e-commerce activities, such as banking, stock trading and shopping, through
wireless mobile devices. In addition, since many wireless carriers and network
operators restrict access to only those websites maintained by companies with
which they have business relationships, Tantau's customers can use the Wireless
Internet Platform to maintain and reinforce their own customer relationships.
Tantau has designed the Wireless Internet Platform with the objective of
ensuring the scalability, availability, transaction security and integrity
necessary for high volume, mission-critical applications, while providing
seamless interoperability with numerous wireless devices, network protocols and
operating systems.
Tantau launched the Wireless Internet Platform on February 7, 2000, with
initial commercial shipments beginning on February 18, 2000. Financial services
institutions that are currently licensing the Wireless Internet Platform include
Chase Manhattan Bank, Commerzbank, Credit Suisse Group, MeritaNordbanken, the
New Zealand Stock Exchange, Rabobank International and SE Banken. Tantau uses
both its direct sales force and third-party resellers for the marketing of the
Wireless Internet Platform to its target customer base. To date, principal
resellers of the Wireless Internet Platform include Compaq, Hewlett-Packard and
Nokia.
Tantau's technology traces its origins to a group of software developers,
led by Mr. Harald Sammer, who comprised the High Performance Research Center at
the Tandem Division of Compaq Computer. This team gained substantial experience
in building high-scale, mission-critical transaction processing systems. Tantau
was spun out from the Tandem Division of Compaq Computer in March 1999, with its
initial assets consisting of the Internet infrastructure products that were then
in development at the High Performance Research Center and the corresponding
customer bases for those products.
Tantau is a member of the Compaq Solutions Alliance, a worldwide partnering
program for software developers, consultants, and system integrators. Tantau is
also a participant in an initiative sponsored by Hewlett-Packard to promote
mobile e-services by enabling the convergence of wireline, wireless and data
communications networks. In addition, Tantau maintains strategic relationships
with leading wireless certificate authorities and standards organizations, such
as Baltimore Technologies, VeriSign and Radicchio.
Headquartered in Austin, Texas, Tantau maintains offices throughout Europe,
the United States, Australia and Japan, with significant engineering operations
in Germany, Switzerland and Finland.
TANTAU SALES AND MARKETING STRATEGY
While Tantau is in an early stage of development, the market opportunity
that Tantau is seeking to address is very large. Therefore, Tantau believes that
it must achieve market reach that extends beyond the current capabilities and
size of its organization. To this end, Tantau has developed a sales and
distribution channel strategy that combines direct selling and marketing efforts
with indirect sales through manufacturers, systems integrators and independent
software vendors. Additionally, in some parts of the world, such as Japan, Korea
and Singapore, Tantau has sought to develop distribution
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relationships that are focused within that geographic region. Overall, Tantau
expects to generate the majority of its revenue through its indirect sales and
marketing channels.
In establishing sales through its relationships with original equipment
manufacturers, Tantau is targeting manufacturers of computer and infrastructure
products that have significant sales reach. For example, Tantau entered into an
OEM agreement with Compaq Computer under which Compaq will resell the Wireless
Internet Platform to its customers in the telecommunications and financial
services markets. Tantau is in discussions with other manufacturers of computer
and infrastructure products to serve as resellers of the Wireless Internet
Platform.
Tantau also targets systems integrators, such as Siemens Business Services,
Compaq Computer and HP Consulting, and independent software vendors, to serve as
resellers of the Wireless Internet Platform within the financial services
marketplace. To support these efforts, Tantau has established a professional
services organization to assist with customer implementations that incorporate
the Wireless Internet Platform. Tantau intends to grow this professional
services organization across its global operations.
To enhance the indirect channels that Tantau has established and intends to
establish in the future with OEMs, systems integrators and software vendors,
Tantau intends to expand its direct sales force. Tantau has established a
geographically-distributed direct sales force in Europe, Asia and the United
States. Tantau intends to expand this direct sales force in these regions, with
plans to eventually base additional direct sales resources in other regions of
the world where supported by the demand for wireless transaction capabilities.
TANTAU'S PRODUCT OFFERING
WIRELESS INTERNET PLATFORM
Tantau has designed its Wireless Internet Platform to uniquely address three
of the key requirements of m-commerce applications:
- to enable its customers to control their relationships with consumers;
- to provide broad scalability, availability, transaction integrity and
security; and
- to integrate with both wireless and wired Internet applications.
The Wireless Internet Platform is intended to support a total wireless
solution by enabling various wireless devices, such as cellular phones, personal
digital assistants, pagers and web browsers, to interact with e-commerce
applications and data sources. It has been designed to permit Tantau's target
customers to:
- more rapidly introduce wireless e-commerce applications;
- improve their customer attraction and retention rates through the delivery
of applications with higher switching costs;
- provide consistent, high quality service levels including during periods
of high demand; and
- enable them to seamlessly integrate with the products and services of
other wireless software vendors, as well as the information technology
products within their existing computing environments.
Tantau believes that, as wireless Internet applications become increasingly
complex and are used by large numbers of consumers, significant demands will be
placed on the ability of corporate data centers to meet increasing demand while
ensuring uninterrupted, high-quality performance. With its Wireless Internet
Platform now facilitating e-commerce transactions for millions of consumers,
Tantau believes this product effectively addresses these demands.
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The Wireless Internet Platform is a component-based product that is
compatible with a number of computing platforms. As a result, the Wireless
Internet Platform supports linear scaling while providing high levels of
availability. Wireless users can access back-end applications and data sources
through modular, standards-based gateways. The Wireless Internet Platform is
distributed and can be configured with or without a gateway for conversion of
mobile telephone to Internet protocols. It supports a variety of communication
protocols as plug-and-play components transparent to the application developer
and end user. The Wireless Internet Platform also supports HTTP access from
standard web browsers.
The Wireless Internet Platform is standards-based, thus enabling it to
interface with the middleware, development environments and management tools
within the existing computing environments of the customer. Content conversion
templates enable developers to control the appearance of wireless content across
different devices.
TANTAU'S COMPETITION
The mobile Internet infrastructure software market is becoming increasingly
competitive. Tantau's products compete primarily on the basis of quality,
breadth of features, security, scalability, openess and transaction processing
capability. Tantau believes that its current and potential competition arises
from four primary different sources:
- in-house development efforts of enterprises, including banks and brokerage
companies, which may choose to build their infrastructure and applications
using in-house development resources;
- mobile Internet software companies, including some relatively large
companies that provide messaging infrastructure products, as well as a
number of new market entrants that primarily focus on the market from a
messaging, content or content transcoding perspective, many of which are
expected to develop their current products to offer transaction
capabilities, with competitors in this category including Aether Systems,
w-Technologies and Brience;
- traditional e-infrastructure companies, including traditional applications
server vendors, that may seek to expand their traditional wireline
infrastructure to incorporate the specific capabilities necessary to
compete in the mobile Internet market; and
- telecom network infrastructure companies, some of which are expected to
build, or enter into relationships with Tantau's competitors to offer,
competitive products, such as Motorola, Nokia, and Ericsson.
EMPLOYEES
As of November 30, 2000, Tantau had 170 employees. None of Tantau's
employees are covered by a collective bargaining agreement.
PROPERTIES
Tantau's principal executive offices are located in Austin, Texas. Tantau
also leases offices in Reston, Virginia; San Francisco, California; Cupertino,
California; Overland Park, Kansas; West Orange, New Jersey; Charlotte, North
Carolina; Sugar Land, Texas; St. Albans, U.K.; Friedrichsdorf, Germany;
Lenzburg, Switzerland; Espoo, Finland; Sydney, Australia; and Tokyo, Japan.
LEGAL PROCEEDINGS
Tantau is currently not a party to any material legal proceedings.
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TANTAU SECURITY OWNERSHIP OF MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Set forth below is information regarding beneficial ownership of Tantau's
capital stock as of December 15, 2000 by:
- each person or entity who is known by Tantau to own beneficially 5% or
more of the outstanding shares of common stock, Series A Preferred Stock
or Series B Preferred Stock;
- each present director and executive officer of Tantau; and
- all Tantau directors and executive officers as a group.
For purposes of this table, the term "beneficial ownership" includes
outstanding shares, as well as shares issuable upon exercise of vested options,
options that vest within 60 days, and shares issuable upon conversion of
Tantau's Series A Preferred Stock and Series B Preferred Stock.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF POST-CONVERSION
BENEFICIAL PERCENT OF PERCENT OF COMMON
NAME OWNERSHIP(+) CLASS OF STOCK CLASS STOCK OF TANTAU(++)
---- -------------------- ------------------ ----------- -------------------
<S> <C> <C> <C> <C>
EXECUTIVE OFFICERS AND
DIRECTORS:
John Sims(1)............ 1,312,500 Common Stock 16.96% 4.85%
Harald Sammer(2)........ 1,312,500 Common Stock 16.96% 4.85%
James Treybig(3)........ 350,000 Common Stock 4.52% 1.29%
Joseph Aragona(4)....... 8,996,431(4) Common Stock 53.76%(4) 33.25%
7,990,000 Series A Preferred 62.18% --
1,006,431 Series B Preferred 15.55% --
Gerald Peterson(5)...... 25,000 Common Stock * *
Charles Goldman(6)...... 1,616,580(6) Common Stock 17.28%(6) 5.97%
1,616,580 Series B Preferred 24.98% --
Roger Bellass(7)........ 200,000 Common Stock 2.52% *
John Reece(8)........... 300,000 Common Stock 3.88% 1.11%
Frank Kaplan(9)......... 350,000 Common Stock 4.52% 1.29%
Ruediger Warns(10)...... 167,500 Common Stock 2.17% *
Rita Selvaggi(11)....... 258,000 Common Stock 3.33% *
Peter Klante(12)........ 258,000 Common Stock 3.33% *
Jim Sink(13)............ 258,000 Common Stock 3.23% *
George Schulze(14)...... 258,000 Common Stock 3.23% *
All Officers and 15,662,511(15) Common Stock 82.15%(15) 57.88%
Directors as a Group 7,990,000 Series A Preferred 62.18% --
(14 persons)(15)...... 2,623,011 Series B Preferred 40.52% --
5% STOCKHOLDERS:
Austin Ventures(16)..... 8,996,431(16) Common Stock 53.76%(16) 33.25%
7,990,000 Series A Preferred 62.18% --
1,006,431 Series B Preferred 15.55% --
TVM Techno Venture 2,701,929(17) Common Stock 25.88%(17) 9.99%
Enterprises III 2,400,000 Series A Preferred 18.68% --
Limited 301,929 Series B Preferred 4.66% --
Partnership(17).......
</TABLE>
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<TABLE>
<CAPTION>
AMOUNT AND NATURE OF POST-CONVERSION
BENEFICIAL PERCENT OF PERCENT OF COMMON
NAME OWNERSHIP(+) CLASS OF STOCK CLASS STOCK OF TANTAU(++)
---- -------------------- ------------------ ----------- -------------------
<S> <C> <C> <C> <C>
Compaq Computer 2,082,737(18) Common Stock 21.21%(18) 7.70%
Corporation(18)....... 1,850,000 Series A Preferred 14.40% --
232,737 Series B Preferred 3.60% --
Chase Manhattan Bank, 1,616,580(19) Common Stock 17.28%(19) 5.97%
Trustee for First 1,616,580 Series B Preferred 24.98% --
Plaza Group
Trust(19).............
Chase Capital 1,616,580(20) Common Stock 17.28%(20) 5.97%
Investments, 1,616,580 Series B Preferred 24.98% --
L.P.(20)..............
Nokia Corporation(21)... 404,145(21) Common Stock 4.96%(21) 1.49%
404,145 Series B Preferred 6.24% --
Hewlett-Packard 404,145(22) Common Stock 4.96%(22) 1.49%
Company(22)........... 404,145 Series B Preferred 6.24% --
Texas Growth Fund 707,254(23) Common Stock 8.38%(23) 2.61%
II-1998(23)........... 707,254 Series B Preferred 10.93% --
</TABLE>
------------
* Indicates less than 1% ownership.
+ Each share of Series A preferred stock is convertible at any time at the
option of the holder of such share into one share of common stock. Each
share of Series B preferred stock also is convertible at any time at the
option of the holder of such share into one share of common stock.
++ Assumes conversion of all shares of Series A preferred stock and Series B
preferred stock prior to the effective time of the merger as currently
contemplated by the merger agreement. Each share of Series A preferred stock
and Series B preferred stock will convert into one share of common stock.
(1) Under his Founder's Stock Purchase Agreement with Tantau, of the 1,312,500
shares of common stock held by Mr. Sims, 710,937 of such shares as of
December 15, 2000 are unvested and are subject to a right of repurchase by
Tantau if Mr. Sims ceases to be an employee for any reason. Pursuant to such
agreement, 27,344 shares of Mr. Sims' unvested common stock will vest and be
released from the repurchase right on each monthly anniversary of the
agreement. Mr. Sims' agreement provides for accelerated vesting of these
shares in the event of a change of control and, as a result, the repurchase
rights as to Mr. Sims' unvested shares will lapse and these shares will
fully vest as of the first anniversary of the effective time of the merger.
However, Mr. Sims has entered into a side letter agreement with 724
Solutions whereby Mr. Sims agreed to postpone the accelerated vesting of his
shares until the second anniversary of the effective time of the merger.
Mr. Sims' address is c/o Tantau Software, Inc., 108 Wild Basin Drive,
Suite 110, Austin, Texas 78746.
(2) Under his Founder's Stock Purchase Agreement with Tantau, of the 1,312,500
shares of common stock held by Mr. Sammer, 710,937 of such shares as of
December 15, 2000 are unvested and are subject to a right of repurchase by
Tantau if Mr. Sammer ceases to be an employee for any reason. Pursuant to
such agreement, 27,344 shares of Mr. Sammer's unvested common stock will
vest and be released from the repurchase right on each monthly anniversary
of the agreement. Mr. Sammer's agreement provides for accelerated vesting of
these shares in the event of a change of control and, as a result, the
repurchase rights as to Mr. Sammer's unvested shares will lapse and these
shares will fully vest as of the first anniversary of the effective time of
the merger. However, Mr. Sammer has entered into a side letter agreement
with 724 Solutions whereby Mr. Sammer agreed to postpone the accelerated
vesting of his shares until the second anniversary of the effective time of
the merger. Mr. Sammer's address is c/o Tantau Software Int'l Inc.,
Max-Planck Str. 36, D-61381 Friedrichsdorf, Germany.
(3) Under his Founder's Stock Purchase Agreement with Tantau, of the 350,000
shares of common stock held by Mr. Treybig, 189,583 of such shares as of
December 15, 2000 are unvested and are subject to a right of repurchase by
Tantau if Mr. Treybig ceases to be an employee for any reason. Pursuant to
such agreement, 7,292 shares of Mr. Treybig's unvested common stock will
vest and be released from the repurchase right on each monthly anniversary
of the agreement. Mr. Treybig's agreement provides for accelerated vesting
of these shares in the event of a change of control and, as a result, the
repurchase rights as to Mr. Treybig's unvested shares will lapse and these
shares will fully vest as of the first anniversary of the effective time of
the merger. Mr. Treybig disclaims beneficial ownership of the shares held by
Austin Ventures, except to the extent of his pecuniary interest.
Mr. Treybig's address is c/o Austin Ventures, 701 N. Brazos Street,
Suite 1400, Austin, Texas 78701.
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(4) All shares indicated as beneficially owned by Mr. Aragona are included due
to his affiliation with funds of Austin Ventures. Mr. Aragona disclaims
beneficial ownership of the shares held by Austin Ventures, except to the
extent of his pecuniary interest therein. The shares of common stock
indicated as beneficially owned by Mr. Aragona represent shares of common
stock issuable upon conversion of the beneficially owned preferred stock
attributed to him. Mr. Aragona's address is c/o Austin Ventures,
701 N. Brazos Street, Suite 1400, Austin, Texas 78701.
(5) All shares of common stock beneficially owned by Mr. Peterson are currently
unvested and are subject to a right of repurchase by Tantau. Twenty-five
percent (25%) of the shares will vest and no longer be subject to the
repurchase right on February 16, 2001, and an additional one forty-eighth
( 1/48th) of the shares will vest and no longer be subject to the repurchase
right on the first day of each month thereafter. However, these shares have
accelerated vesting in the event of a change of control. Under Tantau's 1999
Stock Plan, the merger will qualify as a change of control and, as a result,
the repurchase right as to Mr. Peterson's unvested shares will lapse and
these shares will fully vest as of the first anniversary of the effective
time of the merger. Mr. Peterson is Compaq Computer Corporation's
representative to the Tantau board of directors. Mr. Peterson's address is
c/o Tantau Software, Inc., 108 Wild Basin Drive, Suite 110, Austin, Texas
78746.
(6) All shares indicated as beneficially owned by Mr. Goldman are included due
to his affiliation with funds of Chase Capital. Mr. Goldman disclaims
beneficial ownership of the shares held by Chase Capital, except to the
extent of his pecuniary interest therein. The shares of common stock
indicated as beneficially owned by Mr. Goldman represent shares of common
stock issuable upon conversion of the beneficially owned preferred stock
attributed to him. Mr. Goldman's address is c/o Chase Capital Partners, 1221
Avenue of the Americas, New York, New York 10020.
(7) Mr. Bellass has a nonstatutory stock option to purchase 50,000 shares of
common stock and an incentive option to purchase 150,000 shares of common
stock. Mr. Bellass' nonstatutory option is fully vested. The incentive stock
option shall vest as to twenty-five percent (25%) on July 1, 2001 and as to
an additional one forty-eighth ( 1/48th) of the option shares on the first
day of each month thereafter. Mr. Bellass may exercise these options at any
time, even as to shares which have not vested. Any unvested shares received
upon exercise of the incentive stock option would be subject to a right of
repurchase by Tantau until such shares vest as described above. Under
Tantau's 1999 Stock Plan, the merger will qualify as a change of control and
Mr. Bellass' unvested shares will vest and the repurchase right will lapse
as of the first anniversary of the effective time of the merger. However,
Mr. Bellass has entered into a side letter agreement with 724 Solutions
whereby he has agreed to postpone the accelerated vesting of his shares
until the second anniversary of the effective time of the merger.
Mr. Bellass' address is c/o Tantau Software, Inc., 108 Wild Basin Drive,
Suite 110, Austin, Texas 78746.
(8) Of the 300,000 shares of common stock beneficially owned by Mr. Reece, as of
December 15, 2000, 187,500 of the shares are unvested and are subject to a
right of repurchase by Tantau. 6,250 shares of Mr. Reece's unvested common
stock will vest and be released from the repurchase right on the first day
of each month hereafter. Under Tantau's 1999 Stock Plan, the merger will
qualify as a change of control and Mr. Reece's unvested shares will vest and
the repurchase right will lapse as of the first anniversary of the effective
time of the merger. However, Mr. Reece has entered into a side letter
agreement with 724 Solutions in which he has agreed to postpone the
accelerated vesting of his shares until the second anniversary of the
effective time of the merger. Mr. Reece's address is c/o Tantau Software,
Inc., 108 Wild Basin Drive, Suite 110, Austin, Texas 78746.
(9) Of the 350,000 shares of common stock beneficially owned by Mr. Kaplan, as
of December 15, 2000, 204,167 of the shares are unvested and are subject to
a right of repurchase by Tantau. 7,292 shares of Mr. Kaplan's unvested
common stock will vest and be released from the repurchase right on the
first day of each month hereafter. Under Tantau's 1999 Stock Plan, the
merger will qualify as a change of control and Mr. Kaplan's unvested shares
will vest and the repurchase right will lapse as of the first anniversary of
the effective time of the merger. However, Mr. Kaplan has entered into a
side letter agreement with 724 Solutions in which he has agreed to postpone
the accelerated vesting of his shares until the second anniversary of the
effective time of the merger. Mr. Kaplan's address is c/o Tantau Software,
Inc., 108 Wild Basin Drive, Suite 110, Austin, Texas 78746.
(10) Of the 167,500 shares of common stock beneficially owned by Mr. Warns, as
of December 15, 2000, 97,708 of the shares are unvested and are subject to a
right of repurchase by Tantau. 3,490 shares of Mr. Warns' unvested common
stock will vest and be released from the repurchase right on the first day
of each month hereafter. Under Tantau's 1999 Stock Plan, the merger will
qualify as a change of control and Mr. Warns' unvested shares will vest and
the repurchase right will lapse as of the first anniversary of the effective
time of the merger. However, Mr. Warns has entered into a side letter
agreement with 724 Solutions in which he has agreed to postpone the
accelerated vesting of his shares until the second anniversary of the
effective time of the merger. Mr. Warns' address is c/o Tantau Software,
Inc., 108 Wild Basin Drive, Suite 110, Austin, Texas 78746.
(11) Of the 258,000 shares of common stock beneficially owned by Ms. Selvaggi,
as of December 15, 2000, 166,625 of the shares are unvested and are subject
to a right of repurchase by Tantau. 5,375 shares of Ms. Selvaggi's unvested
common stock will vest and be released from the repurchase right on the
first day of each month hereafter. Under Tantau's 1999 Stock Plan, the
merger will qualify as a change of control and Ms. Selvaggi's unvested
shares will vest and the repurchase right will lapse as of the first
anniversary of the effective time of the merger. However, Ms. Selvaggi has
entered into a side letter
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<PAGE>
agreement with 724 Solutions in which she has agreed to postpone the
accelerated vesting of her shares until the second anniversary of the
effective time of the merger. Ms. Selvaggi's address is c/o Tantau Software,
Inc., 108 Wild Basin Drive, Suite 110, Austin, Texas 78746.
(12) Of the 258,000 shares of common stock beneficially owned by Mr. Klante, as
of December 15, 2000, 193,500 of the shares are unvested and are subject to
a right of repurchase by Tantau. 5,375 shares of Mr. Klante's unvested
common stock will vest and be released from the repurchase right on the
first day of each month hereafter. Under Tantau's 1999 Stock Plan, the
merger will qualify as a change of control and Mr. Klante's unvested shares
will vest and the repurchase right will lapse as of the first anniversary of
the effective time of the merger. However, Mr. Klante has entered into a
side letter agreement with 724 Solutions in which he has agreed to postpone
the accelerated vesting of his shares until the second anniversary of the
effective time of the merger. Mr. Klante's address is c/o Tantau Software,
Inc., 108 Wild Basin Drive, Suite 110, Austin, Texas 78746.
(13) Mr. Sink has an option to purchase 258,000 shares of common stock. On
December 26, 2000, twelve and a half percent (12.5%) of the option shares
will vest and an additional one forty second ( 1/42) of the option shares
will vest on the 17th day of each month thereafter. Mr. Sink may exercise
the option at any time, even as to shares which have not vested. Any
unvested shares received upon exercise of the option would be subject to a
right of repurchase by Tantau until such shares vest as described above.
Under Tantau's 1999 Stock Plan, the merger will qualify as a change of
control and Mr. Sink's unvested shares will vest and the repurchase right
will lapse as of the first anniversary of the effective time of the merger.
However, Mr. Sink has entered into a side letter agreement with 724
Solutions in which he has agreed to postpone the accelerated vesting of his
shares until the second anniversary of the effective time of the merger.
Mr. Sink's address is c/o Tantau Software, Inc., 108 Wild Basin Drive,
Suite 110, Austin, Texas 78746.
(14) Mr. Schulze has an option to purchase 258,000 shares of common stock. On
February 14, 2001, twelve and a half percent (12.5%) of the option shares
will vest and an additional ( 1/42) of the option shares will vest on the
14th day of each month thereafter. Mr. Schulze may exercise the option at
any time even as to shares which have not vested. Any unvested shares
received upon exercise of the option would be subject to a right of
repurchase by Tantau until such shares vest as described above. Under
Tantau's 1999 Stock Plan, the merger will qualify as a change of control and
Mr. Schulze's unvested shares will vest and the repurchase right will lapse
as of the first anniversary of the effective time of the merger. However,
Mr. Schulze has entered into a side letter agreement with 724 Solutions in
which he has agreed to postpone the accelerated vesting of his shares until
the second anniversary of the effective time of the merger. Mr. Schulze's
address is c/o Tantau Software, Inc., 108 Wild Basin Drive, Suite 110,
Austin, Texas 78746.
(15) The shares of common stock indicated as beneficially owned by the officers
and directors as a group include 10,613,011 shares of common stock issuable
upon conversion of the beneficially owned preferred stock attributed to
them.
(16) The shares of common stock indicated as beneficially owned by Austin
Ventures represent shares of common stock issuable upon conversion of
(a) the 7,771,429 shares of Series A Preferred Stock and the 978,899 shares
of Series B Preferred Stock held by Austin Ventures VI, L.P. and (b) the
218,571 shares of Series A Preferred Stock and the 27,532 shares of
Series B Preferred Stock held by Austin Ventures VI Affiliates Fund, L.P.
also indicated as beneficially owned. The general partner of Austin Ventures
VI, L.P. and Austin Ventures VI Affiliates Fund, L.P. is AV Partners VI,
L.P. The general partners of AV Partners VI, L.P. are Joseph Aragona,
Kenneth DeAngelis, Jeffery Garvey, Ed Olkkola, John Thorton and Blaine
Wesner. Each of the general partners of AV Partners VI, L.P. disclaim
beneficial ownership of the shares held by Austin Ventures VI, L.P. and
Austin Ventures VI Affiliates Fund, L.P., except to the extent of his
pecuniary interest in these shares. The address of the investment funds
affiliated with Austin Ventures is 701 N. Brazos Street, Suite 1400, Austin,
Texas 78701.
(17) The shares of common stock indicated as beneficially owned by TVM Techno
Venture Enterprises III Limited Partnership represent shares of common stock
issuable upon conversion of the 2,400,000 shares of Series A Preferred Stock
and the 301,929 shares of Series B Preferred Stock also indicated as
beneficially owned. The general partner of TVM Techno Venture Enterprises
III Limited Partnership is TVM Techno Management No. III Limited
Partnership. The general partner of TVM Techno Management No. III Limited
Partnership is TVM Management Corporation. The address for TVM Techno
Venture Enterprises No. III Limited Partnership is c/o TVM Techno Venture
Management, 101 Arch Street, Suite 1950, Boston, Massachusetts 02110.
(18) The shares of common stock indicated as beneficially owned by Compaq
Computer Corporation represent shares of common stock issuable upon
conversion of (a) the 1,850,000 shares of Series A Preferred Stock held by
Compaq Computer Corporation and (b) the 232,737 shares of Series B Preferred
Stock held by CPQ Holdings, Inc., a wholly owned subsidiary of Compaq
Computer Corporation also indicated as beneficially owned. The address for
Compaq Computer Corporation is 20555 State Highway 249, Mail Code 110701,
Houston, Texas 77070. The address for CPQ Holdings, Inc. is 10600 Ridgeview
Court, Cupertino, California 95014.
(19) The shares of common stock indicated as beneficially owned by First Plaza
Group Trust represent shares of common stock issuable upon conversion of the
1,616,580 shares of Series B Preferred Stock also indicated as beneficially
owned. The beneficiaries of the First Plaza Group Trust are the General
Motors Salaried Employees Pension Trust and the General
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Motors Hourly-Rate Employees Pension Trust. The address for First Plaza
Group Trust is c/o The Chase Manhattan Bank, as Trustee for First Plaza
Group Trust, Attn: John F. Weeda, 4 Chase Metro Tech Center, 18th Floor,
Brooklyn, New York 11245.
(20) The shares of common stock indicated as beneficially owned by Chase Capital
Investments, L.P. represent shares of common stock issuable upon conversion
of the 1,616,580 shares of Series B Preferred Stock also indicated as
beneficially owned. The investment manager of Chase Capital Investments,
L.P., is Chase Capital Partners. The address for Chase Capital Investments,
L.P. is c/o Chase Capital Partners, 1221 Avenue of the Americas, New York,
New York 10021-1080.
(21) The shares of common stock indicated as beneficially owned by Nokia
Corporation represent shares of common stock issuable upon conversion of the
404,145 shares of Series B Preferred Stock also indicated as beneficially
owned. The address for Nokia Corporation is Keilalahdentie 4, 02150 Espoo,
Finland.
(22) The shares of common stock indicated as beneficially owned by
Hewlett-Packard Company represent shares of common stock issuable upon
conversion of the 404,145 shares of Series B Preferred Stock also indicated
as beneficially owned. The address for Hewlett-Packard Company is 3000
Hanover Street, MS 20BQ, Palo Alto, California 94 304-1112.
(23) The shares of common stock indicated as beneficially owned by Texas Growth
Fund II-1998 represent shares of common stock issuable upon conversion of
the 707,254 shares of Series B Preferred Stock also indicated as
beneficially owned. The address for Texas Growth Fund II-1998 is c/o TGF
Management Corp., 111 Congress, Suite 2900, Austin, Texas 78701.
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DESCRIPTION OF 724 SOLUTIONS' CAPITAL STOCK
AUTHORIZED AND ISSUED SHARE CAPITAL
COMMON SHARES
Our authorized share capital consists of an unlimited number of common
shares, no par value, of which 39,061,130 common shares were issued and
outstanding as of September 30, 2000, and an unlimited number of preference
shares, issuable in series. 29,402,426 of our common shares were outstanding on
December 31, 1999. We have not issued any preference shares.
Holders of common shares are entitled to one vote per share on all matters
to be voted on at all meetings of shareholders and to receive dividends as and
when declared by our board of directors. Upon any voluntary or involuntary
liquidation, dissolution or winding-up of our company, the holders of common
shares are entitled to share ratably in our remaining assets available for
distribution, after payment of liabilities. A holder of common shares has no
preemptive, redemption or conversion rights.
PREFERENCE SHARES
Our articles provide that our board of directors has the authority, without
further action by the shareholders, to issue an unlimited number of preference
shares, no par value, in one or more series. These preference 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 a particular series of
any preference shares issued, including any qualifications, limitations or
restrictions. Special rights which may be granted to a series of preference
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. Preference 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 preference shares could
also have the effect of delaying or preventing a change in control of our
company.
SHARE SPLIT
On December 30, 1999, we filed articles of amendment to split all of our
outstanding and reserved common shares on a two-for-one basis. All disclosure in
this document is based on post-split numbers.
PRIOR SALES
The following are the only transactions involving the sale of our common
shares:
1. At inception, July 28, 1997, we issued 200 common shares for an
aggregate subscription price of $1,000.
2. Between inception of our corporation and December 31, 1997, we issued
3,999,800 common shares for an aggregate subscription price of
$1.4 million.
3. Between January 1, 1998 and December 31, 1998, we issued 3,428,000
common shares for an aggregate subscription price of $4.56 million.
4. Between January 1, 1998 and December 31, 1998, we issued 4,000,000
common shares for an aggregate subscription price of approximately
$1.3 million upon the exercise of stock options held by our investors.
5. In June 1999, we issued 541,790 common shares for an aggregate
subscription price of $2.0 million.
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6. In August 1999, we issued 950,000 common shares for an aggregate
subscription price of $3.6 million.
7. In August 1999, we issued 6,400,000 common shares for an aggregate
subscription price of $24.5 million.
8. In October 1999, we issued 5,450,000 common shares for an aggregate
subscription price of $20.8 million, 2,658,210 common shares for an
aggregate subscription price of $10.2 million, and 1,973,856 common
shares for an aggregate subscription price of $10.0 million.
9. In February 2000, in connection with our initial public offering, we
issued 6,900,000 common shares for an aggregate purchase price of
$179.4 million, less underwriters fees of $12.6 million.
10. In June 2000, in connection with our acquisition of ezlogin, we issued
1,003,594 common shares to the former shareholders of ezlogin, and
assumed employee stock options to purchase our common shares.
11. In September 2000, in connection with our acquisition of Spyonit, we
issued 1,041,616 common shares to the former shareholders of Spyonit.
12. In the nine months ended September 30, 2000, we issued 713,494 common
shares for an aggregate subscription price of approximately $541,000 upon
the exercise of employee stock options.
Each of the above issuances were made under resolutions passed by our board
of directors or an authorized committee.
For a description of our common shares subject to outstanding options, see
"724 Solutions -- Management -- Executive Compensation -- Stock Option Plans."
REGISTRAR AND TRANSFER AGENTS
The registrar and transfer agents for our common shares are Computershare
Investor Services Inc., 8th Floor, 100 University Avenue, Toronto, Ontario
M5J 2Y1, and Computershare Trust Company Inc., 12039 West Alamenda Parkway,
Lakewood, Colorado, 80228.
MEMORANDUM AND ARTICLES
Our corporation number assigned by the Ontario Ministry of Consumer and
Commercial Relations is 1363809. Our articles do not contain our purpose or
objectives, as neither is required under the laws of Ontario.
None of our directors are permitted to vote on any resolution to approve a
material contract or transaction in which that director has a material interest.
Neither our articles nor our bylaws limit the directors' power, in the absence
of a quorum, to vote compensation to themselves. The bylaws provide that
directors shall receive remuneration as the board of directors shall determine
from time to time. In addition, our board of directors may, without the
authorization of the shareholders, cause us to:
- borrow money;
- issue, reissue, sell or pledge debt obligations;
- give a guarantee to secure performance of another party's obligations; and
- mortgage, hypothecate, pledge or otherwise create a security interest in
all or any of our property.
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Neither our articles nor our bylaws discuss the retirement or non-retirement
of directors under an age limit requirement, and there is no number of shares
required for director qualification.
The following is a description of additional rights, preferences and
restrictions attached to our capital stock as set forth in our articles and
bylaws:
VOTING RIGHTS. Neither our articles nor our bylaws provide for the election
or reelection of directors at staggered intervals. Ontario law therefore
requires annual elections of all of our directors.
REDEMPTION PROVISIONS. Neither our articles nor our bylaws provide for the
redemption of our common shares, although we are permitted to enter into
consensual repurchase transactions under Ontario law.
SHAREHOLDER MEETINGS. Annual meetings of our shareholders are held on the
day determined by the board of directors, the Chairman of the Board, the Chief
Executive Officer or the President. Our board or any of these officers may also
call special meetings of our shareholders. Shareholders of record must be given
notice of meetings not less than 21 days nor more than 50 days before the date
of the meeting. However, under applicable securities laws, notice is generally
mailed not less than 25 days nor more than 33 days before the meeting. Notices
of a meeting of shareholders called for any purpose other than consideration of
the financial statements and auditor's report, election of directors and
re-appointment of the auditor shall state the nature of that business in
sufficient detail to permit a shareholder to form a reasoned judgment of the
matter and shall state the text of any special resolution or bylaw to be
submitted to the meeting. Our board of directors is permitted to fix a record
date for any meeting of the shareholders that is between 21 and 50 days prior to
that meeting. However, as a result of applicable Ontario securities laws, the
record date must be at least 35 days prior to the meeting date. The only persons
entitled to admission at a meeting of the shareholders are shareholders entitled
to vote, our directors, our auditors, and others entitled by law, by invitation
of the chairman of the meeting, or by consent of the meeting.
SINKING FUND PROVISIONS. Neither our articles nor our bylaws contain
sinking fund provisions for our common shares.
LIABILITY TO FURTHER CAPITAL CALLS. Neither our articles nor our bylaws
contain provisions allowing us to make further capital calls with respect to any
holder of our common shares. Under Ontario law, common shares must be fully paid
for when issued.
DISCRIMINATORY PROVISIONS BASED ON SUBSTANTIAL OWNERSHIP. Neither our
articles nor our bylaws contain provisions which discriminate against any
existing or prospective holders of our common shares as a result of that
shareholder owning a substantial number of shares.
OTHER PROVISIONS. In the event we were to pay dividends on issued and
outstanding shares, the dividend must be claimed within six years of the payment
date or payment shall be forfeited and shall revert to the company.
Our articles and by-laws do not address the process by which the rights of
holders of common shares may be changed, and therefore this process is governed
by the provisions of the Ontario Business Corporations Act. Our articles
provide, as generally required by the Ontario Business Corporations Act, that
holders of shares of any class or series, including common shares, shall not be
entitled to dissent or to vote separately as a class or series upon a proposal
to amend the articles to:
- increase or decrease any maximum number of authorized shares of such class
or series, or increase the maximum number of authorized shares of a class
or series having rights or privileges equal or superior to the shares of
such class or series;
- effect an exchange or reclassification or cancellation of the shares of
such class or series; or
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- create a new class or series of shares equal or superior to the shares of
such class or series.
Otherwise, the general provisions of the Ontario Business Corporations Act
apply to the process and require shareholder meetings and independent voting to
amend our articles to change the rights of holders of our common shares.
Except for our ability to issue shares of preferred stock without
shareholder approval, there are no material provisions of our articles or bylaws
that would delay, defer or prevent a change in control of our company, and that
would operate only with respect to a merger, acquisition, or corporate
restructuring involving us or any of our subsidiaries. Our bylaws do not contain
a provision indicating any ownership threshold above which shareholder ownership
must be disclosed. Neither our articles nor our bylaws contain provisions
governing changes in capital that are more stringent than the conditions
required by Ontario law.
For a description of material differences between the Ontario Business
Corporations Act and the Delaware General Corporation Law in relation to this
transaction, see "Comparison of Stockholder Rights."
OUR ORGANIZATIONAL STRUCTURE
We have six significant wholly-owned subsidiaries. The following table sets
forth these subsidiaries, including the country or state/province of
incorporation of the subsidiary, and the percentage of our direct and/or
indirect ownership interest in the subsidiary.
<TABLE>
<CAPTION>
COUNTRY OR STATE/ OWNERSHIP
NAME OF SUBSIDIARY PROVINCE OF INCORPORATION INTEREST
------------------ ------------------------- ---------
<S> <C> <C>
724 Solutions Corp........................ Delaware 100%
724 Solutions International SRL........... Barbados 100%
724 Solutions (UK) Limited................ United Kingdom 100%
Ezlogin.com, Inc.......................... California 100%
YRLess Internet Corporation............... Canada 100%
Spyonit.com, Inc.......................... Delaware 100%
</TABLE>
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COMPARISON OF STOCKHOLDER RIGHTS
We are incorporated under the Ontario Business Corporations Act and,
accordingly, we are governed by the corporate laws of Ontario and our articles
and bylaws. Tantau is incorporated under the Delaware General Corporation Law
and, accordingly, is governed by Delaware law and its charter and bylaws. The
Ontario Business Corporations Act is often referred to as the OBCA, and the
Delaware General Corporation Law is often referred to as the DGCL. If the merger
is completed, holders of Tantau's capital stock at the effective time of the
merger will have their Tantau shares exchanged for our common shares.
While the rights and privileges of stockholders of a Delaware corporation
are, in many instances, comparable to those of stockholders of an Ontario
corporation, there are some differences. The following is a summary discussion
of the most significant differences in stockholder rights. These differences
arise from differences between Delaware and Canadian law, between the DGCL and
OBCA and between Tantau's charter and bylaws and our articles and bylaws. This
summary is not intended to be complete and is qualified by reference to the
DGCL, the OBCA and the governing corporate instruments of our company and
Tantau. For a description of the respective rights of the holders of our common
shares and Tantau's capital stock, please see "Description of 724 Solutions'
Capital Stock."
IMPACT OF THE MERGER ON THE RIGHTS OF PREFERRED STOCKHOLDERS OF TANTAU
Prior to the effective time of the merger, Tantau's Series A and Series B
preferred stock will be converted into shares of Tantau's common stock. These
shares of Tantau's common stock will be converted into common shares of 724
Solutions in the merger. As a result of these conversions, several material and
valuable rights possessed by holders of Tantau's preferred stock will be
eliminated. These rights include:
- the right to receive preferential dividends;
- the right to receive preferential payments upon a liquidation of Tantau;
- the right of the holders of Tantau's Series A Preferred Stock to elect
three directors to the Tantau board; and
- the right to approve in advance, through a separate class vote, specified
types of major transactions, including mergers and similar transactions,
amendments to Tantau's organizational documents, and the issuance of
specified types of senior equity securities.
To obtain more information on the rights currently held by holders of the
preferred stock of Tantau, these holders should refer to the documents that they
executed in connection with their initial investment. Once the conversion of
Tantau's preferred stock and the merger has occurred, holders of these
securities will no longer have these rights. Instead, these holders will obtain
the more limited rights of holders of 724 Solutions' common shares described
under "Description of 724 Solutions' Capital Stock."
QUORUM
DELAWARE. The DGCL provides that, unless otherwise stated in the
certificate of incorporation, each stockholder has one vote for each share of
capital stock held. According to Tantau's current bylaws, the holders of a
majority of the stock issued and outstanding and entitled to vote at a meeting,
present in person or by proxy, shall constitute a quorum at all meetings of the
stockholders for the transaction of business, except as otherwise provided by
statute.
ONTARIO. According to 724 Solutions' current bylaws, a quorum for the
transaction of business at any meeting of shareholders is the number of persons,
present in person or by proxy, holding at least one-third of the outstanding
common shares.
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The OBCA provides that, unless otherwise stated in the articles, each share
of a corporation entitles the holder to one vote at a meeting of shareholders.
VOTE REQUIRED FOR EXTRAORDINARY TRANSACTIONS
DELAWARE. The DGCL requires the affirmative vote of a majority of the
outstanding stock entitled to vote to authorize any merger, consolidation,
dissolution or sale of substantially all of the assets of a corporation, except
that, unless required by its certificate of incorporation:
- no authorizing stockholder vote is required of a corporation surviving a
merger if:
- that corporation's certificate of incorporation is not amended in any
respect by the merger,
- each share of stock of that corporation which is outstanding
immediately prior to the effective date of the merger will be an
identical outstanding or treasury share of the surviving
corporation after the effective date of the merger, and
- either no shares of common stock of the surviving corporation and
no shares, securities or obligations convertible into such stock
are to be issued or delivered under the plan of merger, or the
authorized unissued shares or the treasury shares of common stock
of the surviving corporation to be issued and delivered in the
merger plus those initially issuable upon conversion of any other
shares, securities or obligations to be issued in the merger do not
exceed 20% of the corporation's outstanding common stock
immediately prior to the effective date of the merger; and
- in some circumstances, no authorizing stockholder vote is required of a
corporation to authorize a merger with or into a single direct or
indirect wholly-owned subsidiary. Stockholder approval is also not
required under the DGCL for mergers or consolidations in which a parent
corporation merges or consolidates with a subsidiary of which it owns
at least 90% of the outstanding shares of each class of stock.
ONTARIO. Under the OBCA, some extraordinary corporate actions, including
some types of amalgamations, continuances, and sales, leases or exchanges of all
or substantially all the property of a corporation other than in the ordinary
course of business, and other extraordinary corporate actions such as
liquidations, dissolutions and arrangements, are required to be approved by
special resolution. A special resolution is a resolution passed at a meeting by
not less than two-thirds of the votes cast by the stockholders who voted on the
resolution. In some cases, a special resolution to approve an extraordinary
corporate action is also required to be approved separately by the holders of a
class or series of shares, including in some cases a class or series of shares
not otherwise carrying voting rights. In some circumstances, a corporation may
amalgamate with one or more of its subsidiaries or a corporation under common
control with approval of its board of directors but without shareholder
approval.
CALLING A STOCKHOLDERS' MEETING
DELAWARE. Under the DGCL, special meetings of the stockholders may be
called by the board of directors or by any other person or persons as may be
authorized by the certificate of incorporation or by the bylaws of a
corporation. According to Tantau's current bylaws, a special meeting of the
stockholders may be called at any time by one or more stockholders holding
shares in the aggregate entitled to cast at least 10% of the votes at that
meeting.
ONTARIO. Under the OBCA, special meetings of the shareholders may be called
by the board of directors or by any other person or persons as may be authorized
by the articles or bylaws of a corporation. Under our by-laws, special meetings
of shareholders may also be called by the Chairman, the Chief Executive Officer
or the President. In addition, the holders of not less than 5% of the issued
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shares of a corporation that carry the right to vote at the meeting to be held
may requisition the directors to call a meeting of shareholders. Upon meeting
the technical requirements set out in the OBCA for making such a requisition,
the directors of the corporation must call a meeting of shareholders. If they do
not, any shareholders who signed the requisition may call the meeting.
RIGHT TO INSPECT CORPORATE BOOKS, RECORDS AND STOCKHOLDER LISTS
DELAWARE. Under the DGCL, any stockholder, in person or by attorney or
other agent, may make a written demand under oath stating the purpose for
inspection, and has the right to inspect for any proper purpose the
corporation's stock ledger, a list of its stockholders and its other books and
records. A proper purpose for a stockholder is defined by the DGCL to mean any
purpose reasonably related to a person's interest as a stockholder. In some
instances, a court will weigh a stockholder's proper purpose for inspection of
specific corporate books and records against the corporation's need to keep such
information confidential.
ONTARIO. Under the OBCA, any shareholder, in person or by agent or legal
representative, may examine, during the usual business hours of the corporation,
the corporation's share ledger and certain other books and records and may take
extracts of such documents free of charge. The OBCA also provides that any
shareholder, in person or by agent or legal representative, may demand a
shareholder list upon payment of a reasonable fee and upon sending a statutory
declaration that the list shall only be put to a permitted use. A permitted use
is defined by the OBCA as a use in connection with:
- an effort to influence the voting of shareholders of the corporation;
- an offer to acquire shares of the corporation; or
- any other matter relating to the affairs of the corporation.
AMENDMENT TO GOVERNING DOCUMENTS
DELAWARE. The DGCL requires approval of a corporation's board of directors
followed by the affirmative vote of a majority of the outstanding stock entitled
to vote for any amendment to the certificate of incorporation, unless a greater
level of approval is required by the certificate of incorporation. Tantau's
current charter is in agreement with the DGCL, except that an affirmative vote
of a majority of the then outstanding shares of both Series A Preferred Stock
and Series B Preferred Stock, voting as distinct and separate classes, is
required for any changes to the charter if such action would change adversely
the preferences, rights, privileges or powers of the Series A Preferred Stock or
Series B Preferred Stock.
The DGCL also states that the power, by a simple majority, to adopt, amend
or repeal the bylaws of a corporation shall be in the stockholders entitled to
vote. Tantau's current bylaws are in agreement with the DGCL, except that an
affirmative vote of a majority of the then outstanding shares of both Series A
Preferred Stock and Series B Preferred Stock, voting as distinct and separate
classes, is required for any changes to the bylaws if such action would change
adversely the preferences, rights, privileges or powers of the Series A
Preferred Stock or Series B Preferred Stock. Tantau's current bylaws also
confers the power to adopt, amend or repeal the bylaws on Tantau's Board of
Directors in accordance with the DGCL.
ONTARIO. Under the OBCA, any amendment to the articles generally requires
approval by special resolution. The OBCA provides that unless the articles or
bylaws otherwise provide, the directors may, by resolution, make, amend or
repeal any bylaws that regulate the business or affairs of a corporation. Where
the directors make, amend or repeal a bylaw, they are required under the OBCA to
submit the bylaw, amendment or repeal to the shareholders at the next meeting of
shareholders, and the shareholders may confirm, reject or amend the bylaw,
amendment or repeal by an ordinary resolution,
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which is a resolution passed by a majority of the votes cast by shareholders who
voted on the resolution. 724 Solutions' articles and bylaws conform to the OBCA.
DISSENTERS' RIGHTS
DELAWARE. Under the DGCL, holders of shares of any class or series have the
right, in some circumstances, to dissent from a merger or consolidation by
demanding payment in cash for their shares equal to the fair value of such
shares, as determined by a court in an action timely brought by the corporation
or the dissenters. In this context, "fair value" would not include any element
of value arising from the accomplishment of the merger or consolidation. The
DGCL grants dissenters appraisal rights only in the case of mergers or
consolidations and not in the case of a sale or transfer of assets or a purchase
of assets for stock, regardless of the number of shares being issued. For a
stockholder to have a valid appraisal claim, the stockholder must file a written
demand for appraisal with the corporation before the taking of the vote relating
to the merger, and his or her shares must either have no voting rights or, if
they can vote, were not voted for the merger or consolidation. In addition, no
appraisal rights are available for shares of any class or series listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 stockholders, unless the
agreement of merger or consolidation requires the holders to accept for the
shares anything other than:
- stock of the surviving corporation;
- shares of stock of another corporation which are either listed on a
national securities exchange or designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc. or held of record by more than 2,000
stockholders;
- cash in lieu of fractional shares, in the case of either of the above; or
- some combination of the above.
In addition, these rights are not available for any shares of the surviving
corporation if the merger did not require the vote of the stockholders of the
surviving corporation.
OBCA. The OBCA provides that shareholders of a corporation who are entitled
to vote on certain matters are entitled to exercise dissent rights and to be
paid the fair value of their shares in connection with the relevant transaction.
The OBCA does not distinguish for this purpose between publicly traded and
unlisted shares. These matters include:
- any amalgamation with another corporation, other than with some kinds of
affiliated corporations;
- an amendment to the corporation's articles to add, change or remove any
provisions restricting the issue, transfer or ownership of shares;
- an amendment to the corporation's articles to add, change or remove any
restriction upon the business or businesses that the corporation may carry
on or upon any powers that the corporation may exercise;
- a continuance under the laws of another jurisdiction;
- a sale, lease or exchange of all or substantially all the property of the
corporation other than in the ordinary course of business;
- a court order permitting a shareholder to dissent in connection with an
application to the court for an order approving an arrangement proposed by
the corporation; or
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- some types of amendments to the articles of a corporation which require a
separate class or series vote, provided that a shareholder is not entitled
to dissent if an amendment to the articles is effected by a court order
approving a proposal under the Bankruptcy and Insolvency Act (Canada) or
by a court order made in connection with an action for an oppression
remedy under the OBCA.
Under the OBCA, a shareholder may, in addition to exercising dissent rights,
seek an oppression remedy for any act or omission, or threatened act or
omission, of a corporation or any of its directors or other affiliates which is
or would, if effected, would be oppressive, unfairly prejudicial to, or that
unfairly disregards or would unfairly disregard a shareholder's interests.
Under the OBCA, a corporation shall not make a payment to a dissenting
shareholder if there are reasonable grounds for believing that:
- the corporation is or, after the payment, would be unable to pay its
liabilities as they become due; or
- the realizable value of the corporation's assets would thereby be less
than the aggregate of its liabilities.
Because the merger with Tantau will involve a subsidiary of 724 Solutions,
724 Solutions' stockholders will not have dissenter's rights in connection with
this transaction.
OPPRESSION REMEDY
ONTARIO. The OBCA provides an oppression remedy that enables a court to
make any order, both interim and final, to rectify the matters complained of if
the court is satisfied upon application by a complainant that:
- any act or omission of the corporation or an affiliate effects or
threatens to effect a result;
- the business or affairs of the corporation or an affiliate are, have been
or are threatened to be carried on or conducted in a manner; or
- the powers of the directors of the corporation or an affiliate are, have
been or are threatened to be exercised in a manner;
which, in each case, is oppressive or unfairly prejudicial to, or that unfairly
disregards the interest of, any security holder, creditor, director or officer
of the corporation.
In this context, a complainant includes:
- a present or former registered holder or beneficial owner of securities of
a corporation or any of its affiliates;
- a present or former officer or director of the corporation or any of its
affiliates; and
- any other person who, in the discretion of the court, is a proper person
to make this type of application.
The oppression remedy provides the court with an extremely broad and
flexible jurisdiction to intervene in corporate affairs to protect the
"reasonable expectations" of shareholders and other complainants. Conduct which
breaches the fiduciary duties of directors or that is contrary to the legal
right of a complainant will normally trigger the court's jurisdiction under the
oppression remedy. However, the exercise of that jurisdiction does not depend on
a finding of a breach of legal and equitable rights. Furthermore, the court may
order a corporation to pay the interim expenses of a complainant seeking an
oppression remedy. Although the complainant may be held accountable for the
interim costs on final disposition of the complaint, it is not required to give
security for costs.
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DELAWARE. The DGCL does not provide for a similar remedy.
DERIVATIVE ACTION
DELAWARE. Derivative actions may be brought in Delaware by a stockholder on
behalf of, and for the benefit of, a corporation. The DGCL provides that a
stockholder must state in the complaint that he or she was a stockholder of the
corporation at the time of the transaction of which he or she complains or that
his or her stock thereafter devolved upon him or her by operation of law. A
stockholder may not sue derivatively unless he or she first makes demand on the
corporation that it bring suit and that its demand has been refused, unless it
is shown that such suit would have been futile. Stockholders bringing a
derivative action against a corporation may recover their attorney's fees where
the litigation results in a benefit to the corporation or the other
stockholders. Should the derivative action be settled or rendered moot, a
plaintiff is entitled to attorney's fees if:
- the derivative action was meritorious when filed;
- the action producing benefit to the corporation was taken by the
defendants before a judicial resolution was achieved; and
- the resulting corporate benefit was causally related to the lawsuit.
ONTARIO. Under the OBCA, a complainant may apply to the court for leave to
bring an action in the name of and on behalf of a corporation or any subsidiary,
or to intervene in an existing action to which that corporation is a party, for
the purpose of prosecuting, defending or discontinuing the action on behalf of
that corporation.
Under the OBCA, no such action in the name of the corporation may be brought
and no such intervention in an action may be made unless the complainant has
given 14 days' notice in the manner required by the OBCA to the directors of the
corporation or its subsidiary of the complainant's intention to apply to the
court. The court must be satisfied that:
- the directors of the corporation or its subsidiary will not bring,
diligently prosecute or defend or discontinue the action;
- the complainant is acting in good faith; and
- it appears to be in the interests of the corporation or its subsidiary
that the action be brought, prosecuted, defended or discontinued.
Under the OBCA, the court in a derivative action may make any order it deems
appropriate. In addition, under the OBCA, a court may order a corporation or its
subsidiary to pay the complainant's interim costs, including reasonable legal
fees and disbursements. Although the complainant may be held accountable for the
interim costs on final disposition of the complaint, it is not required to give
security for costs in a derivative action.
CLASS ACTIONS
DELAWARE. Tantau is a Delaware corporation and the majority of its assets
are located in the United States. A class action provides a means by which,
where a large group of persons are interested in a matter, one or more may sue
or be sued as representatives of the class without needing to join every member
of the class. This procedure is available in U.S. federal courts and in most
state courts of the U.S. If a stockholder sought to sue Tantau in the name of
all the stockholders of the company, the likely jurisdiction would be a
U.S. district court or a state court located in the United States, if the number
of stockholders of Tantau satisfied the minimum requirements of the relevant
jurisdiction.
ONTARIO. 724 Solutions is an Ontario corporation with a substantial amount
of its assets located in Ontario. A class proceeding provides means by which,
where a large group of persons are interested in
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a matter, one or more may sue or be sued as representatives of the class without
needing to join every member of the class. In Ontario, a class proceeding may be
brought in the name of all of the shareholders of the company under the Class
Proceedings Act, 1992.
DIRECTOR QUALIFICATIONS
DELAWARE. The DGCL does not have any requirements that directors be
residents of a particular state or nation, or that they be independent of the
corporation.
ONTARIO. A majority of the directors of a OBCA corporation generally must be
resident Canadians. The OBCA also requires that at least one-third of the
directors of a corporation whose securities are publicly traded not be officers
or employees of that corporation or any of its affiliates. Directors are not
required to hold a qualifying share.
STOCKHOLDER CONSENT IN LIEU OF MEETING
DELAWARE. Under the DGCL, unless otherwise provided in the company's
charter, any action required to be taken or which may be taken at an annual or
special meeting of stockholders may be taken without a meeting and without prior
notice if a consent in writing is signed by the holders of outstanding stock
having not less than the minimum number of votes that would be necessary to
authorize the relevant action at a meeting at which all shares entitled to vote
were present and voted. Tantau's charter does not prohibit its stockholders from
taking action by written consent in lieu of a meeting.
ONTARIO. Under the OBCA, shareholder action without a meeting may only be
taken by written resolution signed by all shareholders who would be entitled to
vote thereon at a meeting. In some instances, the OBCA does not permit
shareholder action to occur without a meeting at all. Under the rules of the
Nasdaq National Market, 724 Solutions is generally required to call a meeting
and to solicit proxies when matters are required to be submitted to shareholders
for their approval.
BOARD OF DIRECTORS STRUCTURE
DELAWARE. Under the DGCL, the business and affairs of every corporation
formed under the DGCL shall be managed by a board of directors, except as
provided in a corporation's certificate of incorporation. The board of directors
must consist of one or more members, which number shall be provided for in the
certificate of incorporation or bylaws. Tantau's bylaws mandate that the number
of directors of Tantau shall be not less than three nor more than five.
Additionally, Tantau's charter provides that the holders of Series A Preferred
Stock, voting as a separate class, shall be entitled to elect three of the
directors.
Each director, under the DGCL, shall hold office until such director's
successor is elected and qualified or until such director's earlier resignation
or removal. When a director resigns, the board of directors may vote to refill
his or her vacancy. Tantau's certificate of incorporation and bylaws provide the
same mechanisms for electing directors as the DGCL. Additionally, Tantau's
certificate of incorporation states that if a person elected by the holders of
Series A Preferred Stock should cease to be a director for any reason, the
vacancy shall be filled only by the vote of a majority or unanimous written
consent of the outstanding shares of Series A Preferred Stock.
A majority of the total number of directors shall constitute a quorum for a
transaction of business. The vote of the majority of the directors present at a
meeting at which a quorum is present shall be the act of the board of directors
unless the certificate of incorporation or the bylaws shall require a vote of a
greater number.
ONTARIO. Under the OBCA, the board of directors shall manage or supervise
the management of the business and affairs of a corporation formed under the
OBCA, subject to any unanimous
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shareholders' agreement. The board of directors must consist of three or more
members, which number shall be provided for in the articles. 724 Solutions'
articles mandate that the number of directors of 724 Solutions shall be not less
than three nor more than twenty.
Each director, under the OBCA, shall hold office until such director's
successor is elected and qualified or until such director's earlier resignation,
death, disqualification or removal. When a director resigns the board of
directors may, if a quorum of the board remains, vote to refill his or her
vacancy. 724 Solutions' by-laws provide the same mechanisms for electing
directors as the OBCA.
Under the OBCA, unless the articles or by-laws otherwise provide, a majority
of the total number of directors shall constitute a quorum for the transaction
of business, provided that a majority of those attending must be Canadian
residents or the meeting must otherwise be held with their written authority.
724 Solutions' articles and by-laws conform to the OBCA but specify that a
quorum for the transaction of business at a meeting of the board of directors is
one-half of the number of directors, rounded down to the nearest whole number.
Under the OBCA, directors shall not generally transact business at a meeting
unless a majority of directors present are resident Canadians.
FIDUCIARY DUTIES OF DIRECTORS
DELAWARE. Directors of corporations incorporated or organized under the
DGCL have fiduciary obligations to the corporation and its stockholders. These
fiduciary obligations require the directors to act in accordance with the
so-called duties of "due care" and "loyalty." Under the DGCL, the duty of care
requires that the directors act in an informed and deliberative manner and that
they inform themselves, prior to making a business decision, of all material
information reasonably available to them. The duty of loyalty may be summarized
as the duty to act in good faith in a manner that the directors reasonably
believe to be in the best interests of the corporation and its stockholders.
ONTARIO. Directors of corporations governed by the OBCA have fiduciary
obligations to the corporation. Under the OBCA, directors must act honestly and
in good faith with a view to the best interests of the corporation, and must
exercise the care, diligence and skill that a reasonably prudent person would
exercise in comparable circumstances.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
DELAWARE. The DGCL provides that a corporation may indemnify its present
and former directors, officers, employees and agents against all reasonable
expenses, including attorneys fees, and, except in actions initiated by or in
the right of the corporation, against all judgments, fines and amounts paid in
settlement of actions brought against them. This indemnification is appropriate
if the individual acted in good faith and in a manner that he or she reasonably
believed to be in, or not opposed to, the best interests of the corporation and,
in the case of a criminal proceeding, had no reasonable cause to believe his or
her conduct was unlawful. The corporation shall indemnify a current or former
director or officer of the corporation to the extent that he or she is
successful on the merits or otherwise in the defense of any claim, issue or
matter associated with an action. Tantau's charter provides for indemnification
of directors and officers to the fullest extent authorized by the DGCL.
The DGCL allows for the advance payment of an officer or director
indemnitee's expenses prior to the final disposition of an action, provided
that, in the case of a current director or officer, the indemnitee undertakes to
repay any such amount advanced if it is later determined that the indemnitee is
not entitled to indemnification with regard to the action for which the expenses
were advanced.
ONTARIO. Under the OBCA, a corporation MAY INDEMNIFY a director or officer,
a former director or officer or a person who acts or acted at the corporation's
request as a director or officer of another company of which the corporation is
or was a shareholder or creditor, and his or her heirs and legal
representatives, against all costs, charges and expenses, including an amount
paid to settle an action or
147
<PAGE>
satisfy a judgment, reasonably incurred by him or her in respect of any civil,
criminal or administrative action or proceeding to which he or she is made a
party by reason of being or having been a director or officer of that entity,
if:
- he or she acted honestly and in good faith with a view to the best
interests of the relevant company; and
- in the case of a criminal or administrative action or proceeding that is
enforced by a monetary penalty, he or she had reasonable grounds for
believing that his or her conduct was lawful.
A person of the type described above IS ENTITLED under the OBCA to indemnity
from the corporation if he or she was substantially successful on the merits in
his or her defense of the action or proceeding and fulfilled the conditions set
out in the two bullets above.
A corporation MAY, WITH THE APPROVAL OF A COURT, also indemnify an
indemnifiable person in respect of an action by or on behalf of the corporation
or body corporate to procure a judgment in its favor, to which that person is
made a party by reason of being or having been a director or an officer of the
corporation or body corporate, if he or she fulfills the conditions set out in
the two bullets above. 724 Solutions' bylaws provide for indemnification of
directors and officers to the fullest extent authorized by the OBCA.
Neither the OBCA nor 724 Solutions' bylaws expressly provide for advance
payment of expenses incurred in a proceeding.
DIRECTOR LIABILITY
DELAWARE. The DGCL provides that the charter of a corporation may include a
provision which limits or eliminates the liability of directors to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director. This type of limitation is valid, provided that the
liability does not arise from some specified types of conduct, including breach
of the duty of loyalty, acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, the payment of unlawful
dividends or expenditure of funds for unlawful stock repurchases or redemptions
or transactions for which the director derived an improper personal benefit.
Tantau's charter contains a provision limiting the liability of its directors to
the fullest extent permitted by the DGCL.
ONTARIO. The OBCA does not permit any limitation of a director's liability
in this manner.
ANTI-TAKE-OVER PROVISIONS AND INTERESTED STOCKHOLDERS
DELAWARE. The DGCL prohibits, in certain circumstances, a "business
combination" between the corporation and an "interested stockholder" within
three years of the stockholder becoming an "interested stockholder." An
"interested stockholder" is a holder who, directly or indirectly, controls 15%
or more of the outstanding voting stock or is an affiliate of the corporation
and was the owner of 15% or more of the outstanding voting stock at any time
within the prior three-year period. A "business combination" includes a merger,
consolidation, sale or other disposition of assets having an aggregate value
equal to or more than 10% of the aggregate market value of all of the
consolidated assets or outstanding stock of the corporation. Other types of
transactions of this kind include some types of transactions that would increase
the interested stockholder's proportionate share ownership in the corporation.
This provision does not apply where:
- the business combination or the transaction that resulted in the
stockholder becoming an interested stockholder is approved by the
corporation's board of directors before the interested stockholder
acquired its 15% interest;
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<PAGE>
- upon the consummation of the transaction that resulted in the stockholder
becoming an interested stockholder, the interested stockholder owned at
least 85% of the outstanding voting stock of the corporation excluding,
for the purpose of determining the number of shares outstanding, shares
held by persons who are directors and also officers and by employee stock
plans in which participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered;
- the business combination is approved by a majority of the board of
directors and the affirmative vote of two-thirds of the outstanding votes
entitled to be cast by disinterested stockholders at an annual or special
meeting;
- the corporation does not have a class of voting stock that is listed on a
national securities exchange, designated as a national market system
security on an interdealer quotation system by the National Association of
Securities Dealers, Inc., or held of record by more than 2,000
stockholders, unless any of the foregoing results from action taken,
directly or indirectly, by an interested stockholder or from a transaction
in which a person becomes an interested stockholder; or
- in some other limited circumstances.
Tantau's merger with 724 Solutions is not affected by these provisions.
ONTARIO. The OBCA does not contain a comparable provision with respect to
business combinations. However, policies of and rules prescribed by several
Canadian securities regulatory authorities, including Rule 61-501 of the Ontario
Securities Commission, contain requirements in connection with "related party
transactions" and "insider bids." An "insider bid" is defined as a takeover bid
made by:
- an insider of the company subject to the offer;
- an associate or affiliated entity, such as an insider;
- an offeror acting jointly or in concert with a person or company referred
to in the above bullets.
An insider, as described in these provisions, generally includes directors,
senior officers and 10% shareholders.
A related party transaction means, generally, any transaction in which an
issuer, directly or indirectly, acquires or transfers an asset or acquires or
issues treasury securities or assumes or transfers a liability from or to, as
the case may be, a related party by any means in any one or any combination of
transactions. A "related party" of an issuer is defined in Rule 61-501 and
includes a person or company, other than a bona fide lender, that is known by
the issuer to be:
- a person or company that holds securities of the issuer sufficient to
materially affect control of the issuer;
- a person or company in respect of which the person or company described
above holds sufficient securities to materially affect control;
- a person or company in respect of which the issuer holds sufficient
securities to materially affect control;
- a person or company that owns or controls voting securities of the issuer
carrying more than 10% of voting rights attached to all voting securities
of the issuer;
- a director or senior officer of the issuer or any related party of the
issuer;
- a person or company that substantially manages or directs the affairs of
the issuer, including a general partner of an issuer that is a limited
partnership; or
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<PAGE>
- an affiliated entity of, person controlling, or company controlled by any
persons described above.
Rule 61-501 requires more detailed disclosure in the proxy materials sent to
security holders in connection with a related party transaction. Subject to some
exceptions, Rule 61-501 also requires the preparation of a formal valuation of
the subject matter of the related party transaction and any non-cash
consideration offered, and the inclusion of a summary of the valuation in the
proxy materials.
Rule 61-501 also requires, subject to some exceptions, that the holders of
capital stock of the issuer, the related party, the parties acting with it, and
specified other types of persons, voting separately by class, approve the
transaction by a simple majority of the votes cast, except in circumstances
where all shareholders receive identical treatment.
150
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LEGAL MATTERS
Ogilvy Renault, Toronto, Ontario, will pass upon the legality of the common
shares offered by this prospectus. Brobeck, Phleger & Harrison LLP, special
counsel to Tantau, has rendered an opinion with respect to the description of
U.S. federal tax matters set forth herein. As of November 30, 2000, partners of
Ogilvy Renault, together with other attorneys of the firm and other nonclerical
staff who provided services in connection with the merger owned an aggregate of
approximately 3,000 common shares of 724 Solutions. As of November 30, 2000,
partners of Brobeck, Phleger & Harrison LLP, together with other attorneys of
the firm and other nonclerical staff who provided services in connection with
the merger, owned an aggregate of 16,166 shares of Series B preferred stock of
Tantau.
EXPERTS
Our consolidated balance sheets as of December 31, 1998 and 1999 and our
consolidated statements of operations, shareholders' equity and cash flows for
the period from July 28, 1997 (date of inception) to December 31, 1997 and the
years ended December 31, 1998 and December 31, 1999 included in this information
statement/prospectus have been audited by KPMG LLP, Independent Auditors, and
have been so included in reliance upon the reports of that firm appearing
elsewhere herein, and upon their authority as experts in accounting and
auditing. KPMG's address is Yonge Corporate Centre, Suite 500, 4120 Yonge
Street, Toronto, Ontario M2P 2B8 Canada.
Tantau's consolidated balance sheets as of December 31, 1999 and
September 30, 2000 and Tantau's consolidated statements of operations,
stockholders' deficit and comprehensive loss and cash flows for the period from
February 11, 1999 (inception) to December 31, 1999 and for the nine months ended
September 30, 2000 included in this information statement/prospectus have been
audited by KPMG LLP, Independent Auditors, and have been so included in reliance
upon the reports of that firm appearing elsewhere herein, and upon their
authority as experts in accounting and auditing.
ezlogin's balance sheet as of December 31, 1999 and ezlogin's statements of
operations, stockholders' equity and cash flows for the period from January 21,
1999 (date of inception) to December 31, 1999 included in this information
statement/prospectus have been audited by KPMG LLP, Independent Auditors, and
have been so included in reliance upon the reports of that firm appearing
elsewhere herein, and upon their authority as experts in accounting and
auditing.
Spyonit's balance sheet as of September 12, 2000 and Spyonit's statements of
operations, stockholders' equity and cash flows for the period from October 5,
1999 (incorporation) to September 12, 2000 included in this information
statement/prospectus have been audited by KPMG LLP, Independent Auditors, and
have been so included in reliance upon the reports of that firm appearing
elsewhere herein, and upon their authority as experts in accounting and
auditing.
151
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WHERE YOU CAN FIND MORE INFORMATION ABOUT 724 SOLUTIONS
We have filed with the U.S. Securities and Exchange Commission a
registration statement on Form F-4 covering the common shares that we will issue
in this merger. We have not included in this information statement/prospectus
all of the information contained in the registration statement, and you should
refer to the registration statement and its exhibits for further information.
Any statement regarding any of the contracts or other documents referred to in
this prospectus is not necessarily complete. If the contract or document is
filed as an exhibit to the registration statement, the contract or document is
deemed to modify the description contained in this prospectus. You must review
the exhibits themselves for a complete description of the contract or document.
You may review a copy of the registration statement, including exhibits and
schedules filed with it, at the Commission's public reference facilities in
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, and
at the regional offices of the Commission located at 7 World Trade Center, 13th
Floor, New York, New York 10048 and at the Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. You may also obtain copies
of such materials from the Public Reference Section of the Commission,
Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C., 20549, at
prescribed rates. You may call the Commission at 1-800-SEC-0330 for further
information on the public reference rooms. These Commission filings are also
available to the public from commercial document retrieval services.
Since our initial public offering in January 2000, we have filed reports and
furnished other information to the Commission under the U.S. Securities Exchange
Act of 1934, as amended, and with the securities regulators in each of the
provinces of Canada under the applicable provincial securities legislation. You
are invited to read and copy any reports, statements or other information that
we have filed with, or submitted to, the Commission at its public reference
room. These materials can also be inspected on the Securities and Exchange
Commission's Website at http://www.sec.gov, and the Canadian System for
Electronic Document Analysis and Retrieval (SEDAR) (http://www.sedar.com).
Since our initial public offering, we have been classified as a "foreign
private issuer" for purposes of the U.S. federal securities laws. As such, our
requirements to file reports and other documents under the Exchange Act differed
in some respects from U.S. companies. Among other things:
- we filed our annual report on Form 20-F, as opposed to Form 10-K;
- we were not required to file quarterly reports on Form 10-Q;
- our directors, officers and 10% shareholders were not required to file
reports of beneficial ownership under Section 16 of the Exchange Act; and
- we were exempt from many of the Commission's regulations with respect to
the solicitation of proxies.
As a result of the transactions under the merger agreement, we will no
longer be a foreign private issuer after the effective time. As a result, our
obligations, and the obligations of our directors, officers and 10% shareholders
to file reports under the Exchange Act will become more similar to those of a
typical U.S. company that has equity securities registered in the U.S.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
724 SOLUTIONS INC.
Auditors' Report............................................ F-2
Consolidated Balance Sheets................................. F-3
Consolidated Statements of Operations....................... F-4
Consolidated Statements of Shareholders' Equity............. F-5
Consolidated Statements of Cash Flows....................... F-6
Notes to Consolidated Financial Statements.................. F-7
TANTAU SOFTWARE, INC.
Report of Independent Auditors.............................. F-27
Consolidated Balance Sheets................................. F-28
Consolidated Statements of Operations....................... F-29
Consolidated Statements of Stockholders' Deficit and
Comprehensive Loss........................................ F-30
Consolidated Statements of Cash Flows....................... F-31
Notes to Consolidated Financial Statements.................. F-32
SPYONIT.COM, INC.
Independent Auditors' Report................................ F-42
Balance Sheet............................................... F-43
Statement of Operations..................................... F-44
Statement of Stockholders' Equity........................... F-45
Statement of Cash Flows..................................... F-46
Notes to Financial Statements............................... F-47
EZLOGIN.COM, INC.
Independent Auditors' Report................................ F-50
Balance Sheet............................................... F-51
Statement of Operations..................................... F-52
Statement of Stockholders' Equity........................... F-53
Statement of Cash Flows..................................... F-54
Notes to Financial Statements............................... F-55
</TABLE>
F-1
<PAGE>
AUDITORS' REPORT
To the Directors of 724 Solutions Inc.
We have audited the consolidated balance sheets of 724 Solutions Inc. as at
December 31, 1999 and 1998 and the consolidated statements of operations,
shareholders' equity and cash flows for the years ended December 31, 1999 and
1998 and for the period from July 28, 1997 (date of inception) to December 31,
1997. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted
auditing standards. Those standards require that we plan and perform an audit to
obtain reasonable assurance whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation.
In our opinion, these consolidated financial statements present fairly, in
all material respects, the financial position of the Company as at December 31,
1999 and 1998 and the results of its operations and its cash flows for the years
ended December 31, 1999 and 1998 and for the period from July 28, 1997 (date of
inception) to December 31, 1997 in accordance with Canadian generally accepted
accounting principles.
Canadian generally accepted accounting principles differ in some respects
from those applicable in the United States (note 14).
Toronto, Canada /s/ KPMG LLP
February 3, 2000, except as to Chartered Accountants
note 16, which is as of November 29, 2000
F-2
<PAGE>
724 SOLUTIONS INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents (note 4)........................ $ 19,915 $ 65,287 $ 2,976
Short-term investments (note 4)........................... 158,062 -- --
Accounts receivable, net of allowance for doubtful
accounts of nil for all periods......................... 3,205 3,121 35
Prepaid expenses and other receivables.................... 3,623 1,368 21
-------- -------- -------
Total current assets...................................... 184,805 69,776 3,032
Capital assets (note 5)..................................... 9,776 2,366 860
Investments (note 6)........................................ 11,935 -- --
Intangible and other assets (note 7)........................ 90,750 1,100 --
-------- -------- -------
Total assets................................................ $297,266 $ 73,242 $ 3,892
======== ======== =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 1,676 $ 1,982 $ 236
Accrued liabilities....................................... 8,199 2,967 463
Deferred revenue, net of deferred stock-based compensation
of
nil -- September 30, 2000; $248 -- December 31, 1999 and
$420 -- December 31, 1998............................... 4,135 6,022 --
-------- -------- -------
Total current liabilities................................. 14,010 10,971 699
Leasehold inducements....................................... 398 103 --
Shareholders' equity (note 8):
Unlimited common shares authorized;
39,061,130 issued and outstanding September 30, 2000;
29,402,426 common shares issued and outstanding
December 31, 1999; 11,428,570 issued and outstanding
December 31, 1998..................................... 357,079 84,762 7,752
Deferred stock-based compensation........................... (16,419) (5,909) (1,705)
Accumulated deficit......................................... (57,802) (16,685) (2,854)
-------- -------- -------
Total shareholders' equity.................................. 282,858 62,168 3,193
-------- -------- -------
Total liabilities and shareholders' equity.................. $297,266 $ 73,242 $ 3,892
======== ======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARES AND PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED YEARS ENDED JULY 28, 1997
SEPTEMBER 30, DECEMBER 31, (INCEPTION) TO
------------------------- ------------------- DECEMBER 31,
2000 1999 1999 1998 1997
----------- ----------- -------- -------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
Product:
Related party (note 12).......................... $ 8,780 $ 1,314 $ 1,697 $ 1,678 $--
Other............................................ 55 -- -- -- --
Less stock-based compensation related to software
development (notes 8 and 12)................... (248) (1,273) (1,644) (1,395) --
Services:
Related party (note 12).......................... 4,037 34 1,169 208 --
Other............................................ 569 754 -- -- --
-------- ------- -------- -------- -------
Net revenue.......................................... 13,193 829 1,222 491 --
Operating expenses:
Cost of net revenue (including stock-based
compensation expense of $464 -- September 30,
2000; $14 -- September 30, 1999;
$19 -- December 31, 1999; $21 -- December 31,
1998; nil -- December 31, 1997).................. 8,744 816 1,858 82 --
Research and development (including stock-based
compensation expense of $1,736 -- September 30,
2000; $73 -- September 30, 1999;
$97 -- December 31, 1999; $107 -- December 31,
1998; nil -- December 31, 1997).................. 20,769 4,433 7,255 2,194 44
Sales and marketing (including stock-based
compensation expense of $352 -- September 30,
2000; $18 -- September 30, 1999;
$24 -- December 31, 1999; $27 -- December 31,
1998; nil -- December 31, 1997).................. 9,748 1,124 2,598 405 39
General and administrative (including stock-based
compensation expense of $1,302 -- September 30,
2000; $19 -- September 30, 1999;
$25 -- December 31, 1999; $26 -- December 31,
1998; nil -- December 31, 1997).................. 12,797 1,902 3,634 528 82
Depreciation....................................... 2,314 445 752 88 --
Amortization of intangible assets.................. 9,267 -- -- -- --
-------- ------- -------- -------- -------
Total operating expenses............................. 63,639 8,720 16,097 3,297 165
-------- ------- -------- -------- -------
Loss from operations................................. (50,446) (7,891) (14,875) (2,806) (165)
Interest income...................................... 8,643 341 1,044 107 10
Equity in loss of affiliate.......................... (543) -- -- -- --
Dilution gain (note 6(a))............................ 1,229 -- -- -- --
-------- ------- -------- -------- -------
Loss for the period.................................. $(41,117) $(7,550) $(13,831) $ (2,699) $ (155)
======== ======= ======== ======== =======
Basic and diluted loss per share..................... $ (1.13) $ (0.57) $ (0.82) $ (0.47) $ (0.06)
======== ======= ======== ======== =======
Weighted-average number of shares used in computing
basic and diluted loss per share (in thousands).... 36,246 13,301 16,887 5,784 2,752
======== ======= ======== ======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS OF U.S. DOLLARS, EXCEPT SHARE NUMBERS)
(INFORMATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 IS UNAUDITED)
<TABLE>
<CAPTION>
DEFERRED
STOCK-BASED
DEFERRED COMPENSATION
STOCK-BASED RELATED TO
COMMON SHARES COMPENSATION SOFTWARE TOTAL
--------------------- RELATED TO DEVELOPMENT ACCUMULATED SHAREHOLDERS'
NUMBER AMOUNT STOCK OPTIONS REVENUE DEFICIT EQUITY
---------- -------- ------------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balances, July 28, 1997 (inception)... 200 $ 1 $ -- $-- $ -- $ 1
Loss for the period................... -- -- -- -- (155) (155)
Issuance of common shares............. 3,999,800 1,442 -- -- -- 1,442
---------- -------- -------- ------- -------- --------
Balances, December 31, 1997........... 4,000,000 1,443 -- -- (155) 1,288
Loss for the year..................... -- -- -- -- (2,699) (2,699)
Deferred stock-based compensation..... -- 414 (414) (3,287) -- (3,287)
Amortization of deferred stock-based
compensation........................ -- -- 181 -- -- 181
Allocation of deferred stock-based
compensation to software development
revenue and deferred revenue........ -- -- -- 1,815 -- 1,815
Issuance on exercise of options....... 4,000,000 1,296 -- -- -- 1,296
Issuance of common shares............. 3,428,570 4,599 -- -- -- 4,599
---------- -------- -------- ------- -------- --------
Balances, December 31, 1998........... 11,428,570 7,752 (233) (1,472) (2,854) 3,193
Loss for the year..................... -- -- -- -- (13,831) (13,831)
Deferred stock-based compensation..... -- 5,841 (5,841) -- -- --
Amortization of deferred stock-based
compensation........................ -- -- 165 -- -- 165
Allocation of deferred stock-based
compensation to software development
revenue and deferred revenue........ -- -- -- 1,472 -- 1,472
Issuance of common shares............. 17,973,856 71,169 -- -- -- 71,169
---------- -------- -------- ------- -------- --------
Balances, December 31, 1999........... 29,402,426 84,762 (5,909) -- (16,685) 62,168
Loss for the period................... -- -- -- -- (41,117) (41,117)
Deferred stock-based compensation..... -- 14,364 (14,364) -- -- --
Common share purchase options......... -- 4,793 -- -- -- 4,793
Amortization of deferred stock-based
compensation........................ -- -- 3,854 -- -- 3,854
Issuance on exercise of options....... 713,494 541 -- -- -- 541
Issuance of common shares............. 8,945,210 252,619 -- -- -- 252,619
---------- -------- -------- ------- -------- --------
Balances, September 30, 2000
(unaudited)......................... 39,061,130 $357,079 $(16,419) $-- $(57,802) $282,858
========== ======== ======== ======= ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
724 SOLUTIONS INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS ENDED YEARS ENDED JULY 28, 1997
SEPTEMBER 30, DECEMBER 31, (INCEPTION) TO
------------------------- ------------------- DECEMBER 31,
2000 1999 1999 1998 1997
----------- ----------- -------- -------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from (used in) operating activities:
Loss for the period................................. $ (41,117) $(7,550) $(13,831) $(2,699) $ (155)
Depreciation and amortization....................... 11,581 445 752 88 --
Stock-based compensation............................ 4,103 1,397 1,809 1,576 --
Other non-cash expenses............................. (62) -- -- -- --
Equity in loss of affiliate......................... 543 -- -- -- --
Dilution gain....................................... (1,229) -- -- -- --
Foreign exchange gain............................... 651 -- -- -- --
Change in operating assets and liabilities:
Accounts receivable............................... (84) (2,230) (3,086) (34) (1)
Prepaid expenses and other receivables............ (2,255) (477) (1,347) (21) --
Accounts payable.................................. (306) 162 1,746 213 23
Accrued liabilities............................... 5,233 994 2,504 453 10
Deferred revenue.................................. (2,238) 3,435 5,953 420 --
--------- ------- -------- ------- ------
Net cash flows used in operating activities......... (25,180) (3,824) (5,500) (4) (123)
Cash flows from (used in) financing activities:
Issuance of common shares........................... 165,672 30,114 71,169 2,608 1,443
Deferred charges.................................... -- -- (1,100) -- --
--------- ------- -------- ------- ------
Net cash flows from financing activities............ 165,672 30,114 70,069 2,608 1,443
Cash flows used in investing activities:
Purchase of capital assets.......................... (8,777) (1,222) (2,258) (927) (21)
Purchase of short-term investments.................. (158,062) -- -- -- --
Purchase of intangible and other assets............. (2,136) -- -- -- --
Investment in Neomar Inc............................ (3,500) -- -- -- --
Investment in Corillian Corporation................. (7,000) -- -- -- --
Investment in Maptuit.com Inc....................... (750) -- -- -- --
Acquisition of YRLess Internet Corporation.......... (1,272) -- -- -- --
Acquisition of Ezlogin.com, Inc..................... (1,651) -- -- -- --
Acquisition of Spyonit.com, Inc..................... (2,065) -- -- -- --
--------- ------- -------- ------- ------
Net cash flows used in investing activities......... (185,213) (1,222) (2,258) (927) (21)
Foreign exchange gain on cash held in a foreign
currency............................................ (651) -- -- -- --
--------- ------- -------- ------- ------
Net increase (decrease) in cash and cash
equivalents......................................... (45,372) 25,068 62,311 1,677 1,299
Cash and cash equivalents, beginning of period........ 65,287 2,976 2,976 1,299 --
--------- ------- -------- ------- ------
Cash and cash equivalents, end of period.............. $ 19,915 $28,044 $ 65,287 $ 2,976 $1,299
========= ======= ======== ======= ======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
1. ORGANIZATION OF THE COMPANY:
The Company was established in July 1997 to provide internet infrastructure
solutions to financial institutions, enabling them to offer personalized and
secure mobile banking, investment and commerce services across a wide range
of internet-enabled wireless and consumer electronic devices. The Company
also provides end-to-end customer support through its global application
hosting and contact centre services.
2. SIGNIFICANT ACCOUNTING POLICIES:
These financial statements are stated in U.S. dollars, except as otherwise
noted. They have been prepared in accordance with Canadian generally
accepted accounting principles which, except as disclosed in note 14,
conform, in all material respects, with U.S. generally accepted accounting
principles.
(a) Consolidation:
These consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. The results of operations for
acquisitions are included in these consolidated financial statements from
the date of acquisition. Intercompany transactions and balances are
eliminated on consolidation.
(b) Financial Instruments:
Financial instruments consist of cash and cash equivalents, short-term
investments, accounts receivable, accounts payable and accrued
liabilities. The Company determines the fair values of its financial
instruments based on quoted market values or discounted cash flow
analyses. Unless otherwise indicated, the fair values of financial assets
and financial liabilities approximate their recorded amounts.
Financial instruments that potentially expose the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents, short-term investments and accounts receivable. Cash and
cash equivalents consist primarily of deposits with major commercial
banks and high-grade commercial paper, the maturities of which are three
months or less from the date of purchase. Short-term investments consist
of high-grade fixed income securities with maturities of three months or
more. The Company performs periodic credit evaluations of the financial
condition of its customers. Allowances are maintained for potential
credit losses consistent with the credit risk of specific customers.
(c) Revenue recognition:
The Company's revenue is primarily derived from (i) the licensing of its
products, (ii) application hosting services and (iii) the provision of
related services, including installation, integration, training and
maintenance and support. Product revenues are recognized when a contract
with a customer has been executed, delivery and acceptance have occurred
and the collection of the related receivables is deemed probable by
management. Application hosting services revenue is recognized monthly as
earned either on a fixed fee or variable rate basis. Services revenues
are recognized as the services are performed. Maintenance and support
revenues paid in advance are non-refundable and are recognized rateably
over the term of the agreement, which is typically twelve months.
Software development, product and services revenues that have been
prepaid but do not yet qualify for recognition as revenues under the
Company's revenue recognition policy are reflected as deferred revenue on
the Company's balance sheet.
(d) Research and development expenses:
Costs related to research, design and development of software products
are charged to research and development expenses as incurred. Software
development costs are capitalized beginning when a product's
technological feasibility has been established, which generally occurs
upon completion of a working model, and ending when a product is
available for general release to customers. To date, completing a working
model of the Company's product and the general release of the product
have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
F-7
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(e) Investment tax credits:
The Company is entitled to Canadian federal and provincial investment tax
credits which are earned as a percentage of eligible research and
development expenditures incurred in each taxation year.
Investment tax credits are accounted for as a reduction of the related
expenditure for items of a current nature and a reduction of the related
asset cost for items of a long-term nature, provided that the Company has
reasonable assurance that the tax credits will be realized.
(f) Stock-based compensation:
The Company uses the intrinsic value method to account for stock-based
compensation related to stock options. As such, deferred stock-based
compensation is recorded if, on the date of grant of the stock option or
the subscription right, the current fair value of an underlying common
share exceeds the exercise price per share. Deferred stock-based
compensation is recognized as an expense over the vesting period of the
option or as a reduction of revenue over the term of the related revenue
contract, as the case may be.
(g) Capital assets:
Capital assets are stated at cost, net of accumulated depreciation and
amortization, and are amortized over their estimated useful lives.
Leasehold improvements are recorded at cost and amortized over the lesser
of their useful lives or the term of the related lease. Expenditures for
maintenance and repairs have been charged to the statement of operations
as incurred. Depreciation and amortization are computed using the
straight-line method as follows:
<TABLE>
<S> <C>
Computer equipment.......................................... 3 years
Computer software........................................... 1 year
Office furniture and equipment.............................. 5 years
Leasehold improvements...................................... 5 years
</TABLE>
The Company regularly reviews the carrying values of its capital assets
by comparing the carrying amount of the asset to the expected future cash
flows to be generated by the asset. If the carrying value exceeds the
amount recoverable, a write-down is charged to the statement of
operations.
(h) Investments:
Investments in affiliates are recorded on the equity method when the
Company's ownership interest in the affiliate is greater than 20% but not
more than 50% and where the Company can exercise significant influence
over the affiliate.
Long-term investments in affiliates in which the Company's ownership
interest is less than 20% and where the Company cannot exercise
significant influence over the affiliate are accounted for by the cost
method. Under this method of accounting, the investment is recorded at
cost and only written down in value if a decline in value is other than
temporary.
(i) Intangible and other assets:
Intangible and other assets are recorded at cost, and are amortized on a
straight-line basis at the following rates:
<TABLE>
<S> <C>
Workforce................................................... Over 1 - 5 years
Core technology............................................. Over 1 - 5 years
Goodwill.................................................... Over 3 - 5 years
</TABLE>
F-8
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Goodwill represents the excess of the purchase price over the fair value
of net assets acquired. On an ongoing basis, management reviews the
valuation and amortization of goodwill, taking into consideration any
events and circumstances which might impair the fair value of the related
asset. Goodwill is written down to fair value when decreases in value are
considered to be other than temporary, based upon expected cash flows of
the acquired business.
(j) Currency translation:
Effective July 31, 1999, the U.S. dollar became the functional currency
of the Company. This change resulted from the increased significance of
U.S. dollar denominated revenue and expenditures in relation to the
Company's Canadian dollar denominated transactions. In addition, the
Company's recent issuances of common shares have been primarily
denominated in U.S. dollars. Exchange gains and losses resulting from
transactions denominated in currencies other than U.S. dollars are
included in the results of operations for the period.
Prior to July 31, 1999, the functional currency of the Company was the
Canadian dollar. Accordingly, monetary assets and liabilities of the
Company that were denominated in foreign currencies were translated into
Canadian dollars at the exchange rate prevailing at the balance sheet
date. Transactions included in operations were translated at the average
rate for the period. Exchange gains and losses resulting from the
translation of these amounts were reflected in the statement of
operations in the period in which they occurred.
(k) Income taxes:
The Company provides for income taxes under the liability method. Under
the liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying value of existing assets and liabilities and
their respective tax basis and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(l) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingencies at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting year. Actual results could differ from those estimates.
(m) Unaudited interim financial information:
The accompanying interim financial information as at September 30, 2000
and for the nine months ended September 30, 2000 and 1999 is unaudited
but includes all adjustments, consisting of only normal recurring
adjustments, which management considers necessary to present fairly, in
all material respects, the interim financial information for the periods
presented.
3. ACQUISITIONS:
(a) YRLess Internet Corporation:
On March 17, 2000, the Company acquired all the outstanding common shares
of YRLess Internet Corporation ("YRLess"), an Internet message gateway
developer, for total cash consideration of approximately $1,272,000,
including acquisition costs of approximately $34,000. In addition, the
Company is committed to pay approximately $4,539,000 in common shares of
the Company, valued at their current market prices, in three annual
installments over the next three
F-9
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
3. ACQUISITIONS: (CONTINUED)
years. The payment of this future consideration is contingent on the
former shareholders of YRLess remaining as employees of the Company and
therefore will be recorded as compensation expense on a straight-line
basis over 36 months.
The cash consideration paid has been allocated to the net assets acquired
based on their fair value, and the excess of the purchase price over the
fair value of the net assets acquired has been recorded as goodwill and
is being amortized over 36 months.
(b) Ezlogin.com, Inc.:
On June 16, 2000, the Company acquired all of the outstanding shares of
Ezlogin.com, Inc. (ezlogin), a privately held company incorporated in
California in the business of providing Internet infrastructure tools for
user-driven personalization. The transaction has been accounted for by
the purchase method, with the results of operations included in these
financial statements from the date of acquisition. The purchase price of
approximately $55.8 million was satisfied by the issuance of 1,003,594
common shares of the Company and the assumption of the existing ezlogin
option plan which, if all options outstanding under the plan are
exercised, would result in the issuance of an additional 91,796 common
shares of the Company. In addition, the Company incurred $3.0 million in
costs related to the acquisition. The excess of the purchase price over
the fair value of the net tangible assets of ezlogin at the date of
acquisition of $56.9 million has been allocated to goodwill and other
intangible assets and is being amortized over 24 months. Amortization
expense of the resulting goodwill and acquired intangible assets of
$7.9 million has been recorded in the nine-month period ended
September 30, 2000.
(c) Spyonit.com, Inc.:
On September 12, 2000, the Company acquired all of the outstanding shares
of Spyonit.com, Inc. ("Spyonit"), a privately held company incorporated
in Delaware which develops software to monitor the Internet and other
content sources for items of interest to end-users. The transaction has
been accounted for by the purchase method, with the results of operations
included in these financial statements from the date of acquisition. The
purchase price of approximately $40.0 million was satisfied by the
issuance of 1,041,616 common shares of the Company and $2.0 million in
cash. As part of the terms of purchase, up to 137,062 common shares of
the total common shares issued are subject to repurchase at a minimum
value if the vendors do not remain employees of the Company through
September 2003. The Company has recorded deferred stock-based
compensation in the amount of $6.0 million related to the 137,062 common
shares and is amortizing this amount as compensation expense on a
straight-line basis over three years. In addition, the Company incurred
$200,000 in costs related to the acquisition. The excess of the purchase
price over the fair value of the net tangible assets of Spyonit at the
date of acquisition of $39.9 million has been allocated to goodwill and
acquired intangible assets and is being amortized over 60 months.
Amortization expense of the resulting goodwill and acquired intangible
assets of $400,000 has been recorded in the nine-month period ended
September 30, 2000.
F-10
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
3. ACQUISITIONS: (CONTINUED)
The transactions are summarized as follows (unaudited):
<TABLE>
<CAPTION>
YRLESS EZLOGIN SPYONIT
-------- -------- --------
<S> <C> <C> <C>
Net assets acquired at fair values:
Cash...................................................... $-- $ 1,517 $ 66
Capital assets............................................ 17 529 87
Other assets.............................................. 43 272 38
Current liabilities....................................... (177) (486) (109)
Acquired technology....................................... -- 2,290 7,290
Workforce................................................. -- 560 280
Non-competition agreements................................ -- -- 260
------ ------- -------
Fair value of identifiable assets......................... (117) 4,682 7,912
Goodwill.................................................... 1,389 54,103 32,063
------ ------- -------
$1,272 $58,785 $39,975
====== ======= =======
Purchase price:
Cash...................................................... $1,238 $ -- $ 2,000
Common shares............................................. -- 51,186 37,775
Fair value of options..................................... -- 4,599 --
Acquisition expenses...................................... 34 3,000 200
------ ------- -------
$1,272 $58,785 $39,975
====== ======= =======
</TABLE>
The table below reflects unaudited pro forma consolidated results of the
Company, YRLess, ezlogin and Spyonit as if the acquisitions had taken place
on January 1, 1999 and January 1, 2000, respectively.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED YEAR ENDED
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
Revenue..................................................... $ 13,214 $ 1,536
Loss for the period......................................... $(66,740) $(43,863)
Loss for the period per common share........................ $ (1.76) $ (2.45)
</TABLE>
4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS:
Cash consists of deposits with major financial institutions. Cash
equivalents consist of short-term deposits and high-grade commercial paper
with an original maturity of three months or less at the date of purchase.
Short-term investments which consist of fixed income securities with a
maturity of three months or more are recorded at their accreted value as
they are held to maturity.
F-11
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
4. CASH AND CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS: (CONTINUED)
The components of cash and cash equivalents are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Cash........................................................ $ 6,117 $ 3,264 $2,976
Cash equivalents............................................ 13,798 62,023 --
------- ------- ------
$19,915 $65,287 $2,976
======= ======= ======
</TABLE>
5. CAPITAL ASSETS:
Capital assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Computer equipment.......................................... $ 6,081 $1,499 $356
Computer software........................................... 1,744 500 200
Office furniture and equipment.............................. 2,043 453 172
Leasehold improvements...................................... 2,743 754 220
------- ------ ----
12,611 3,206 948
Less: accumulated depreciation and amortization............. (2,835) (840) (88)
------- ------ ----
$ 9,776 $2,366 $860
======= ====== ====
</TABLE>
6. INVESTMENTS:
(a) On March 8, 2000, the Company purchased a one-third interest in
Maptuit.com Inc. ("Maptuit") for cash consideration of $750,000. Maptuit
is a privately held Canadian company in the business of developing
directional mapping software and providing online directional services,
mapping services and spatial relational search services to its customers.
The investment in Maptuit has been accounted for using the equity method.
Under the equity method, the original cost of the investment is adjusted
for the Company's share of post-acquisition income or losses, less
dividends. The excess of the cost of the shares of Maptuit over the
Company's proportionate interest in the net book value of Maptuit's net
assets on the date of acquisition amounted to approximately $677,000.
This excess is being amortized on a straight-line basis over three years.
On September 27, 2000, Maptuit completed a $5.0 million private placement
through the issuance of 3,000 convertible preferred shares. The Company
recorded a dilution gain of $1,228,711 which took its investment from a
33.3% interest to a 27.5% interest.
(b) In April 2000, the Company acquired 875,000 common shares (then
representing approximately a 2.9% interest) for $7.0 million in cash in
Corillian Corporation ("Corillian"), a provider of e-finance solutions
for the Internet. The market value of the Corillian shares, based on the
publicly quoted price, on September 30, 2000 is $8.4 million. In
addition, the Company announced its intention to partner with Corillian
to provide financial services providers with a seamless wired and
wireless Internet banking services solution based on the 724 Solutions
Financial Services Platform in combination
F-12
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
6. INVESTMENTS: (CONTINUED)
with Corillian's eFinance Voyager platform. Corillian is a U.S. publicly
traded company on the Nasdaq National Market trading under the symbol
CORI. The investment is accounted for using the cost method of
accounting.
(c) In June 2000, the Company acquired a 9.5% interest in Neomar Inc.
("Neomar") for $3.5 million in cash. Neomar is a privately held company
in the business of providing Wireless Application Protocol ("WAP")-based
services for personal digital assistants. In addition, the Company has
entered into a license agreement with Neomar to license the WAP solution
and incorporate it into the Company's Financial Services Platform. The
investment is accounted for using the cost method of accounting.
7. INTANGIBLE AND OTHER ASSETS:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Goodwill.................................................... $ 87,541 $-- $--
Acquired technology and other assets........................ 12,682 1,100 --
-------- ------ ------
100,223 1,100 --
Less: accumulated amortization.............................. (9,473) -- --
-------- ------ ------
$ 90,750 $1,100 $--
======== ====== ======
</TABLE>
8. SHAREHOLDERS' EQUITY:
(a) Common share issuances:
1997:
In September 1997, the Company issued 3,999,800 common shares and granted
an option to acquire an additional 4,000,000 common shares to the founder
of the Company for gross proceeds of Cdn. $1,999,900. The option was
exercisable at the holder's option at a price of $0.50 per common share.
The option was exercised in October 1998.
1998:
In April 1998, the Company issued to Bank of Montreal ("BMO") 1,000,000
common shares for gross proceeds of Cdn. $1,000,000 and granted BMO an
option to subscribe for 2,428,570 additional common shares for Cdn.
$1,000,000, exercisable upon BMO's extension of its technology licensing
agreement with the Company for a second year, and payment of the second
year's technology licensing fee. In October 1998, following BMO's
extension of the technology license agreement, BMO exercised the option
to subscribe for 2,428,570 common shares for Cdn. $1,000,000. On the date
of exercise, the fair value of the 2,428,570 common shares was determined
to be Cdn. $6,071,425, resulting in a deferred stock-based compensation
charge of Cdn. $5,071,425 (U.S. $3,286,943).
1999:
In June 1999, the Company issued 541,790 common shares to Bank of America
("BA") at a price of $3.69 per share for gross proceeds of $2,000,000 and
BA committed to subscribe for 541,790 additional common shares for
$2,000,000. BA subscribed for the 541,790 additional common shares in
October 1999 for gross proceeds of $2,000,000.
In August 1999, the Company issued to Citicorp Strategic Technology
Corporation 950,000 common shares at a price of $3.83 per share for gross
proceeds of $3,633,750. Citicorp Strategic Technology Corporation also
contracted at this time
F-13
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
to subscribe for 5,450,000 additional common shares at a price of $3.83
per share upon the satisfaction of certain conditions, including the
receipt of applicable regulatory approvals. The option was exercised in
October 1999 for gross proceeds of $20,846,250.
In August 1999, the Company granted BA an option to subscribe for
2,116,420 common shares at a price of $3.90 per share. The option was
exercised in October 1999 for cash proceeds of $8,243,446.
In August 1999, the Company issued 6,400,000 common shares to Sonera
Corporation for a price of $3.83 per share for gross proceeds of
$24,480,000.
In October 1999, the Company completed three private placements for a
total issuance of 1,973,856 common shares at prices of $3.83 and $7.50
per share and a warrant in respect of 666,668 common shares exercisable
at a price of $7.50 per share for total proceeds of $10,000,000. This
warrant expired unexercised on January 14, 2000.
On December 30, 1999, all of the outstanding and reserved common shares
were split on a basis of two for one. The Company's share capital and
earnings (loss) per share have been restated to give effect to this share
split.
2000:
In February 2000, the Company issued 6,900,000 common shares through an
initial public offering at $26.00 per common share on the Nasdaq National
Market and The Toronto Stock Exchange for net proceeds of approximately
$165,700,000.
During 2000, in connection with the acquisition of ezlogin and Spyonit,
the Company issued an aggregate of 2,045,210 common shares with an
ascribed aggregate value of $89 million (note 3).
(b) Stock option plans:
The Company currently has a Canadian stock option plan, a U.S. stock
option plan, and a new 2000 stock option plan (the "Plans"), each of
which is intended to attract, retain and motivate employees, officers,
directors and consultants. The stock option committee, in conjunction
with the compensation committee, determines, among other things, the
eligibility of individuals to participate in the Plans and the term,
vesting periods and the exercise price of options granted under the
Plans. The Company has reserved an aggregate of 3,200,000 common shares
for issuance under the Canadian and U.S. plans, and an additional
2,000,000 common shares under the new 2000 plan. In April 2000, the Board
of Directors approved an increase in the maximum number of shares
issuable under the 2000 Plan to 3,800,000 common shares, which was
ratified by the Company's shareholders at the annual and special meeting
of shareholders held May 31, 2000.
The Canadian stock option plan was adopted in September 1997. All options
granted under the plan have a maximum term of 10 years and have an
exercise price per share of no less than the fair market value of the
common shares on the date of the option grant as determined by the Board
of Directors or duly authorized committee as at the time of the grant. If
an optionee's employment is terminated without cause, the vested portion
of any grant will remain exercisable until its expiration date, subject
to compliance with certain non-competition and non-solicitation
obligations. In the event of termination for cause, the vested portion of
any grant will remain exercisable for a period of 30 days after the date
of termination. Unvested options will expire on termination except for
such portion thereof which would have vested within six months or within
the required statutory notice period, following a termination without
cause, whichever is earlier, or within one year if termination is due to
death or disability. If a change of control of the Company occurs, all
options become immediately vested and exercisable.
The U.S. stock option plan was adopted in October 1999. The plan provides
for the grant of both incentive stock options and non-qualified stock
options. Incentive stock options granted under the plan have a maximum
term of
F-14
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
10 years, or five years in the case of incentive stock options granted to
an employee who owns common shares having more than 10% of the voting
power of the Company. The exercise price of incentive stock options is
the fair market value of common shares on the date of the grant, or 110%
of the fair market value in the case of an incentive stock option granted
to an employee who owns common shares having more than 10% of the voting
power of the Company. Non-qualified stock options granted under the plan
have a maximum term of 10 years and an exercise price of no less than 85%
of the fair market value of the common shares on the date of the grant,
or 110% of the fair market value for those employees who own common
shares representing more than 10% of the voting power. Restricted shares
granted under the plan have a maximum term of 10 years and an exercise
price of no less than 85% of the fair market value of the common shares
on the date of the grant, or 100% of the fair market value in the case of
restricted shares granted to an employee who owns common shares having
more than 10% of the voting power.
Under the Canadian stock option plan and the U.S. stock option plan, the
Company has the right to repurchase options from optionees after
termination of employment on certain terms.
The new 2000 stock option plan was adopted in December 1999 and replaced,
on a prospective basis, the Canadian and U.S. stock option plans. The
stock options granted under the Canadian and U.S. stock option plans
prior to the date of completion of the IPO, continue to be effective and
governed by the terms of the plans under which they were granted. The
options granted under the 2000 plan have a maximum term of 10 years and
an exercise price no less than the fair market value of the common shares
on the date of the grant as determined by the Board of Directors or duly
authorized committee at the date of the grant. Options held by any person
under the new plan, together with any other options granted to that
person may not at any time exceed 5% of the aggregate number of common
shares outstanding. If a change of control of the Company occurs, all
options granted under this plan will become immediately vested and
exercisable.
On June 16, 2000, the Company assumed the ezlogin stock option plan in
connection with its acquisition of ezlogin. In aggregate, the Company
assumed options to issue common shares of the Company totalling 91,796.
The Company does not plan to issue any additional options under the
ezlogin stock option plan in the future. Instead, any of the former
directors, officers, employees and consultants of ezlogin will be issued
options under the Company's 2000 stock option plan.
The ezlogin plan provided for the grant of both incentive stock options
and non-qualified stock options. Incentive stock options granted under
the plan have a maximum term of 10 years, or 5 years in the case of
incentive stock options granted to an employee who owned common shares
having more than 10% of the voting power of ezlogin. In the event of
termination and to the extent unexercised and exercisable, the option
will remain exercisable for a period of three months after the date of
termination. If termination is due to death or disability, the right to
exercise the option will expire within one year.
F-15
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
A summary of the status of the Company's options under the Plans as at
December 31, 1999 and September 30, 2000 is as follows:
December 31, 1999:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING NUMBER OF
NUMBER OF CONTRACTUAL OPTIONS
EXERCISE PRICE OPTIONS LIFE (YEARS) EXERCISABLE
-------------- ---------- ------------ -----------
<S> <C> <C> <C>
$0.34....................................................... 1,604,000 8.2 1,000,660
$1.71....................................................... 424,400 9.2 105,666
$3.75....................................................... 258,460 9.5 131,600
$7.50....................................................... 20,200 9.7 --
$10.00...................................................... 569,870 9.9 --
--------- ---------
2,876,930 1,237,926
========= =========
</TABLE>
September 30, 2000 (unaudited):
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING NUMBER OF
NUMBER OF CONTRACTUAL OPTIONS
EXERCISE PRICE RANGES OPTIONS LIFE (YEARS) EXERCISABLE
--------------------- ---------- ------------ -----------
<S> <C> <C> <C>
$0.34 - 20.00............................................... 2,234,622 9.0 1,008,551
$29.82 - 36.78.............................................. 310,105 9.9 --
$40.53 - 58.38.............................................. 962,750 9.7 --
$64.03 - 76.45.............................................. 14,676 9.5 --
$83.07 - 90.89.............................................. 189,200 9.4 12,000
$105.95 - 155.98............................................ 68,900 9.5 --
$163.87 - 207.82............................................ 95,884 9.5 --
--------- ---------
3,876,137 1,020,551
========= =========
</TABLE>
F-16
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
8. SHAREHOLDERS' EQUITY: (CONTINUED)
The following table summarizes the continuity of options issued under the
Plans:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------
SEPTEMBER 30, 2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of period.... 2,876,930 $ 2.81 1,865,000 $0.49 400,000 $0.35
Granted............................. 1,896,820 56.25 1,071,196 8.44 1,465,000 0.54
Exercised........................... (713,565) 25.30 -- -- -- --
Cancelled........................... (184,048) 0.78 (59,266) 3.42 -- --
--------- ------ --------- ----- --------- -----
Outstanding, end of period.......... 3,876,137 $27.08 2,876,930 $2.81 1,865,000 $0.49
========= ====== ========= ===== ========= =====
Options exercisable, end of
period............................ 1,020,551 $ 2.00 1,237,926 $0.72 625,166 $0.34
========= ====== ========= ===== ========= =====
</TABLE>
The Company recorded deferred stock-based compensation relating to
options issued under the Company's Plans amounting to $14,380,000 for the
nine months ended September 30, 2000, $5,841,000 for the year ended
December 31, 1999 and $414,000 for the year ended December 31, 1998.
Amortization of deferred stock-based compensation amounted to $3,870,000
for the nine months ended September 30, 2000; $165,000 for the year ended
December 31, 1999 and $181,000 for the year ended December 31, 1998.
F-17
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
9. INCOME TAXES:
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to net income (loss) before income taxes. The
sources and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS JULY 28, 1997
ENDED YEARS ENDED (INCEPTION)
SEPTEMBER 30, DECEMBER 31, TO
------------------- ------------------- DECEMBER 31,
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Basic rate applied to net income (loss) before provision
for income taxes........................................ $(17,679) $(3,360) $(6,168) $(1,201) $(69)
Adjustments resulting from:
Scientific research expenses not deducted for tax....... -- 770 2,285 333 --
Foreign losses affected at lower rates.................. 4,206 -- 991 -- --
Stock-based compensation not deducted for tax........... 1,764 622 789 701 --
Amortization of intangibles............................. 3,985 -- -- -- --
Share issue costs....................................... (879) -- -- -- --
Other................................................... 1,802 85 218 167 45
-------- ------- ------- ------- ----
(6,801) (1,883) (1,885) -- (24)
Unrecognized benefit of net operating losses carried
forward................................................. 6,801 1,883 1,885 -- 24
-------- ------- ------- ------- ----
Income taxes.............................................. $ -- $ -- $ -- $ -- --$
======== ======= ======= ======= ====
</TABLE>
Significant components of the Company's future tax assets are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Research and development expenses deferred for income tax
purposes.................................................. $ 3,067 $3,067 $244
Net operating losses carried forward........................ 10,459 1,909 24
Share issue costs........................................... 5,713 -- --
Capital assets.............................................. 570 -- --
------- ------ ----
Future tax asset............................................ 19,809 4,976 268
Less:
Future tax liability related to capital assets............ -- 420 --
Future tax liability related to acquired technology....... 4,275 -- --
Valuation allowance....................................... 15,534 4,556 268
------- ------ ----
$-- $-- $--
======= ====== ====
</TABLE>
In assessing the realizability of future tax assets, management considers
whether it is more likely than not that some portion or all of the future
tax assets will not be realized. The ultimate realization of future tax
assets is dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. Management
considers projected future taxable income, uncertainties related to the
industry in which the Company operates, and tax planning strategies in
making this assessment. In order to fully realize the future tax assets, the
Company will need
F-18
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
9. INCOME TAXES: (CONTINUED)
to generate future taxable income of approximately $36 million prior to the
expiration of the net operating losses carried forward in the years 2003 to
2019. Due to the uncertainties related to the industry in which the Company
operates, the tax benefit of the above carried forward amounts have been
completely offset by a valuation allowance.
10. LEASE COMMITMENTS:
Future minimum lease payments under non-cancellable operating leases for
premises and equipment are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
2000........................................................ $ 839 $1,311
2001........................................................ 2,974 1,231
2002........................................................ 2,344 1,059
2003........................................................ 2,173 1,059
2004........................................................ 1,858 924
2005 and thereafter......................................... 1,027 343
------- ------
$11,215 $5,927
======= ======
</TABLE>
Rent expense for the nine months ended September 30, 2000 and 1999, the
years ended December 31, 1999 and 1998, and the period from July 28, 1997
(inception) to December 31, 1997 was $2,244,000, $307,000, $590,000,
$107,000 and $17,000, respectively. The Company is also responsible for
certain common area costs at its various leased premises.
F-19
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
11. SEGMENTED INFORMATION:
The Company operates in a single reportable operating segment, that is, the
design and delivery of an Internet infrastructure platform that enables
customers to deliver services involving transactions such as online banking,
brokerage and mobile electronic commerce to a broad range of
Internet-enabled devices. The single reportable operating segment derives
its revenue from the sale of software and related services. Information
about the Company's geographical net revenues and assets is set forth below:
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS JULY 28, 1997
ENDED YEARS ENDED (INCEPTION)
SEPTEMBER 30, DECEMBER 31, TO
------------------- ------------------- DECEMBER 31,
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net revenue by geographic locations:
Other North America....................................... $11,158 $-- $ 1,135 $-- --$
Canada.................................................... 2,035 829 87 491 --
------- ---- ------- ---- ----
$13,193 $829 $ 1,222 $491 --$
======= ==== ======= ==== ====
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
--------------------- --------------------- ---------------------
INTANGIBLE INTANGIBLE INTANGIBLE
CAPITAL AND OTHER CAPITAL AND OTHER CAPITAL AND OTHER
ASSETS ASSETS ASSETS ASSETS ASSETS ASSETS
-------- ---------- -------- ---------- -------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C>
United States.................................. $1,412 $89,591 $ 41 $1,100 $-- $--
Canada......................................... 8,300 1,159 2,325 -- 860 --
International.................................. 64 -- -- -- -- --
------ ------- ------ ------ ---- ------
$9,776 $90,750 $2,366 $1,100 $860 $--
====== ======= ====== ====== ==== ======
</TABLE>
For the nine months ended September 30, 2000, four customers accounted for
43%, 21%, 18% and 15% of revenue, respectively. For the nine months ended
September 30, 1999, one customer accounted for 100% of revenue. For the year
ended December 31, 1999, three customers accounted for 100% of revenue. For
the year ended December 31, 1998, one customer accounted for 100% of
revenue.
At September 30, 2000, three customers accounted for 52%, 17% and 16% of the
accounts receivable balance. At December 31, 1999, three customers accounted
for 100% of the accounts receivable balance.
12. RELATED PARTY TRANSACTIONS:
(a) On April 30, 1998, the Company entered into a share subscription
agreement and a technology license agreement with Bank of Montreal
("BMO"). Pursuant to the share subscription agreement, on April 30, 1998,
BMO subscribed for 1,000,000 of the Company's common shares for Cdn.
$1,000,000 and received an option to subscribe for 2,428,570 additional
common shares for Cdn. $1,000,000, exercisable in the event that BMO
extended its technology license agreement for a second year and paid the
second year's technology licensing fee. In October 1998, upon exercising
its right to extend the technology license agreement, BMO exercised the
option and subscribed for 2,428,570 shares for Cdn. $1,000,000. On the
date of exercise, the fair value of the 2,428,570 common shares was
determined to be Cdn. $6,071,425, resulting in a stock-based compensation
charge related to software development revenue of Cdn. $5,071,425
F-20
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
12. RELATED PARTY TRANSACTIONS: (CONTINUED)
(U.S. $3,286,943). The stock-based compensation is being attributed to
the software development revenue over the term of the technology license
agreement in proportion to the revenue recognized in the first and second
years under the agreement. The excess of the stock-based compensation
over the accumulated allocation to software development revenue has been
netted against the related deferred revenue, with the balance being
recorded as deferred stock-based compensation in shareholders' equity. As
of September 30, 2000, the deferred stock-based compensation charge has
been fully expensed. As at September 30, 2000 and December 31, 1999, BMO
owned approximately 8.8% and 11.7%, respectively, of the Company's
outstanding common shares.
The BMO technology license agreement had an initial term of 10 months
commencing on April 30, 1998 and is extendable annually at the option of
BMO. BMO has extended the term of the technology license for two
additional years such that the current renewal period ends on February
28, 2001. The technology license agreement provides for fixed annual
license fees of Cdn. $3,000,000 in exchange for a world-wide perpetual
license for all technology existing at the commencement of the license
period and all technology developed during each term of the agreement.
The annual license fees in the first two technology licensing terms of
the agreement were subject to refund to the extent that the Company
failed to meet certain spending commitments. As at December 31, 1999, all
spending commitments had been satisfied. Initially BMO had a right to be
the exclusive Canadian financial institution to which the Company would
license its technology. In November 1998, BMO agreed to waive this right
in exchange for the right to a payment, if any, equal to a percentage of
licence fees paid by other Canadian financial institutions to license the
Company's technology up to a maximum payment of Cdn. $700,000. To
September 30, 2000, no amounts have been subject to payment under this
provision. The Company has recognized the annual license fees of the
technology license on a straight-line basis over the term of the license.
(b) On June 1, 1999, the Company entered into a subscription agreement with
Bank of America, NA ("BA") and a technology licensing agreement with an
affiliate of BA. Pursuant to the subscription agreement BA subscribed for
541,790 common shares of the Company for $2,000,000. The subscription
agreement also stipulated that BA would unconditionally subscribe for an
additional 541,790 common shares on February 1, 2000 for $2,000,000. BA
subscribed for the 541,790 additional common shares in October 1999 as a
result of the Company attracting additional equity investors at that
time. On August 2, 1999, an Option and Subscription Amending Agreement
was entered into which granted BA the option to acquire a further
2,116,420 common shares for an aggregate subscription price of
$8,243,456. BA exercised this option in October 1999.
The technology license agreement provides for a fixed license fee to be
paid by the Company over a twenty-month period commencing on June 1,
1999, in exchange for the delivery of specific products over the term of
the agreement and for a license of all technology developed during the
license period. The license fee has been recognized over the term of the
contract commencing upon the delivery of the first product. The Company
has deferred the recognition of revenue on payments subject to refund in
the event that the Company does not deliver certain defined products. BA
has an option to extend this agreement for consecutive one year terms at
the end of the twenty month term. The Company has also contracted with BA
to provide consulting fees at commercial rates. As at September 30, 2000
and December 31, 1999, BA owned approximately 8.2% and 10.9%,
respectively, of the Company's outstanding common shares.
In 2000, the Company entered into additional agreements with BA in
connection with the technology license agreement to provide BA with
application hosting services and implementation consulting services
including a master services agreement under which the Company will
provide services to BA and its affiliates. These services will be
provided under separate statements of services that will incorporate all
the terms and provisions of the master services agreement and detail the
services to be performed, the price to be paid for the services, the
designated project managers and any other additional provisions the
parties may agree upon. The master services agreement will continue
through November 2004
F-21
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
12. RELATED PARTY TRANSACTIONS: (CONTINUED)
unless either party terminates the agreement upon six months prior
written notice. In 2000, the Company has also provided BA with consulting
services related to its LiveClips offering.
(c) On September 28, 1999 and October 19, 1999, the Company entered into a
technology license agreement and share subscription agreement,
respectively, with Wells Fargo Bank, N.A. ("WF"). Pursuant to the share
subscription agreement, WF subscribed for 784,374 common shares of the
Company for $3,000,000. As at September 30, 2000 and December 31, 1999,
WF owned approximately 2.0% and 2.7%, respectively, of the Company's
outstanding common shares.
Under the original terms of the technology license agreement, the
agreement provided for an annual license fee to be paid by WF over the
next four years, in exchange for the delivery of a specific software
product over the term of the agreement. In 2000, the Company delivered
the software product specified in the technology license agreement and
has recognized the first annual license fee that had been paid. In
addition, the original terms of the technology license agreement also
provided for a variable monthly user fee for certain products that are
also deliverable under the agreement if licensed by WF. The variable
monthly user fee was to be calculated on the number of users and subject
to certain maximum and minimum amounts. The Company is currently in
negotiations with WF to redefine the deliverables over the remaining term
of the contracts. The Company has also contracted with WF to provide
consulting fees at commercial rates.
(d) On December 29, 1999, the Company entered into a master technology
license agreement with Citicorp Strategic Technology Corporation
("Citibank"). The initial term of the master agreement is five years. The
agreement enables Citigroup and its affiliates to license the technology
by entering into separate agreements which will incorporate the terms of
the master agreement. In the period ended September 30, 2000, the Company
has entered into an agreement under the master technology license
agreement with a Citigroup affiliate in Asia. As at September 30, 2000
and December 31, 1999, Citibank owned approximately 14.0% and 21.8%,
respectively, of the Company's outstanding common shares.
Under the terms of the master agreement, Citibank is required to pay to
the Company a specified minimum amount during each year that the master
agreement is in effect, whether or not Citigroup or any Citigroup
affiliates actually enter into agreements under the master agreement to
license the technology. The required payments may increase each year of
the agreement, up to specified maximum levels, based on specified targets
relating to the number of world-wide Citigroup customers that use
services based upon the Company's financial services platform, the number
of Citigroup affiliates that license the technology and the amount of
revenue generated under this agreement. The specified minimum amount
received in fiscal 2000 is being recognized rateably over the first year
of the contract.
In addition, under the master agreement the Company will provide to each
Citigroup licensee, maintenance services relating to the technology that
is licensed under the master agreement. These maintenance services will
include, among other things, the provision of updates and upgrades to our
technology that are generally made available to our customers. The master
agreement also provides that the Company will perform services for
Citigroup affiliates that license technology under the agreement,
including consulting, development, implementation and other services. The
terms of any services of this type, including the fees to be paid for
these services, will be set forth in a separate agreement that will be
entered into by the Company and the applicable Citigroup affiliate.
The Company agreed to purchase from Citicorp Strategic Technology
Corporation a range of consulting services that are described in the
master agreement. These services will include consulting services
relating to the promotion of the technology for adoption by Citigroup's
affiliates. The Company will pay, for these services, a fee that will be
calculated based upon the number of Citigroup affiliates that enter into
agreements to license the technology during the first year of the master
agreement, which ends December 2000. In the nine months ended September
30, 2000, the Company paid approximately $400,000 for these services.
F-22
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
12. RELATED PARTY TRANSACTIONS: (CONTINUED)
These technology license agreements are extendible annually at the option
of the licensees. In addition, the Company has agreed to provide related
support and maintenance services to the licensees at commercial rates.
The following table sets out the balances and transactions with the
licensees relating to these agreements:
<TABLE>
<CAPTION>
DECEMBER 31,
SEPTEMBER 30, -------------------
2000 1999 1998
-------------- -------- --------
(Unaudited)
<S> <C> <C> <C>
Related party balances:
Accounts receivable, net of allowance for doubtful
accounts................................................ $2,249 $3,121 $34
Deferred revenue, net of deferred stock-based compensation
of $248
(1998 -- $420).......................................... 2,934 6,125 --
</TABLE>
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS JULY 28, 1997
ENDED YEARS ENDED (INCEPTION)
SEPTEMBER 30, DECEMBER 31, TO
------------------- ------------------- DECEMBER 31,
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Related party transactions:
Net revenue:
Product................................................. $8,532 $41 $ 53 $283 $--
Services................................................ 4,037 34 1,169 208 --
</TABLE>
(e) In August 1999, the Company entered into a two year consulting agreement
with a director of the Company providing for a monthly consulting fee of
$34,000, together with options, granted under the option plan, to
purchase 48,000 common shares of the Company at an exercise price of
$3.75. This consulting agreement was cancelled, with the last payment
being made in August 2000.
13. EARNINGS (LOSS) PER SHARE:
Due to the net loss for all periods presented, all potential common shares
outstanding are considered anti-dilutive and are excluded from the
calculation of diluted loss per share. Common shares issuable on the
exercise of common shares that could potentially dilute basic loss per share
in the future that were not included in the computation of diluted loss per
share, because to do so would have been anti-dilutive for the nine months
ended September 30, 2000 and for the year ended December 31, 1999, amounted
to 2,805,863 and 2,117,951, respectively.
14. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES:
The financial statements of the Company have been prepared in accordance
with generally accepted accounting principles ("GAAP") as applied in Canada,
which conform in all material respects with generally accepted accounting
principles in the U.S. except as noted below.
F-23
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
14. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES: (CONTINUED)
Comprehensive income:
In June 1997, the Financial Accounting Standards Board issued SFAS No. 130,
"Reporting Comprehensive Income" (SFAS No. 130), which establishes standards
for reporting and presentation of comprehensive income. This standard
defines comprehensive income as the changes in equity of an enterprise
except those resulting from stockholder transactions.
As described in note 6(b), the Company has an investment in a publicly
traded entity which the Company has classified as an available-for-sale
security. Under U.S. GAAP, the Company would record the investment at fair
value and record the unrealized gain as a separate component of
stockholders' equity. This would result in investments and stockholders'
equity on the balance sheet being increased by $1.4 million and a separate
caption in stockholders' equity entitled "accumulated other comprehensive
income" with a balance of $1.4 million. Comprehensive loss for the
nine-months ended September 30, 2000 would be $39.7 million. For all other
periods presented, comprehensive loss would be the same as the loss for the
period presented.
Supplemental disclosures required under U.S. GAAP include the following:
(a) Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded on the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133, as recently
amended, is effective for fiscal years beginning after June 15, 2000. To
date, the Company has not entered into derivative instruments. Management
believes the adoption of SFAS No. 133 will not have a material effect on
the Company's financial position or results of operations.
The U.S. Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" (SAB
101), on December 3, 1999. SAB 101 provides additional guidance on the
application of existing generally accepted accounting principles to
revenue recognition in financial statements. The Company does not expect
the guidance of SAB 101 to have a material effect on its financial
statements upon adoption.
(b) SFAS 123 pro forma information:
The Company has elected to apply the disclosure-only provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, for the disclosure of
compensation costs related to employee stock options valued at fair
value. For companies electing not to adopt the fair value measurement for
stock based compensation, the pronouncement requires the disclosure of
pro forma net income and net income (loss) per share information as if
the Company had accounted
F-24
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
14. CANADIAN AND U.S. ACCOUNTING POLICY DIFFERENCES: (CONTINUED)
for its stock options issued from inception on July 28, 1997 under the
fair value method. A summary of the required pro forma disclosure of the
impact on the statement of operations is presented in the table below:
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS JULY 28, 1997
ENDED YEARS ENDED (INCEPTION)
SEPTEMBER 30, DECEMBER 31, TO
------------------- ------------------- DECEMBER 31,
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Net income (loss).................................... $(41,117) $(7,550) $(13,831) $(2,699) $ (155)
Compensation expense related to the fair value of
stock options...................................... (12,504) (272) (362) (23) (4)
-------- ------- -------- ------- ------
Pro forma net income (loss).......................... $(53,621) $(7,822) $(14,193) $(2,722) $ (159)
======== ======= ======== ======= ======
Pro forma net income (loss) per share................ $ (1.48) $ (0.59) $ (0.84) $ (0.47) $(0.06)
======== ======= ======== ======= ======
</TABLE>
The fair value of each option granted prior to the Company becoming a
publicly traded company has been estimated at the date of grant using the
minimal value method and by applying the following assumptions:
weighted-average risk free interest rate of 4.9% for the nine months
ended September 30, 1999, 4.9% and 5.1% for the years ended December 31,
1999 and 1998, respectively and 4.75% for the period from July 28, 1997
(inception) to December 31, 1997; dividend yield of 0%, and an expected
life of the options of five years.
The fair value of each option granted between the date the Company became
a publicly traded company and September 30, 2000 has been estimated at
the date of grant using the Black-Scholes option pricing model with the
following assumptions used: dividend yield of zero, expected volatility
of 145%, risk free rate of return of 6.41% and an expected life of the
option of five years.
The Company has assumed no forfeiture rate, as adjustments for actual
forfeitures are made in the year they occur. The weighted-average
grant-date fair value of options issued in the nine months ended
September 30, 2000 and 1999 was $83.46 and $0.38 per option,
respectively; in the years ended December 31, 1999 and 1998 was $3.26 and
$0.13 per option, respectively, and in the period from July 28, 1997
(inception) to December 31, 1997 was $0.07 per option.
15. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
The following presents the supplemental disclosure of cash flow information
for the nine months ended September 30, 2000. Non-cash activities in the
other periods presented in these financial statements are not significant.
<TABLE>
<S> <C>
Supplemental disclosure of non-cash investing and financing
activities:
Liabilities assumed in business acquisitions.............. $ 772
Fair value of assets assumed on business acquisition less
cash acquired........................................... 11,666
</TABLE>
16. SUBSEQUENT EVENTS:
On November 29, 2000, the Company entered into an agreement to acquire all
of the issued and outstanding shares of Tantau Software, Inc. in exchange
the issuance of common shares of the Company. At the time of closing, it is
anticipated that the outstanding share capital of Tantau will include
approximately 27.4 million common shares and options to acquire
approximately 3.1 million common shares. As consideration for the
acquisition, the Company will issue in the aggregate
F-25
<PAGE>
724 SOLUTIONS INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(Tabular amounts in thousands of U.S. dollars, except share and option numbers
and per share amounts)
Years ended December 31, 1999 and 1998 and for the period from July 28, 1997
(date of inception) to December 31, 1997
(Information as at September 30, 2000 and for the nine months ended
September 30, 2000 and 1999 is unaudited)
16. SUBSEQUENT EVENTS: (CONTINUED)
19 million common shares and common share replacement options resulting in
an exchange ratio of approximately 0.62 common shares and common share
options of the Company for every common share and common share option of
Tantau. In addition, Tantau may issue up to 500,000 Tantau stock options to
new hires and promoted employees in the period from November 29, 2000 to the
closing date. These stock options will be converted into stock options of
the Company using the exchange ratio. On closing, up to 1,500,000 stock
options of the Company will be issued to key employees of Tantau with an
exercise price equal to the market value on the closing date. The
consideration for the common shares and replacement options issued will be
calculated based on the average of the market price of the Company's common
shares on the Nasdaq National Market exchange for the period from
November 28, 2000 to November 30, 2000, being $19.15. The acquisition price
is estimated to be approximately $372 million. The acquisition will be
accounted for by the purchase method with the fair value of the
consideration paid being allocated to the assets acquired and liabilities
assumed on the closing date based on their fair values. A preliminary
acquisition equation, based on the estimated fair value of the net assets
and liabilities as at September 30, 2000, has been set out below:
<TABLE>
<CAPTION>
FAIR VALUE
----------
<S> <C>
Net assets acquired:
Cash and cash equivalents................................. $ 41,121
Cash received on the exercise of the warrants prior to
closing................................................. 1,337
Accounts receivable....................................... 2,338
Prepaid expenses and other receivables.................... 271
Investment in Accrue...................................... 17,904
Capital assets............................................ 1,468
Intangible and other assets............................... 221
Accounts payable.......................................... (797)
Accrued liabilities....................................... (1,695)
Deferred revenue.......................................... (588)
Notes payable............................................. (4,482)
--------
56,288
Allocation of the net purchase price:
Goodwill and other intangibles............................ 270,358
Deferred stock based compensation......................... 44,905
--------
$371,551
Consideration paid:
Share and stock option consideration...................... $360,551
Costs of acquisition...................................... 11,000
--------
$371,551
========
</TABLE>
The actual split of the purchase price between goodwill and other
intangibles and deferred stock-based compensation will be affected by the
closing price of the Company's shares on the closing date of the acquisition.
For the purposes of this preliminary acquisition equation, the value per share
used in calculating and classifying the purchase price, is $19.15.
F-26
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors of Tantau Software, Inc.
We have audited the accompanying consolidated balance sheets of Tantau
Software, Inc. and subsidiaries as of September 30, 2000 and December 31, 1999,
and the related consolidated statements of operations, stockholders' deficit and
comprehensive loss, and cash flows for the nine months ended September 30, 2000
and the period from February 11, 1999 (inception) to December 31, 1999. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Tantau
Software, Inc. and subsidiaries as of September 30, 2000 and December 31, 1999,
and the consolidated results of their operations and their cash flows for the
nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999 in conformity with accounting principles
generally accepted in the United States of America.
December 11, 2000 /s/ KPMG LLP
Austin, Texas
F-27
<PAGE>
TANTAU SOFTWARE, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
SEPTEMBER 30, 2000 AND DECEMBER 31, 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 41,121 $ 3,567
Accounts receivable....................................... 2,338 1,665
Prepaid expenses and other current assets................. 271 278
Investment in Accrue Software, Inc. at fair value......... 17,094 --
-------- -------
Total current assets...................................... 60,824 5,510
Property and equipment, net................................. 1,468 1,186
Goodwill, net of accumulated amortization of $184 in 2000
and $128 in 1999.......................................... 397 726
Other assets................................................ 221 107
-------- -------
Total assets................................................ $ 62,910 $ 7,529
======== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable.......................................... $ 797 $ 497
Accrued expenses.......................................... 3,164 482
Deferred revenue.......................................... 4,936 1,272
Current portion of note payable........................... 259 --
Current portion of deferred gain on sales of assets....... 23,970 --
-------- -------
Total current liabilities................................. 33,126 2,251
Note payable, net of current portion and discount of
$1,361.................................................... 3,380 --
Deferred gain on sales of assets, net of current portion.... 17,516 --
Series A redeemable convertible preferred stock -- $.001 par
value, 14,000,000 shares authorized, 12,850,000 shares
issued and outstanding in 2000 and 1999; aggregate
preferences on voluntary or involuntary liquidation or
redemption are $12,850.................................... 12,533 12,533
Series B redeemable convertible preferred stock -- $.001 par
value, 6,816,290 shares authorized, 6,466,319 shares
issued and outstanding in 2000, no shares issued and
outstanding in 1999; aggregate preferences on voluntary or
involuntary liquidation or redemption are $40,000......... 39,939 --
Series B preferred stock purchase warrants.................. 1,655 --
Stockholders' deficit:
Common stock, $.001 par value; 39,000,000 shares
authorized, 7,818,000 shares
issued and 7,607,116 shares outstanding in 2000;
5,557,750 shares issued
and outstanding in 1999............................... 8 6
Additional paid-in capital................................ 18,791 4,527
Deferred stock compensation............................... (16,041) (3,654)
Accumulated other comprehensive loss...................... (280) (56)
Accumulated deficit....................................... (47,717) (8,078)
-------- -------
Total stockholders' deficit............................... (45,239) (7,255)
-------- -------
Total liabilities and stockholders' deficit................. $ 62,910 $ 7,529
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-28
<PAGE>
TANTAU SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS OF U.S. DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND THE PERIOD FROM FEBRUARY 11, 1999
(INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Software license revenue.................................... $ 5,413 $ 2,296
Professional services revenue............................... 1,161 580
-------- -------
Total revenue............................................. 6,574 2,876
-------- -------
Cost of revenue:
Software license.......................................... 133 155
Professional services (including stock compensation of
$338 in 2000 and
$120 in 1999)........................................... 897 601
-------- -------
Total cost of revenue....................................... 1,030 756
-------- -------
Gross profit.............................................. 5,544 2,120
-------- -------
Operating expenses:
Research and development (including stock compensation of
$499 in 2000 and $177 in 1999).......................... 5,808 3,328
Sales and marketing (including stock compensation of
$1,027 in 2000 and
$217 in 1999)........................................... 7,550 2,637
General and administrative (including stock compensation
of $247 in 2000 and $58 in 1999)........................ 6,155 4,480
-------- -------
Total operating expenses.................................... 19,513 10,445
-------- -------
Loss from operations...................................... (13,969) (8,325)
-------- -------
Other income (expense):
Gain on sales of assets................................... 5,213 --
Realized loss on investment in Accrue Software, Inc....... (31,413) --
Interest expense.......................................... (550) --
Interest income........................................... 1,080 247
-------- -------
Net other income (expense).................................. (25,670) 247
-------- -------
Net loss.................................................... $(39,639) $(8,078)
======== =======
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-29
<PAGE>
TANTAU SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT AND COMPREHENSIVE LOSS
(IN THOUSANDS OF U.S. DOLLARS EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ACCUMULATED
-------------------- ADDITIONAL DEFERRED OTHER
NUMBER OF PAID-IN STOCK COMPREHENSIVE ACCUMULATED
SHARES AMOUNT CAPITAL COMPENSATION LOSS DEFICIT TOTAL
--------- -------- ---------- ------------ ------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Issuance of common stock at
inception........................... 3,325,000 $ 4 $ 80 $ -- -$- $ -- $ 84
Exercise of stock options............. 2,232,750 2 221 -- -- -- 223
Deferred stock compensation........... -- -- 4,226 (4,226) -- -- --
Compensation expense.................. -- -- -- 572 -- -- 572
Comprehensive loss:
Net loss............................ -- -- -- -- -- (8,078) (8,078)
Foreign currency translation
adjustment........................ -- -- -- -- (56) -- (56)
--------
Total comprehensive loss............ (8,134)
--------- --- ------- -------- ----- -------- --------
Balances as of December 31, 1999...... 5,557,750 6 4,527 (3,654) (56) (8,078) (7,255)
========= === ======= ======== ===== ======== ========
Repurchase of common stock............ (210,884) -- -- -- -- -- --
Exercise of stock options............. 2,260,250 2 266 -- -- -- 268
Deferred stock compensation........... -- -- 13,998 (13,998) -- -- --
Compensation expense.................. -- -- -- 1,611 -- -- 1,611
Comprehensive loss:
Net loss............................ -- -- -- -- -- (39,639) (39,639)
Foreign currency translation
adjustment........................ -- -- -- -- (224) -- (224)
--------
Total comprehensive loss............ (39,863)
--------- --- ------- -------- ----- -------- --------
Balances as of September 30, 2000..... 7,818,000 $ 8 $18,791 $(16,041) $(280) $(47,717) $(45,239)
========= === ======= ======== ===== ======== ========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-30
<PAGE>
TANTAU SOFTWARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF U.S. DOLLARS)
NINE MONTHS ENDED SEPTEMBER 30, 2000 AND THE PERIOD FROM FEBRUARY 11, 1999
(INCEPTION) TO DECEMBER 31, 1999
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Operating activities:
Net loss.................................................. $(39,639) $(8,078)
Adjustment to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization expense................... 680 568
Non-cash interest expense............................... 217 --
Stock compensation expense.............................. 2,111 572
Realized loss on investment in Accrue Software, Inc..... 31,413 --
Gain on sales of assets................................. (5,213) --
Changes in operating assets and liabilities:
Accounts receivable................................... (734) (1,665)
Prepaid expenses and other current assets............. -- (278)
Other assets.......................................... (39) (107)
Accounts payable and accrued expenses................. 396 967
Deferred revenue...................................... 3,706 1,272
-------- -------
Net cash used in operating activities..................... (7,102) (6,749)
-------- -------
Investing activities:
Purchase of property and equipment........................ (927) (616)
Proceeds from sales of assets............................. 600 --
-------- -------
Net cash used in investing activities..................... (327) (616)
-------- -------
Financing activities:
Proceeds from issuance of Series A redeemable preferred
stock, net of issuance costs............................ -- 10,683
Proceeds from issuance of Series B redeemable preferred
stock, net of issuance costs............................ 39,939 --
Proceeds from issuance of common stock.................... 268 307
Proceeds from note payable................................ 5,000 --
-------- -------
Net cash provided by financing activities................. 45,207 10,988
-------- -------
Effect of exchange rate on cash............................. (224) (56)
-------- -------
Increase in cash and cash equivalents....................... 37,554 3,567
Cash and cash equivalents, beginning of period.............. 3,567 --
-------- -------
Cash and cash equivalents, end of period.................... $ 41,121 $ 3,567
======== =======
Supplemental disclosure of cash flow information:
Cash paid for interest.................................... $ 292 $ --
Supplemental disclosure of non-cash investing and financing
activities:
Issuance of preferred stock for property and equipment.... $ -- $ 996
Issuance of preferred stock for intangible assets......... -- 854
Sale of Infocharger assets in exchange for investment in
Accrue Software, Inc.................................... 46,087 --
Issuance of preferred stock warrants for note payable and
line of credit.......................................... 1,655 --
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-31
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
1. ORGANIZATION:
Tantau Software, Inc. (the "Company") was incorporated under the laws of the
State of Delaware on February 11, 1999.
The Company is a global provider of software and services that enable
enterprises to conduct high-volume, secure, m-commerce transactions while
maintaining direct access to their customers. The Company's Wireless
Internet Platform creates a link for a variety of wireless and wired
devices, including cellular telephones, personal digital assistants, pagers
and web browsers, to interact with enterprise applications and data sources.
The Company's platform allows enterprises to provide access to their
Internet e-commerce activities, such as banking, stock-trading, and shopping
through wireless mobile devices.
The consolidated financial statements include the accounts of the Company
and its wholly-owned foreign subsidiaries. All material intercompany
accounts and transactions have been eliminated in consolidation.
Headquartered in Austin, Texas, the Company has sales offices in Australia,
Finland, Germany, Switzerland, the United Kingdom, Japan, and the United
States. The primary research and development activity is in Friedrichsdorf,
Germany and Lensburg, Switzerland, with additional development in Helsinki,
Finland.
2. SIGNIFICANT ACCOUNTING POLICIES:
(a) Use of estimates:
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual
results could differ from those estimates.
(b) Cash and cash equivalents:
Cash and cash equivalents primarily consist of cash deposits and liquid
investments with original maturities of three months or less when
purchased and are stated at cost.
(c) Property and equipment:
Property and equipment are stated at cost. Depreciation and amortization
is provided over the estimated useful lives of the assets, which is three
to five years for furniture and fixtures, office equipment, and computer
equipment, and three years for computer software. Leasehold improvements
are depreciated over the shorter of their useful life or the life of the
lease. The Company uses the straight-line method for depreciating all
assets.
(d) Capitalized software:
In accordance with SFAS 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE
TO BE SOLD, LEASED OR OTHERWISE MARKETED, the Company capitalizes
purchased software and internal costs of software development beginning
when the resulting products become technologically feasible and ending
when the product is available for general release, subject to net
realizable value considerations. The Company has defined technological
feasibility as completion of a working model. No internally developed
software costs have been capitalized as the costs incurred between
completion of a working model and general release have been
insignificant. Accordingly, the Company has charged all such costs to
research and development expense.
(e) Goodwill:
Goodwill is stated at cost and amortized using the straight-line method
over its estimated life of five years. Goodwill consists of the excess
purchase price over the fair value of tangible and identifiable
intangible assets acquired from Compaq Computer Corporation as described
in Note 3. The Company assesses the recoverability of goodwill by
determining whether the carrying value of the assets will be recovered
through estimated undiscounted future cash flows. If this assessment
indicates that the goodwill is not recoverable, the carrying value of
goodwill is reduced to the net realizable value.
F-32
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
(f) Impairment of long-lived assets and long-lived assets to be disposed of:
Long-lived assets are reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to undiscounted future
net cash flows expected to be generated by the asset. If such assets are
considered to be impaired on this basis, the impairment loss to be
recognized is measured by the amount by which the carrying amount of the
assets exceeds the fair value of the assets. Assets to be disposed of are
reported at the lower of their carrying amount or fair value less costs
to sell.
(g) Revenue recognition:
The Company recognizes revenue in accordance with the American Institute
of Certified Public Accountants Statement of Position 97-2, "Software
Revenue Recognition" ("SOP 97-2"), as modified by SOP 98-9. SOP 97-2, as
modified, generally requires revenue earned on software arrangements
involving multiple elements such as software products, upgrades,
enhancements, post contract customer support ("PCS"), installation,
training, etc. to be allocated to each element based on the relative fair
values of the elements. The fair value of an element must be based on
evidence that is specific to the vendor. If evidence of fair value does
not exist for all elements of a license agreement and PCS is the only
undelivered element, then all revenue for the license arrangement is
recognized ratably over the term of the agreement. If evidence of fair
value of all undelivered elements exists but evidence does not exist for
one or more delivered elements, then revenue is recognized using the
residual method. Under the residual method, the fair value of the
undelivered elements is deferred, and the remaining portion of the
arrangement fee is recognized as revenue.
The Company licenses its products to end users primarily under perpetual
licenses. The Company's standard perpetual license agreement includes PCS
for a specified period of time. Thereafter, PCS can be renewed annually
for an additional fee. The Company uses the PCS renewal rate as evidence
of fair value of PCS. Since PCS is the only undelivered element in these
arrangements, revenue is recognized using the residual method. The fair
value of PCS is recognized over the PCS term and the remaining portion of
the arrangement fee is recognized after the execution of a license
agreement and the delivery of the product to the customer, provided that
there are no uncertainties surrounding the product acceptance, fees are
fixed and determinable, collectibility is probable, and the Company has
no remaining obligations other than the delivery of PCS.
The Company has entered into certain arrangements with original equipment
manufacturers ("OEM") and resellers. Under these arrangements, the
Company grants the OEM or reseller rights to sell products which
incorporate the Company's products for a specified period of time. The
Company's primary obligation to the OEM or reseller is to deliver a
product master and any bug fixes under warranty provisions to maintain
the product master in accordance with published specifications. In
certain arrangements, the Company receives prepaid, non-refundable
minimum license fees from the OEM or reseller. Because the Company's
primary obligations to an OEM or reseller have been fulfilled upon
delivery of the product master, the Company recognizes the prepaid,
non-refundable minimum license fees as revenue as the fees become due and
payable or upon delivery of the product master, whichever is later.
Professional services revenue is comprised of PCS for the perpetual
licenses and consulting and training services. Revenue from consulting
and training contracts is recognized as the services are performed.
(h) Advertising expenses:
The Company accounts for advertising costs as expense in the period in
which they are incurred. Advertising expense in the period ended
September 30, 2000 was approximately $1,610 (1999 -- $241).
(i) Income taxes:
The Company accounts for income taxes using the asset and liability
method whereby deferred tax asset and liability account balances are
determined based on the differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards. Deferred tax
assets and liabilities are measured using the enacted tax rates expected
to apply to taxable income in the years in which those
F-33
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
2. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
temporary differences are expected to be recovered or settled. The effect
on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(j) Stock-based compensation:
The Company has elected to apply the disclosure-only provisions of SFAS
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. Accordingly, the
Company accounts for its employee stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board ("APB")
Opinion No. 25, ACCOUNTING FOR STOCK OPTIONS ISSUED TO EMPLOYEES and
related interpretations. Compensation cost for employee stock options is
measured as the excess, if any, of the fair value of the Company's common
stock at the date of grant over the stock option exercise price and is
amortized to expense on a straight-line basis over the period during
which the options vest.
The Company accounts for equity instruments issued to non-employees using
the fair value method in accordance with the provisions of SFAS No. 123
and Emerging Issues Task Force Issue No. 96-18, ACCOUNTING FOR EQUITY
INSTRUMENTS THAT ARE ISSUED TO OTHER THAN EMPLOYEES FOR ACQUIRING OR IN
CONJUNCTION WITH SELLING, GOODS OR SERVICES.
Equity instruments issued to non-employees that are fully vested and
non-forfeitable are measured at fair value at the issuance date and
expensed in the period over which the benefit is expected to be received.
Equity instruments issued to non-employees which are either unvested or
forfeitable, for which counter-party performance is required for the
equity instrument to be earned, are measured initially at fair value and
subsequently adjusted for changes in fair value until the earlier of:
(1) the date at which a commitment for performance is required for
performance by the counter-party to earn the equity instrument is
reached, or (2) the date of which the counter-party's performance is
complete.
(k) Comprehensive loss:
Comprehensive loss for the periods ended September 30, 2000 and
December 31, 1999 consists of net loss and the gross amount of foreign
currency translation adjustments. The tax effect of the foreign currency
translation adjustments was insignificant.
(l) Concentration of credit risk:
Financial instruments include cash and cash equivalents, accounts
receivable, accounts payable and notes payable. The fair values of these
financial instruments approximates their carrying values as they either
have a short-term to maturity or carry a market interest rate.
(m) Recently issued accounting standards:
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS No. 133"). SFAS
No. 133 establishes new accounting and reporting standards requiring that
every derivative instrument be recorded on the balance sheet as either an
asset or liability measured at its fair value. SFAS No. 133, as recently
amended, is effective for fiscal years beginning after June 15, 2000. The
Company is required to adopt SFAS No. 133 beginning January 1, 2001.
Management believes the adoption of SFAS No. 133 will not have a material
effect on the Company's financial position or results of operations.
The U.S. Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), on December 3, 1999. SAB 101 provides additional guidance on the
application of existing generally accepted accounting principles to
revenue recognition in financial statements. The Company is required to
apply the guidance of SAB 101, effective in the fourth quarter of 2000
with retroactive application to January 1, 2000. Management believes the
adoption of SAB 101 will not have a material effect on the Company's
financial position or results of operations.
F-34
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
3. ACQUISITION:
On March 31, 1999, the Company acquired certain fixed assets, several
existing Internet infrastructure products, their corresponding customer
bases and related patents, trademarks and technology from the Tandem
division of Compaq Computer Corporation for 1,850,000 shares of Series A
preferred stock valued at $1,850. The transaction was accounted for using
the purchase method. The Company recorded property and equipment at their
estimated fair value of $996 at the purchase date and recorded the remaining
assets purchased as intangible assets of $854. The operations of the
acquired business have been included in the accompanying financial
statements from March 31, 1999.
4. PROPERTY AND EQUIPMENT:
The Company's property and equipment by major class as of September 30, 2000
and December 31, 1999 was as follows:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Furniture................................................... $ 74 $ 59
Equipment................................................... 2,230 1,619
Software.................................................... 257 161
Leasehold improvements...................................... 99 75
------ ------
2,660 1,914
Less accumulated depreciation and amortization.............. 1,192 728
------ ------
$1,468 $1,186
====== ======
</TABLE>
5. ACCRUED EXPENSES:
The Company's accrued expenses consisted of the following as of
September 30, 2000 and December 31, 1999:
<TABLE>
<CAPTION>
2000 1999
-------- --------
<S> <C> <C>
Non-employee stock compensation............................. $1,469 $--
Bonuses payable............................................. 884 --
Salaries and benefits....................................... 381 122
Other....................................................... 430 360
------ ----
$3,164 $482
====== ====
</TABLE>
6. DISPOSITION OF ASSETS:
SALE OF INFOCHARGER
On July 14, 2000, the Company sold certain tangible and intangible assets
associated with its InfoCharger technology to Accrue Software, Inc.
("Accrue") for 1,667,667 common shares of Accrue, of which 234,722 shares
are held in escrow subject to certain restrictions. Accrue is a provider of
e-Business analytic solutions for optimizing visitor response to Web-based
campaign, content, commerce and affiliate initiatives. In addition, the
Company entered into a two-year agreement to license certain software
products and provide post-contract support on the software to Accrue for
$5,000 in cash.
The Company did not have vendor specific objective evidence upon which the
elements of the arrangement, which included the assets sold, software
license and post-contract support, could be unbundled for purposes of
determining gain recognition as of the date of the sale. Therefore, the
Company is recognizing the entire arrangement over the two-year term of the
post-contract support. The Company has allocated the stock proceeds to the
sale of the assets and the cash proceeds to license revenue. The net gain on
the sale of the assets, excluding the value of the shares in escrow,
totalled $46,087, of which $4,801 has been recognized as gain on sale of
assets in the period ended September 30, 2000.
F-35
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
6. DISPOSITION OF ASSETS: (CONTINUED)
Of the Accrue shares held in escrow, 90,278 shares will be released on the
six-month anniversary of the closing if certain key employees remain with
Accrue. The remaining shares will be released on the one-year anniversary of
the closing pursuant to the indemnification provisions of the sale
agreement.
In conjunction with the sale, the Company issued certain employees
transferring to Accrue 100,000 options to purchase the Company's common
stock at an exercise price of $0.62 per share. As of September 30, 2000,
75,000 options had been exercised. These options, or the common stock
obtained upon exercise, are forfeitable in the event that the employees do
not remain with Accrue for at least one year. The value of these options was
determined to be $969 using the Black-Scholes model with the following
assumptions: risk free interest rate of 5.93%, a dividend yield of 0%,
volatility of 77.5%, and contractual life of 10 years. This value has been
recorded as a reduction of the gain on the sale of the Infocharger assets.
In September 2000, the Company adopted a plan to dispose of its investment
in Accrue at which time the decline in the value of the Accrue stock was
determined to be other than temporary. Therefore, the Company recorded a
loss in the statement of operations of $31,413 on its investment in Accrue
based upon the fair value of Accrue's stock as of September 30, 2000.
SALE OF J-PRODUCTS
In March 2000, the Company sold its J-product technology to a third party in
exchange for $900 cash payable in three equal installments. As part of the
sale, the Company licensed to the buyer certain technology rights including
support through December 31, 2000. The Company did not have vendor specific
objective evidence upon which the elements of the arrangement could be
unbundled for purposes of determining gain recognition as of the date of the
sale. Therefore, the Company is recognizing the entire arrangement over the
term of the technology rights and support. Of the proceeds received, the
Company has allocated $600 to the sale of the assets and $300 to the license
and support. As of September 30, 2000, the Company had recognized $412 as
gain on sale of assets.
7. NOTES PAYABLE:
In February 2000, the Company obtained a $5,000 loan from Comdisco bearing
an interest rate of 10% per annum. Interest is due and payable monthly for
the first 18 months subsequent to the advance, with payments that include
interest and principal being due and payable for the next 18 months with a
final maturity date in January 2003.
Future principal payments due under the loan are as follows:
Year ending December 31:
<TABLE>
<S> <C>
2001........................................................ $1,048
2002........................................................ $3,079
</TABLE>
In conjunction with the financing, the Company granted Comdisco a warrant to
purchase approximately 311,000 shares of the Company's Series B redeemable
preferred stock at an exercise price of $4.02 per share. The warrant is
exercisable at any time and expires upon the earlier of seven years from
date of issuance or three years from the date of completion of an initial
public offering by the Company. The fair value of the warrant was estimated
to be $1,556 as determined using the Black Scholes model with the following
assumptions: risk free interest rate of 5.93%, a dividend yield of 0%,
volatility of 77.5% and a term of seven years. The fair value of the warrant
was recorded as a discount on the note payable at the date of issuance.
During the period ended September 30, 2000, $195 of the discount was
amortized as interest expense resulting in an effective interest rate on the
note payable of approximately 16%.
In February 2000, the Company was extended a $2,000 revolving line of credit
and a $1,000 equipment advance by Imperial Bank. The period for the
equipment advance ended on July 31, 2000 without being borrowed against and
is thus no longer outstanding. The $2,000 line of credit has yet to be
borrowed against but remains available to the Company. Amounts borrowed by
the Company can be repaid and reborrowed anytime prior to February 9, 2001.
On that date any such advances outstanding become due and payable. The line
of credit bears an interest rate equal to the prime rate and interest
payments are due on the first of each month. In conjunction with the
financing, the Company issued a warrant giving Imperial Bank
F-36
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
7. NOTES PAYABLE: (CONTINUED)
the right to buy 20,000 shares of Series B redeemable preferred stock upon
the closing of the B series financing at an exercise price of $4.33 per
share. The warrant is exercisable at any time and expires upon the earlier
of June 1, 2007, one year from the date of completion of an initial public
offering by the Company, or immediately prior to completion of an
acquisition of the Company in which the warrant is not assumed by the
successor entity. The fair value of the warrant was estimated to be $99 as
determined using the Black Scholes model with the following assumptions:
risk free interest rate of 5.93%, a dividend yield of 0%, volatility of
77.5% and a term of seven years. The fair value of the warrant was recorded
as a prepaid loan fee and is included with other assets. During the period
ended September 30, 2000, $22 of the loan fee was amortized as interest
expense.
8. COMMON STOCK:
The Company has authorized 39,000,000 shares of common stock, of which
12,850,000 shares have been reserved for the conversion of Series A
preferred stock, 6,797,200 shares have been reserved for the conversion of
Series B preferred stock, and 7,925,000 shares have been reserved for the
issuance of common stock upon the exercise of the stock options. The common
stock is subject to the prior and superior rights of the preferred stock.
The holders of common stock are entitled to one vote per share. Under a
founder's stock purchase agreement between the Company and certain common
stockholders, 1,735,417 shares of common stock are subject to a right of
repurchase by the Company if these stockholders cease to be employees of the
Company. The repurchase rights are released monthly with respect to 1/48 of
such shares as they vest.
9. REDEEMABLE CONVERTIBLE PREFERRED STOCK:
In 1999, the Company issued 12,850,000 Shares of Series A redeemable
preferred stock ("Series A"). Of the Series A preferred stock issued,
1,850,000 shares were issued in exchange for assets from Compaq Computer
Corporation as described in Note 3. The remaining 11,000,000 shares were
issued in exchange for cash of $1 per share. The Company incurred issuance
costs of $317 related to Series A. In June 2000, the Company issued
6,466,319 shares of Series B redeemable preferred stock ("Series B") in
exchange for cash of $6.1859 per share. In September 2000, the Company
issued 6,466 shares of Series B in exchange for services. As measured by the
fair value of the stock issued, the value of these services was determined
to be insignificant. The Company incurred issuance costs of $61 related to
Series B.
Each share of Series A and Series B is convertible into one share of common
stock at the option of the holder at any time subject to adjustment in
accordance with anti-dilution provisions. All the outstanding shares of
Series A and Series B preferred stock are automatically converted into
common stock in the event of a public offering whose gross proceeds equal or
exceed $20,000.
In the event of liquidation of the Company, the holders of the Series A and
Series B preferred stock are entitled to receive, prior and in preference to
any distribution of assets of the Company to holders of common stock, an
amount for each share of $1, and $6.1859, respectively, plus declared but
unpaid dividends.
Subject to a put right agreement, the Series A and Series B preferred stock
are first redeemable on March 31, 2008, at the option of the holder, in cash
at the liquidation preference of $1 and $6.1859 per share, respectively,
plus any declared but unpaid dividends.
Each holder of shares of Series A and Series B preferred stock has voting
rights equal to the number of shares of common stock into which the
preferred stock is convertible. The holders of shares of Series A and
Series B preferred stock are entitled to receive dividends when, as, and if
declared by the Board of Directors.
10. STOCK OPTIONS:
The Company's 1999 Stock Plan (the "Plan") allows for the grant of options
to purchase shares of common stock and the issuance of common stock directly
to eligible persons. The Plan provides for the options to be either
Incentive Options or Non-Statutory Options and approves issuance of up to
7,925,000 shares of common stock over the term of the Plan. The exercise
price per share of Incentive Options cannot be less than 100% of the fair
market value of the shares of common stock as determined by the Board of
Directors. Vesting of options is generally 25% after one year of service
with the
F-37
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
10. STOCK OPTIONS: (CONTINUED)
remaining options vesting monthly over the following three years. No option
can have a term exceeding ten years from the grant date.
The Plan provides the grantee the right to exercise prior to vesting.
Options exercised prior to an employee becoming fully vested in such options
are subject to repurchase by the Company at the original exercise price
should the employee be terminated or leave the Company prior to becoming
fully vested in such options. At September 30, 2000, 3,194,385 shares
(1999 - 2,232,750) were outstanding which had been exercised by optionees
but remained unvested and subject to repurchase.
In accordance with the disclosure requirements of SFAS No. 123, if the
Company had elected to recognize compensation cost based on the fair value
of options granted at grant date, net loss would have been increased to the
pro forma amounts indicated in the table below:
<TABLE>
<CAPTION>
NET LOSS: 2000 1999
--------- -------- --------
<S> <C> <C>
As reported................................................. $(39,639) $(8,078)
Pro forma................................................... (39,696) (8,101)
</TABLE>
The fair value for options was estimated at the date of grant using the
minimum value method with the following weighted-average assumptions:
weighted-average risk free interest rate of 5.93%, a dividend yield of 0%
and a weighted-average expected life of the options of five years. For
purposes of pro forma disclosures, the estimated fair value of options is
amortized to expense over the options' vesting period. The per share
weighted average fair value of stock options granted during 2000 and 1999
was $6.59 and $0.94, respectively. All of the options granted during 2000
and 1999 were granted with exercise prices less than the amount determined
to be the fair value of the common stock at the date of grant for financial
reporting purposes.
A summary of the Company's 1999 Stock Plan activity and related information
for the periods ended September 30, 2000 and December 31, 1999 follows:
<TABLE>
<CAPTION>
WEIGHTED-
AVERAGE
OUTSTANDING EXERCISE
OPTIONS PRICE
----------- ---------
<S> <C> <C>
Outstanding, February 11, 1999.............................. -- $--
Granted..................................................... 4,945,500 0.10
Exercised................................................... (2,232,750) 0.10
Forfeited................................................... (253,750) 0.10
---------- -----
Outstanding, December 31, 1999.............................. 2,459,000 $0.10
Granted..................................................... 2,292,600 0.59
Exercised................................................... (2,185,250) 0.11
Forfeited................................................... (50,000) 0.46
---------- -----
Outstanding, September 30, 2000............................. 2,516,350 $0.53
========== =====
</TABLE>
Options available for grant at September 30, 2000 were 990,650
(1999 -- 633,250).
F-38
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
10. STOCK OPTIONS: (CONTINUED)
The following table summarizes information about stock options outstanding
under the 1999 Stock Plan as of September 30, 2000:
<TABLE>
<CAPTION>
OUTSTANDING
-----------------------
WEIGHTED
AVERAGE
REMAINING
EXERCISE CONTRACT VESTED
PRICES SHARES LIFE (YEARS) SHARES
-------- -------- ------------ --------
<S> <C> <C> <C>
$0.10 975,250 9.0 185,911
0.62 824,850 9.8 --
0.90 333,000 9.9 --
1.10 383,250 10.0 --
</TABLE>
During the periods ended September 30, 2000 and December 31, 1999, the
Company issued options to certain employees with exercise prices below the
amount determined to be the fair value of the common stock at the date of
grant for financial reporting purposes. In accordance with the requirement
of APB No. 25, the Company has recorded deferred stock compensation for the
difference between the exercise price of the options and the deemed fair
value of the Company's common stock at the date of grant. The aggregate
deferred stock compensation recorded during the periods ended September 30,
2000 and December 31, 1999 is $13,998 and $4,226, respectively, which is
being amortized to expense straight-line over the period during which the
options vest.
During the periods ended September 30, 2000 and December 31, 1999, the
Company issued 190,000 and 45,000 options, respectively, to certain
non-employees in exchange for services. The options had exercise prices of
$0.10 and vest over terms ranging from six months to four years as the
services are performed. The Company recorded stock compensation of $500 in
the period ended September 30, 2000, for these non-employee options. The
expense for non-employee stock options in the period ended December 31, 1999
was insignificant. The amount of compensation was computed based upon the
service period and the fair value of the options using the Black-Scholes
model with the following assumptions: risk free interest rate of 5.93%, a
dividend yield of 0%, volatility of 77.5%, and contractual life of
10 years.
11. INCOME TAXES:
The components of loss before income taxes for the period ended
December 31, 1999 are as follows:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
U.S. operations............................................. $ (771)
Foreign operations.......................................... (7,307)
-------
(8,078)
=======
</TABLE>
The following is a reconciliation of the Company's actual income tax expense
to the expected income tax expense (benefit) based upon the U.S. statutory
rate of 34% in 1999:
<TABLE>
<CAPTION>
1999
--------
<S> <C>
Expected income tax benefit................................. $(2,747)
Change in valuation allowance............................... 2,732
Other....................................................... 15
-------
Actual income tax expense................................... $ --
=======
</TABLE>
F-39
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
11. INCOME TAXES: (CONTINUED)
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amount of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Significant
components of the Company's deferred tax assets and liabilities as of
December 31, 1999 are as follows:
<TABLE>
<S> <C>
Deferred tax liabilities:
Property and equipment...................................... $ (1)
Prepaid expenses and other.................................. (61)
-------
Total deferred tax liabilities.............................. (62)
Deferred tax assets:
Deferred revenue............................................ 352
Net operating loss and tax credit carryforwards............. 2,431
Other....................................................... 11
-------
2,794
Net deferred tax assets..................................... 2,732
Valuation allowance for deferred tax assets................. (2,732)
-------
Net deferred taxes.......................................... $ --
=======
</TABLE>
Due to operating losses and uncertainty regarding the recoverability of
deferred tax assets, the Company provided a valuation allowance equal to net
deferred tax assets.
As of December 31, 1999, the Company has net operating loss carryforwards of
approximately $6,166 for U.S. Federal tax purposes, and research and
development credit carryforwards of approximately $109. These carryforwards
begin to expire in 2019 if not utilized.
12. LEASE COMMITMENTS:
The Company is obligated under operating lease agreements covering certain
facilities and equipment. Rental expense under operating lease agreements
was approximately $749 for the period ended September 30, 2000
(1999 -- $490). Future minimum payments by year and in aggregate for all
leases with initial terms of one year or more consist of the following at
September 30, 2000:
<TABLE>
<S> <C>
2001........................................................ $ 823
2002........................................................ 525
2003........................................................ 366
2004........................................................ 277
------
Total minimum lease payments................................ $1,991
======
</TABLE>
13. RELATED PARTY TRANSACTIONS:
The Company had entered into OEM agreements with three stockholders. Under
these agreements, the Company has granted the stockholders rights to sell
products incorporating the Company's products for a specified period of
time. The terms of these arrangements are substantially the same as terms
with unrelated OEM's. During the period ended September 30, 2000, revenues
recognized from these stockholders were approximately 42% of total revenues
(1999 -- 34%). Approximately 30% of total accounts receivable at
September 30, 2000 (1999 -- 64%) were due under the agreements with these
stockholders.
The Company leases office space from one of its shareholders. Rent expense
under this agreement was $65 in 2000 (1999 -- $0).
F-40
<PAGE>
TANTAU SOFTWARE, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine months ended September 30, 2000 and the period from February 11, 1999
(inception) to December 31, 1999
(In thousands of U.S. Dollars, except share and per share data)
14. EMPLOYEE BENEFITS:
The Company has a voluntary, contributory 401(k) defined contribution plan,
which is available to all U.S. employees. The Company contracts with, and
bears the costs for, a third-party administrator. The costs paid by the
Company in 2000 and 1999 were not significant. To date, the Company has not
made any contributions to the plan.
15. SUBSEQUENT EVENT:
On November 29, 2000, the Company and 724 Solutions Inc., a leading provider
of Internet infrastructure software enabling clients to offer secure online
banking, brokerage and e-commerce services across Internet-enabled wireless
devices, entered into a definitive agreement under which the Company will
merge with a wholly-owned subsidiary of 724 Solutions Inc. After the merger,
the Company will be the surviving corporation and will continue as a
wholly-owned subsidiary of 724 Solutions Inc. The transaction will be
accounted for as a purchase by 724 Solutions Inc. and is expected to close
during the first quarter of 2001.
F-41
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors of Spyonit.com, Inc.
We have audited the balance sheet of Spyonit.com, Inc. (a Development Stage
Enterprise) as of September 12, 2000 and the statements of operations,
stockholders' equity and cash flows for the period from incorporation on
October 5, 1999 to September 12, 2000. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as of September 12, 2000 and the
results of its operations and its cash flows for the period from incorporation
on October 5, 1999 to September 12, 2000 in conformity with accounting
principles generally accepted in the United States of America.
Toronto, Canada /s/ KPMG LLP
November 28, 2000 Chartered Accountants
F-42
<PAGE>
SPYONIT.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(EXPRESSED IN U.S. DOLLARS)
SEPTEMBER 12, 2000 (DATE OF ACQUISITION BY 724 SOLUTIONS INC.)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current assets:
Cash...................................................... $ 65,895
Accounts receivable....................................... 9,000
Prepaid expenses and other receivables.................... 27
-----------
Total current assets...................................... 74,922
Fixed assets (note 2)....................................... 86,647
-----------
Total assets................................................ $ 161,569
===========
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Accrued liabilities....................................... $ 124,635
Unearned revenue.......................................... 51,000
-----------
Total current liabilities................................. 175,635
Stockholders' equity (note 3):
Capital stock:
Authorized:
100,000,000 common shares, $0.01 par value
Issued:
11,623,331 common shares.............................. 116,234
Contributed surplus....................................... 1,099,386
Deficit accumulated during the development stage.......... (1,229,686)
-----------
Total stockholders' deficiency............................ (14,066)
-----------
Total liabilities and stockholders' deficiency.............. $ 161,569
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-43
<PAGE>
SPYONIT.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
PERIOD FROM INCORPORATION ON OCTOBER 5, 1999 TO SEPTEMBER 12, 2000
(DATE OF ACQUISITION BY 724 SOLUTIONS INC.)
<TABLE>
<CAPTION>
<S> <C>
Revenue..................................................... $ 9,000
Operating expenses:
Research and development (including stock-based
compensation expense of $224,920)....................... 481,075
Sales and marketing (including stock-based compensation
expense of $68,500)..................................... 238,463
General and administrative (including stock-based
compensation expense of $46,200)........................ 537,690
-----------
Total operating expenses.................................. 1,257,228
-----------
Loss from operations........................................ (1,248,228)
Interest income............................................. 18,542
-----------
Loss for the period......................................... $(1,229,686)
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-44
<PAGE>
SPYONIT.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS)
PERIOD FROM INCORPORATION ON OCTOBER 5, 1999 TO SEPTEMBER 12, 2000
(DATE OF ACQUISITION BY 724 SOLUTIONS INC.)
<TABLE>
<CAPTION>
DEFERRED DEFICIT
STOCK-BASED ACCUMULATED TOTAL
COMMON SHARES COMPENSATION DURING THE STOCKHOLDERS'
--------------------- CONTRIBUTED RELATED TO DEVELOPMENT EQUITY
NUMBER AMOUNT SURPLUS STOCK OPTIONS STAGE (DEFICIENCY)
---------- -------- ----------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C>
Issued October 5, 1999............. 9,600,665 $ 96,007 $ (96,007) $ -- $ -- $ --
Issued October 6, 1999............. 182,666 1,827 (1,827) -- -- --
Issued December 22, 1999........... 360,000 3,600 (3,600) -- -- --
Issued January 6, 2000 at $0.80 per
share............................ 1,080,000 10,800 853,200 -- -- 864,000
Issued July 11, 2000 on the
exercise of stock options at
$0.03 per share.................. 400,000 4,000 8,000 -- -- 12,000
Deferred stock-based
compensation..................... -- 339,620 (339,620) -- --
Amortization of deferred
stock-based compensation......... -- -- -- 339,620 -- 339,620
Loss for the period................ -- -- -- -- (1,229,686) (1,229,686)
---------- -------- ---------- --------- ----------- -----------
Balance, September 12, 2000........ 11,623,331 $116,234 $1,099,386 $ -- $(1,229,686) $ (14,066)
========== ======== ========== ========= =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-45
<PAGE>
SPYONIT.COM, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
PERIOD FROM INCORPORATION ON OCTOBER 5, 1999 TO SEPTEMBER 12, 2000
(DATE OF ACQUISITION BY 724 SOLUTIONS INC.)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Loss for the period....................................... $(1,229,686)
Items not involving cash:
Depreciation and amortization........................... 14,095
Stock-based compensation................................ 339,620
Change in non-cash working capital:
Accounts receivable..................................... (9,000)
Prepaid expenses and other receivables.................. (27)
Accrued liabilities..................................... 124,635
Unearned revenue........................................ 51,000
-----------
Cash flows used in operating activities................... (709,363)
Cash flows from financing activities:
Issuance of common shares for cash........................ 876,000
Cash flows used in investing activities:
Purchase of fixed assets.................................. (100,742)
-----------
Increase in cash, being cash, end of period................. $ 65,895
===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-46
<PAGE>
SPYONIT.COM INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
Period from incorporation on October 5, 1999 to September 12, 2000
(date of acquisition by 724 Solutions Inc.)
Spyonit.com, Inc. (the "Company") was incorporated on October 5, 1999 under the
laws of Delaware and commenced operations in January 2000 to develop software to
monitor the internet and other content sources for items of interest to end
users. During the period from October 5, 1999 to December 31, 1999, the only
activity of the Company was the issuance of 10,143,331 founders shares for
nominal consideration.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These financial statements are expressed in U.S. dollars. They have been
prepared in accordance with accounting principles generally accepted in
the United States.
(b) Revenue recognition:
The Company's revenue consists of application hosting, consulting and
custom development.
As the Company's application hosting arrangements do not include
contracted rights for the customer to take possession of the software
during the hosting period, application hosting revenue is recognized
ratably over the term of the agreement.
Consulting and custom development revenue is earned either on a
time-and-materials basis or on a fixed fee basis. Revenue earned on a
time-and-materials basis is recognized as the services are performed.
Revenue earned on a fixed-fee basis is recognized using the percentage of
completion method, based on the ratio of total labor hours incurred to
date to total estimated labor hours. Changes in job performance, job
conditions, estimated profitability and final contract settlement may
result in revisions to costs and income, and are recognized in the period
in which the revisions are determined. Contract costs include direct
material and labor costs. Provisions for estimated losses on complete
contracts are made in the period in which such losses are determined.
Revenue that has been prepaid but does not yet qualify for recognition as
revenue under the Company's revenue recognition policy will be reflected
as unearned revenue on the Company's consolidated balance sheet.
(c) Financial instruments:
Financial instruments consist of cash, accounts receivable and accrued
liabilities. The fair values of financial assets and financial
liabilities approximate their recorded amounts due to their short-term
nature.
(d) Research and development expenses:
Costs related to research, design and development of software products
are charged to research and development expenses as incurred. Software
development costs are capitalized beginning when a product's
technological feasibility has been established, which generally occurs
upon completion of a working model, and ending when a product is
available for general release to customers. To date, completing a working
model of the Company's product and the general release of the product
have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
(e) Stock-based compensation:
The Company uses the intrinsic value method to account for stock-based
compensation to employees. As such, deferred stock-based compensation is
recorded if, on the date of grant, the current fair value of each
underlying common share exceeds the exercise price per share. Deferred
stock-based compensation is recognized as an expense over the vesting
period of the option.
(f) Fixed assets:
Fixed assets are stated at cost, net of accumulated depreciation and
amortization, and are amortized over their estimated useful lives.
Expenditures for maintenance and repairs are charged to the statement of
operations as incurred.
F-47
<PAGE>
SPYONIT.COM INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Expressed in U.S. dollars)
Period from incorporation on October 5, 1999 to September 12, 2000
(date of acquisition by 724 Solutions Inc.)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
Depreciation and amortization of computer equipment and software are
computed using the straight-line method over three years.
(g) Income taxes:
The Company is taxed under the provisions of subchapter S of the Internal
Revenue Code. Under those provisions, the Company does not pay federal
income taxes on its taxable income; such income is reportable by the
Company's shareholders for federal income tax purposes. Accordingly, no
income tax or deferred income tax information is presented in these
financial statements.
(h) Comprehensive income:
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which
establishes standards for reporting and presentation of comprehensive
income. This standard defines comprehensive income as the changes in
equity of an enterprise except those resulting from stockholder
transactions. Comprehensive net income (loss) for the period from
October 5, 1999 to September 12, 2000 equalled the loss for the period.
(i) Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133, as recently
amended, is effective for fiscal years beginning after June 15, 2000. As
to date the Company has not entered into derivative instruments,
management believes the adoption of SFAS No. 133 will not have a material
effect on the Company's financial position or results of operations.
The U.S. Securities and Exchange Commission issued Staff Accounting
Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
101"), on December 3, 1999. SAB 101 provides additional guidance on the
application of existing generally accepted accounting principles to
revenue recognition in financial statements. As management considers the
Company's stated revenue recognition accounting policy to be consistent
with the guidance in SAB 101, the Company does not expect the adoption of
SAB 101 to have a material effect on its financial statements.
(j) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingencies at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
2. FIXED ASSETS:
Fixed assets consist of the following:
<TABLE>
<S> <C>
Computer equipment and software............................. $ 96,114
Furniture and office equipment.............................. 4,628
--------
100,742
Less accumulated depreciation and amortization.............. 14,095
--------
$ 86,647
========
</TABLE>
F-48
<PAGE>
SPYONIT.COM INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Expressed in U.S. dollars)
Period from incorporation on October 5, 1999 to September 12, 2000
(date of acquisition by 724 Solutions Inc.)
3. STOCKHOLDERS' EQUITY:
Common shares:
On October 5, 1999, date of incorporation, the Company's common shares were
without par value. On February 24, 2000, the Company amended each issued and
outstanding common share with no par value to be changed into and
reclassified as common shares with a par value of $0.01 per common share.
This amendment has been reflected retroactively.
Stock option plans:
The Company has a stock option plan (the "Plan"), which is intended to
attract, retain and motivate employees, officers, directors and consultants.
The stock option committee determines, among other things, the eligibility
of individuals to participate in the Plan and the term, vesting periods and
the price of options to be granted under the Plan. The Company has reserved
an aggregate of 400,000 common shares for issuance under the 1999 plan.
Options granted under the Plan have a maximum term of 10 years, subject to
earlier termination if the optionee ceases to be an employee, officer or
director of the Company, and vest annually on a straight-line basis over
four years. Upon change of control, all options become fully vested. Options
under the Plan are nontransferable.
During the period from October 5, 1999 to September 12, 2000, the Company
granted 400,000 stock options with an exercise price of $0.03 per option.
Immediately prior to the change of control related to the acquisition of the
Company by 724 Solutions Inc. (note 5), all of the options were exercised.
The Company has recorded a stock-based compensation expense of $742,330
related to the options based on the difference between the fair value of the
common shares on the date the options were granted and the exercise price of
the options. In determining the fair value of the common shares on the date
the options were granted, management took into account, among other factors,
the proximity of the option grant date to the initial round of financing at
$0.80 per share on January 6, 2000 and the value obtained on the sale of the
shares to 724 Solutions Inc. on September 12, 2000 at approximately $4.11
per share.
Had compensation expense for the Company's stock option plan been determined
based on the fair value at the grant dates for the awards under the plan
consistent with the method under SFAS 123 "Accounting for Stock-Based
Compensation", the Company's loss would not be significantly different from
the Company's loss reported for the period.
4. LEASE COMMITMENTS:
<TABLE>
<S> <C>
2000........................................................ $1,231
2001........................................................ 4,103
2002........................................................ 4,103
------
$9,437
======
</TABLE>
5. STOCK PURCHASE AGREEMENT:
On September 12, 2000, 724 Solutions Inc. acquired all of the outstanding
shares of the Company. The purchase price of approximately $40.0 million was
satisfied by the issuance of 1,041,616 common shares of 724 Solutions Inc.
and $2.0 million in cash in exchange for all of the outstanding shares of
the Company. As part of the terms of purchase, up to 137,062 common shares
of the total common shares issued by 724 Solutions Inc. are subject to
repurchase at a minimum value if the employees who were shareholders of the
Company on the acquisition date do not remain employees of 724
Solutions Inc., or one of its subsidiaries, through September 2003.
F-49
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Directors of Ezlogin.com, Inc.
We have audited the balance sheet of Ezlogin.com, Inc. (a Development Stage
Enterprise) as at December 31, 1999 and the statements of operations,
stockholders' equity and cash flows for the period from January 21, 1999 (date
of inception) to December 31, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the Company as at December 31, 1999 and the
results of its operations and its cash flows for the period from January 21,
1999 (date of inception) to December 31, 1999 in conformity with accounting
principles generally accepted in the United States of America.
Toronto, Canada /s/ KPMG LLP
November 30, 2000 Chartered Accountants
F-50
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEET
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
--------------- ------------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 3,285,806 $ 3,728,784
Prepaid expenses.......................................... 167,561 111,561
----------- -----------
Total current assets...................................... 3,453,367 3,840,345
Fixed assets (note 2)....................................... 153,313 131,881
----------- -----------
Total assets................................................ $ 3,606,680 $ 3,972,226
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 303,460 $ 63,561
----------- -----------
Total current liabilities................................. 303,460 63,561
Stockholders' equity (note 3):
Authorized:
20,000,000 common shares, $0.001 par value
2,400,000 Series A preferred shares, $0.001 par value
6,700,000 Series B preferred shares, $0.001 par value
Issued:
7,031,600 common shares (1999 -- 7,021,600)............. 7,032 7,022
2,400,000 Series A preferred shares
(1999 -- 2,400,000)................................... 2,400 2,400
3,701,665 Series B preferred shares
(1999 -- 3,626,665)................................... 3,702 3,627
Contributed surplus....................................... 8,448,048 5,410,525
Deferred compensation..................................... (1,815,118) (344,523)
Deficit accumulated during the development stage.......... (3,342,844) (1,170,386)
----------- -----------
Total stockholders' equity................................ 3,303,220 3,908,665
----------- -----------
Total liabilities and stockholders' equity.................. $ 3,606,680 $ 3,972,226
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-51
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF OPERATIONS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM JANUARY 21, 1999 PERIOD FROM
THREE MONTHS JANUARY 21, 1999 (DATE OF INCEPTION ON
ENDED (DATE OF INCEPTION) TO JANUARY 21, 1999
MARCH 31, INCEPTION) TO DECEMBER 31, TO MARCH 31,
2000 MARCH 31, 1999 1999 2000
------------ ----------------- ----------------- -----------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Operating expenses:
Research and development (including
stock-based compensation expense
of $439,162 -- March 31, 2000,
$105,098 -- December 31, 1999,
nil -- March 31, 1999)........... $ 935,798 $ 63,528 $ 634,762 $ 1,570,560
Sales and marketing (including
stock-based compensation expense
of $4,929 -- March 31, 2000,
$1,779 -- December 31, 1999,
nil -- March 31, 1999)........... 134,521 -- 347,967 482,488
General and administrative
(including stock-based
compensation expense of
$935,022 -- March 31, 2000,
nil -- December 31, 1999, nil
March 31, 1999).................. 1,131,876 13,711 210,587 1,342,463
Depreciation......................... 8,148 414 14,626 22,774
----------- --------- ----------- -----------
Loss from operations................. (2,210,343) (77,653) (1,207,942) (3,418,285)
Interest income...................... 37,885 1,087 37,556 75,441
----------- --------- ----------- -----------
Loss for the period.................. $(2,172,458) $ (76,566) $(1,170,386) $(3,342,844)
=========== ========= =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-52
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS' EQUITY
(EXPRESSED IN U.S. DOLLARS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SERIES A PREFERRED SERIES B PREFERRED
COMMON SHARES SHARES SHARES
-------------------- -------------------- -------------------- CONTRIBUTED
NUMBER AMOUNT NUMBER AMOUNT NUMBER AMOUNT SURPLUS
--------- -------- --------- -------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, January 21, 1999 (date of
inception)................................. -- $-- -- $-- -- $-- $ --
Issuance of common shares.................... 7,021,600 7,022 -- -- -- -- 13,154
Issued February 26, 1999 at $0.25 per
share...................................... -- -- 2,400,000 2,400 -- -- 597,600
Issued October 8, 1999 at $1.20 per share.... -- -- -- -- 2,076,666 2,077 2,489,922
Issued November 8, 1999 at $1.20 per share... -- -- -- -- 1,341,666 1,342 1,608,657
Issued November 30, 1999 at $1.20 per
share...................................... -- -- -- -- 208,333 208 249,792
Deferred stock-based compensation............ -- -- -- -- -- -- 451,400
Amortization of deferred stock-based
compensation............................... -- -- -- -- -- -- --
Loss for the period.......................... -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ ----------
Balance, December 31, 1999................... 7,021,600 7,022 2,400,000 2,400 3,626,665 3,627 5,410,525
Issued February 25, 2000 at $2.00 per
share...................................... -- -- -- -- 75,000 75 149,925
Issued March 9, 2000 at $3.79 per share...... 10,000 10 -- -- -- -- 37,890
Deferred stock-based compensation............ -- -- -- -- -- -- 2,849,708
Amortization of deferred stock-based
compensation............................... -- -- -- -- -- -- --
Loss for the period.......................... -- -- -- -- -- -- --
--------- ------ --------- ------ --------- ------ ----------
Balance, March 31, 2000 (unaudited).......... 7,031,600 $7,032 2,400,000 $2,400 3,701,665 $3,702 $8,448,048
========= ====== ========= ====== ========= ====== ==========
<CAPTION>
DEFERRED DEFICIT
STOCK-BASED ACCUMULATED
COMPENSATION DURING THE TOTAL
RELATED TO DEVELOPMENT STOCKHOLDERS'
STOCK OPTIONS STAGE EQUITY
------------- ----------- -------------
<S> <C> <C> <C>
Balance, January 21, 1999 (date of
inception)................................. $ -- $ -- $ --
Issuance of common shares.................... -- -- 20,176
Issued February 26, 1999 at $0.25 per
share...................................... -- -- 600,000
Issued October 8, 1999 at $1.20 per share.... -- -- 2,491,999
Issued November 8, 1999 at $1.20 per share... -- -- 1,609,999
Issued November 30, 1999 at $1.20 per
share...................................... -- -- 250,000
Deferred stock-based compensation............ (451,400) -- --
Amortization of deferred stock-based
compensation............................... 106,877 -- 106,877
Loss for the period.......................... -- (1,170,386) (1,170,386)
----------- ----------- -----------
Balance, December 31, 1999................... (344,523) (1,170,386) 3,908,665
Issued February 25, 2000 at $2.00 per
share...................................... -- -- 150,000
Issued March 9, 2000 at $3.79 per share...... -- -- 37,900
Deferred stock-based compensation............ (2,849,708) -- --
Amortization of deferred stock-based
compensation............................... 1,379,113 -- 1,379,113
Loss for the period.......................... -- (2,172,458) (2,172,458)
----------- ----------- -----------
Balance, March 31, 2000 (unaudited).......... $(1,815,118) $(3,342,844) $ 3,303,220
=========== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-53
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF CASH FLOWS
(EXPRESSED IN U.S. DOLLARS)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM JANUARY 21, 1999 PERIOD FROM
JANUARY 21, 1999 (DATE OF INCEPTION ON
THREE MONTHS (DATE OF INCEPTION) TO JANUARY 21,1999
ENDED INCEPTION) TO DECEMBER 31, TO MARCH 31,
MARCH 31, 2000 MARCH 31, 1999 1999 2000
--------------- ----------------- ----------------- ----------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Loss for the period................................ $(2,172,458) $(76,566) $(1,170,386) $(3,342,844)
Depreciation and amortization...................... 8,148 414 14,626 22,774
Stock-based compensation........................... 1,379,113 -- 106,877 1,485,990
Shares issued for services......................... 37,900 -- 13,176 51,076
Change in non-cash working capital:
Prepaid expenses and other receivables........... (56,000) (2,000) (111,561) (167,561)
Accounts payable................................. 239,899 -- 63,561 258,460
----------- -------- ----------- -----------
Cash flows used in operating activities............ (563,398) (78,152) (1,083,707) (1,692,105)
Cash flows from financing activities:
Issuance of common shares.......................... -- 7,000 7,000 52,000
Issuance of preferred shares....................... 150,000 600,000 4,951,998 5,101,998
----------- -------- ----------- -----------
Cash flows from financing activities............... 150,000 607,000 4,958,998 5,153,998
Cash flows used in investing activities:
Purchase of fixed assets........................... (29,580) (18,709) (146,507) (176,087)
----------- -------- ----------- -----------
Increase (decrease) in cash.......................... (442,978) 510,139 3,728,784 3,285,806
Cash, beginning of period............................ 3,728,784 -- -- --
----------- -------- ----------- -----------
Cash, end of period.................................. $ 3,285,806 $510,139 $ 3,728,784 $ 3,285,806
=========== ======== =========== ===========
</TABLE>
SEE ACCOMPANYING NOTES TO FINANCIAL STATEMENTS.
F-54
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
(Expressed in U.S. dollars)
Period from January 21, 1999 (date of inception) to December 31, 1999
(Information as at March 31, 2000 and for the periods ended March 31, 2000 and
1999 are unaudited)
Ezlogin.com, Inc. was established in January 1999 to conceive, design and
deliver Internet infrastructure tools that enable Web users a single point of
sign-on, as well as the ability to consolidate, access and manage personalized
content from virtually any source on the Internet.
1. SIGNIFICANT ACCOUNTING POLICIES:
(a) Basis of presentation:
These financial statements are expressed in U.S. dollars. They have been
prepared in accordance with accounting principles generally accepted in
the United States.
(b) Financial Instruments:
Financial instruments consist of cash, prepaid expenses and other
receivables and accounts payable and accrued liabilities. The fair values
of financial assets and financial liabilities approximate their recorded
amounts due to their short-term nature.
(c) Unaudited interim financial information:
The accompanying interim financial information as at March 31, 2000 and
for the three months ended March 31, 2000 and 1999 is unaudited but
includes all adjustments, consisting of only normal recurring
adjustments, which management considers necessary to present fairly, in
all material respects, the interim financial information for the periods
presented.
(d) Cash and cash equivalents:
All highly liquid investments, with an original maturity of three months
or less at the time of purchase, are classified as cash equivalents.
(e) Research and development expenses:
Costs related to research, design and development of software products
are charged to research and development expenses as incurred. Software
development costs are capitalized beginning when a product's
technological feasibility has been established, which generally occurs
upon completion of a working model, and ending when a product is
available for general release to customers. To date, completing a working
model of the Company's product and the general release of the product
have substantially coincided. As a result, the Company has not
capitalized any software development costs since such costs have not been
significant.
(f) Stock-based compensation:
The Company uses the intrinsic value method to account for employee
stock-based compensation. As such, deferred stock-based compensation is
recorded if, on the date of grant, the current fair value of each
underlying common share exceeds the exercise price per share. Deferred
stock-based compensation is recognized as an expense over the vesting
period of the option.
(g) Fixed assets:
Fixed assets are stated at cost, net of accumulated depreciation and
amortization, and are amortized over their estimated useful lives.
Expenditures for maintenance and repairs have been charged to the
statement of operations as incurred. Depreciation and amortization of
computer equipment and software are computed using the straight-line
method over three years.
(h) Income taxes:
The Company provides for income taxes under the liability method. Under
the liability method, deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying value of existing assets and liabilities and
their respective tax basis and operating loss and tax credit
carryforwards. This method also requires the recognition of future tax
benefits such as net operating loss carryforwards, to the extent that
realization of such benefits is more likely than not. Deferred tax assets
and liabilities are measured
F-55
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Expressed in U.S. dollars)
Period from January 21, 1999 (date of inception) to December 31, 1999
(Information as at March 31, 2000 and for the periods ended March 31, 2000 and
1999 are unaudited)
1. SIGNIFICANT ACCOUNTING POLICIES: (CONTINUED)
using enacted tax rates expected to apply to taxable income in the years
in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in
tax rates is recognized in income in the period that includes the
enactment date.
(i) Comprehensive income:
In June 1997, the Financial Accounting Standards Board issued SFAS
No. 130, "Reporting Comprehensive Income" (SFAS No. 130), which
establishes standards for reporting and presentation of comprehensive
income. This standard defines comprehensive income as the changes in
equity of an enterprise except those resulting from stockholder
transactions. Comprehensive net income (loss) for the periods presented
in these financial statements is the same as the loss for the periods
presented.
(j) Recent Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (SFAS No. 133). SFAS No. 133
establishes accounting and reporting standards requiring that every
derivative instrument be recorded in the balance sheet as either an asset
or liability measured at its fair value. SFAS No. 133, as recently
amended, is effective for fiscal years beginning after June 15, 2000. As
to date the Company has not entered into derivative instruments,
management believes the adoption of SFAS No. 133 will not have a material
effect on the Company's financial position or results of operations.
(k) Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and the disclosure of contingencies at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
2. FIXED ASSETS:
Fixed assets consist of the following:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
------------ -------------
(Unaudited)
<S> <C> <C>
Computer equipment and software............................. $172,445 $146,507
Furniture and office equipment.............................. 3,642 --
-------- --------
176,087 146,507
Less accumulated depreciation and amortization.............. 22,774 14,626
-------- --------
$153,313 $131,881
======== ========
</TABLE>
3. STOCKHOLDERS' EQUITY:
(a) Preferred Shares:
Preferred shares are issuable in series. The Board of Directors is
authorized to determine the number of shares of any series of preferred
shares. The Company has authorized 2,400,000 Series A Preferred Shares
that are entitled to non-cumulative dividends at a rate of $0.025 per
share, per annum, when and if declared by the Board of Directors. The
Series A Preferred Shares have preference over the common shares on
liquidation, dissolution or winding-up in the amount equal to $0.25 per
share, being the original paid-up capital. The Series A Preferred Shares
are voting and convertible into common shares, at the option of the
holder at an initial rate of one-for-one.
F-56
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Expressed in U.S. dollars)
Period from January 21, 1999 (date of inception) to December 31, 1999
(Information as at March 31, 2000 and for the periods ended March 31, 2000 and
1999 are unaudited)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
The Company has authorized 6,700,000 Series B Preferred Shares that are
entitled to non-cumulative dividends at a rate of $0.12 per share, per
annum, when and if declared by the Board of Directors. The Series B
Preferred Shares have preference over the common shares on liquidation,
dissolution or winding up in the amount equal to $1.20 per share, being
the original paid-up capital. The Series B Preferred Shares are voting
and convertible into common shares, at the option of the holder at an
initial rate of one-for-one.
(b) Stock option plans:
The Company has a stock option plan (the "Plan"), which is intended to
attract, retain and motivate employees, officers, directors and
consultants. The stock option committee determined among other things,
the eligibility of individuals to participate in the plans and the term,
vesting periods and the price of options granted under the plans. The
Company has reserved an aggregate of 1,000,000 common shares for issuance
under the 1999 plan.
The Plan was adopted in July 1999. The Plan provides for the grant of
both incentive stock options and non-qualified stock options. Incentive
stock options granted under the Plan have a maximum term of 10 years, or
5 years in the case of incentive stock options granted to an employee who
owns common shares having more than 10% of the voting power of the
Company. No options granted to prospective employees, consultants, or
directors may become exercisable prior to the date in which such person
commences services with the Company. In addition, with the exception of
options granted to an officer, director, or consultant, no option shall
become exercisable at a rate less than 20% per year over a period five
years from the effective date of grant of such option, subject to
continued service. The exercise price of incentive stock options is the
fair market value of common shares on the date of the grant, or 110% of
the fair market value in the case of an incentive stock option granted to
an employee who owns common shares having more than 10% of the voting
power of the Company.
In the event of termination and to the extent unexercised and
exercisable, the option will remain exercisable for a period of three
months after the date of termination. If termination is due to death or
disability, the right to exercise the option will expire within one year.
If a change of control of the Company occurs, all options become
immediately vested and exercisable. Non-qualified stock options granted
under the Plan have a maximum term of 10 years and an exercise price of
no less than 85% of the fair market value of the common shares on the
date of the grant, or 110% of the fair market value for those employees
who own common shares representing more than 10% of the voting power.
A summary of the status of the Company's options under the Plan as at
March 31, 2000, is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
REMAINING NUMBER OF
NUMBER OF CONTRACTUAL OPTIONS
EXERCISE PRICE OPTIONS LIFE (YEARS) EXERCISABLE
-------------- ---------- ------------ -----------
<S> <C> <C> <C>
$0.03....................................................... 660,833 9.1 219,375
0.20....................................................... 1,120,000 9.6 288,667
0.35....................................................... 75,000 9.7 40,000
5.50....................................................... 65,000 9.7 --
--------- --- -------
1,920,833 548,042
========= === =======
</TABLE>
F-57
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Expressed in U.S. dollars)
Period from January 21, 1999 (date of inception) to December 31, 1999
(Information as at March 31, 2000 and for the periods ended March 31, 2000 and
1999 are unaudited)
3. STOCKHOLDERS' EQUITY: (CONTINUED)
The following table summarizes the continuity of options issued under the
Plan:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
--------------------- ---------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF EXERCISE NUMBER OF EXERCISE
OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding, beginning of period............................ 740,000 $0.03 -- $--
Granted..................................................... 1,770,000 0.48 740,000 0.03
Exercised................................................... (225,000) 0.03 -- --
Cancelled................................................... (364,167) 0.53 -- --
--------- ----- ------- -----
Outstanding, end of period.................................. 1,920,833 $0.31 740,000 $0.03
========= ===== ======= =====
Options exercisable, end of period.......................... 548,292 $0.14 175,209 $0.03
========= ===== ======= =====
</TABLE>
The Company recorded deferred stock-based compensation relating to options
issued under the Company's plans amounting to $2,849,708 (December 31,
1999 -- $451,400). Amortization of deferred stock-based compensation
amounted to $1,379,113 (December 31, 1999 -- $106,877).
During the periods ended March 31, 2000 and December 31, 1999, the Company
issued 10,000 and 21,600 common shares, respectively, to certain
non-employees in exchange for services. The Company recorded an expense of
$37,900 and $13,176 in 2000 and 1999, respectively, related to these
non-employee share issuances. The amount of expense recorded was computed
based upon the fair value of the shares on the date of issue as determined
by the board of directors.
Had compensation expense for the Company's Plan been determined based on the
fair value at the grant dates for the awards under the Plan consistent with
the method under SFAS 123 "Accounting for Stock-Based Compensation", the
Company's loss would not be significantly different from the Company's loss
reported for each period.
4. INCOME TAXES:
The provision for income taxes differs from the amount computed by applying
the statutory income tax rate to net income (loss) before income taxes. The
sources and tax effects of the differences are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
THREE MONTHS PERIOD FROM JANUARY 21, 1999
ENDED JANUARY 21, 1999 (DATE OF INCEPTION)
MARCH 31, (DATE OF INCEPTION) TO DECEMBER 31,
2000 TO MARCH 31, 1999 1999
------------- ------------------- -------------------
34% 34% 34%
<S> <C> <C> <C>
Basic rate applied to loss before provision for income
taxes.................................................. $(868,983) $(30,626) $(483,177)
Adjustments resulting from:
Stock-based compensation not deducted for tax.......... 551,645 -- 42,751
--------- -------- ---------
(317,338) (30,626) (440,426)
Unrecognized benefit of net operating losses carried
forward................................................ 317,338 30,626 440,426
--------- -------- ---------
Income taxes............................................. $ -- $-- $--
========= ======== =========
</TABLE>
F-58
<PAGE>
EZLOGIN.COM
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Expressed in U.S. dollars)
Period from January 21, 1999 (date of inception) to December 31, 1999
(Information as at March 31, 2000 and for the periods ended March 31, 2000 and
1999 are unaudited)
4. INCOME TAXES: (CONTINUED)
Significant components of the Company's future tax assets are as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
2000 1999
---------- -------------
<S> <C> <C>
Net operating losses carried forward........................ $757,764 $440,426
-------- --------
Future tax asset............................................ 757,764 440,426
Less valuation allowance.................................... 757,764 440,426
-------- --------
$ -- $ --
======== ========
</TABLE>
5. LEASE COMMITMENTS:
Future minimum lease payments under non-cancellable operating leases for
premises for the year ended December 31, 2000 are $28,030 and nil
thereafter.
6. RELATED PARTY TRANSACTIONS:
On November 1, 1999, the Company entered into a joint marketing agreement
with Verisign Inc. ("Verisign"). Pursuant to the agreement, the Company
acquired $100,000 worth of digital security certificates. The joint
marketing agreement has an initial term of one year. Each party can
independently terminate the agreement if any breach is not corrected within
60 days of receipt of notice in connection with a breach of contract. In
addition, Verisign requires 30 days written notice prior to a change in
control. Verisign subscribed for 100,000 Series B Preferred Shares as at
November 8, 1999 for cash consideration paid at an amount per share equal to
other share acquirers at the same time. The cost of the digital security
certificates has been capitalized within prepaid expenses as at
December 31, 1999 and will be expensed as used.
7. SUBSEQUENT EVENT:
On June 16, 2000, 724 Solutions Inc. acquired all of the outstanding shares
of the Company. The purchase price of approximately $55.8 million was
satisfied by the issuance of 1,003,594 common shares of 724 Solutions Inc.
in exchange for all of the outstanding shares of the Company and the
assumption of the existing option plan of the Company which, if all options
outstanding under the Company's plan are exercised, would result in the
issuance of an additional 91,796 common shares of 724 Solutions Inc.
F-59
<PAGE>
ANNEX A
AGREEMENT AND PLAN OF MERGER
AMONG
724 SOLUTIONS INC.,
SATURN MERGER SUB, INC.
AND
TANTAU SOFTWARE, INC.
DATED AS OF NOVEMBER 29, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
<CAPTION>
ARTICLE I
THE MERGER
1.01 Effective Time of the Merger. A-2
<S> <C> <C>
1.02 Closing..................................................... A-2
1.03 Effect of the Merger........................................ A-2
1.04 Certificate of Incorporation and By-laws.................... A-2
1.05 Directors................................................... A-2
1.06 Officers.................................................... A-2
<CAPTION>
ARTICLE II
CONVERSION OF SECURITIES
2.01 Conversion of Capital Stock. A-3
<S> <C> <C>
2.02 Exchange of Certificates.................................... A-5
2.03 Maximum Number of Shares to be Issued....................... A-7
<CAPTION>
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.01 Organization, Standing and Corporate Power. A-8
<S> <C> <C>
3.02 Authority; Noncontravention................................. A-8
3.03 Capitalization.............................................. A-9
3.04 Equity Interests............................................ A-11
3.05 Financial Statements........................................ A-11
3.06 Undisclosed Liabilities..................................... A-11
3.07 Taxes....................................................... A-11
3.08 Assets...................................................... A-14
3.09 Intellectual Property, Etc.................................. A-14
3.10 Contracts................................................... A-16
3.11 Litigation; Decrees......................................... A-18
3.12 Operation of the Business; Absence of Changes or Events..... A-19
3.13 Compliance with Applicable Laws............................. A-20
3.14 Certain Employee Matters.................................... A-21
3.15 Benefit Plans............................................... A-22
3.16 Insurance................................................... A-24
3.17 Customers................................................... A-24
3.18 Disclosure.................................................. A-24
3.19 Information Supplied........................................ A-25
3.20 Voting Requirements; Company Voting Agreement and Resale
Restriction Agreement..................................... A-25
3.21 Brokers..................................................... A-25
3.22 State Takeover Statutes..................................... A-25
3.23 Customer Accounts Receivable................................ A-26
3.24 Corporate Name.............................................. A-26
3.25 Accounts; Safe Deposit Boxes; Powers of Attorney; Officers
and Directors............................................. A-26
</TABLE>
A-i
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
<CAPTION>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
4.01 Organization. A-26
<S> <C> <C>
4.02 Authority; Noncontravention................................. A-26
4.03 Capital Stock of Parent..................................... A-27
4.04 Parent Public Disclosure Documents.......................... A-28
4.05 Undisclosed Liabilities..................................... A-29
4.06 Absence of Certain Changes or Events........................ A-29
4.07 Litigation; Decrees......................................... A-29
4.08 No Vote Required............................................ A-29
4.09 Taxes....................................................... A-29
4.10 Interim Operations of Sub................................... A-29
4.11 Information Supplied........................................ A-30
4.12 Brokers..................................................... A-30
4.13 Assets...................................................... A-30
4.14 Intellectual Property, Etc.................................. A-30
4.15 Material Contracts.......................................... A-31
4.16 Compliance with Applicable Laws............................. A-31
<CAPTION>
ARTICLE V
COVENANTS
5.01 Covenants of the Company. A-32
<S> <C> <C>
5.02 Covenants of Parent......................................... A-38
5.03 Other Actions............................................... A-39
5.04 Advice of Changes; Filings.................................. A-39
<CAPTION>
ARTICLE VI
ADDITIONAL AGREEMENTS
6.01 Preparation of the Form F-4; Company Shareholders' Meeting. A-39
<S> <C> <C>
6.02 Access to Information....................................... A-40
6.03 Legal Conditions to Merger.................................. A-41
6.04 Stock Options, Warrants and Restricted Stock................ A-41
6.05 Fees and Expenses........................................... A-43
6.06 Additional Agreements....................................... A-43
6.07 Indemnification, Exculpation and Insurance.................. A-43
6.08 Litigation.................................................. A-44
6.09 Tax Treatment............................................... A-44
6.10 Affiliates.................................................. A-44
6.11 Employee Benefits........................................... A-44
6.12 Parent Board of Directors................................... A-45
<CAPTION>
ARTICLE VII
CONDITIONS
7.01 Conditions to Each Party's Obligation to Effect the Merger. A-46
<S> <C> <C>
7.02 Conditions of Obligations of Parent and Sub................. A-46
7.03 Conditions of Obligations of the Company.................... A-47
7.04 Frustration of Closing Conditions........................... A-48
</TABLE>
A-ii
<PAGE>
<TABLE>
<CAPTION>
PAGE
-----
<S> <C> <C>
<CAPTION>
ARTICLE VIII
TERMINATION AND AMENDMENT
8.01 Termination. A-48
<S> <C> <C>
8.02 Effect of Termination....................................... A-49
8.03 Amendment................................................... A-49
8.04 Extension; Waiver........................................... A-49
<CAPTION>
ARTICLE IX
MISCELLANEOUS
9.01 Survival of Representations, Warranties and Covenants. A-49
<S> <C> <C>
9.02 Notices..................................................... A-49
9.03 Definitions................................................. A-50
9.04 Entire Agreement; No Third-Party Beneficiaries; Rights of
Ownership................................................. A-51
9.05 GOVERNING LAW............................................... A-51
9.06 Publicity................................................... A-51
9.07 Assignment.................................................. A-51
9.08 Counterparts................................................ A-51
9.09 Exhibits and Schedules; Interpretation...................... A-51
9.10 Consent to Jurisdiction..................................... A-51
9.11 Waiver of Jury Trial........................................ A-52
9.12 Enforcement................................................. A-52
Exhibit A -- Form of Resale Restriction Agreement
Exhibit B -- Form of Indemnification and Escrow Agreement
Exhibit C -- Form of Affiliate Letter
Exhibit D -- Form of Registration Rights Agreement
Schedule A -- Company Voting Agreement Signatories
Schedule B -- Employment Agreement Signatories
Schedule C -- Employment Terms Letter Signatories
</TABLE>
A-iii
<PAGE>
AGREEMENT AND PLAN OF MERGER dated as of November 29, 2000
(this "Agreement"), by and among 724 SOLUTIONS INC., a
corporation amalgamated under the Business Corporations Act of
the Province of Ontario ("Parent"), SATURN MERGER SUB, INC., a
Delaware corporation and a wholly owned subsidiary of Parent
("Sub"), and TANTAU SOFTWARE, INC., a Delaware corporation (the
"Company").
WHEREAS the respective Boards of Directors of the Company and Sub have
approved and declared advisable, and the Board of Directors of Parent has
approved, this Agreement and the Merger (as defined in Section 1.03), upon the
terms and subject to the conditions set forth herein, all in accordance with the
General Corporation Law of the State of Delaware (the "DGCL") and the Business
Corporations Act of the Province of Ontario (the "OBCA");
WHEREAS, for U.S. Federal income tax purposes, it is intended that (a) the
Merger will qualify as a reorganization under the provisions of
Section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder (the "Code"), (b) this Agreement
constitutes a plan of reorganization, (c) Parent, Sub and the Company will each
be a party to such reorganization within the meaning of Section 368(b) of the
Code and (d) U.S. holders of stock of the Company who will not be "five percent
transferee shareholders" as defined in Treasury Regulation
Section 1.367(a)-3(c)(5)(ii) or who enter into five-year gain recognition
agreements in the form provided in Treasury Regulation Section 1.367(a)-8(b)
("Eligible Company Shareholders") and who exchange Company Capital Stock (as
defined in Section 3.03) for Parent Common Stock (as defined in
Section 2.01(c)) pursuant to the Merger will not recognize taxable gain with
respect to the Merger pursuant to Section 367(a) of the Code;
WHEREAS, concurrently with the execution of this Agreement and as a
condition to the willingness of Parent to enter into this Agreement, each of the
persons identified on Schedule A have entered into voting agreements dated as of
the date of this Agreement (the "Company Voting Agreements") with Parent
pursuant to which each such person has agreed, among other things, to vote all
shares of Company Capital Stock held by such person in favor of the adoption of
this Agreement;
WHEREAS, concurrently with the execution of this Agreement and as a
condition to the willingness of Parent to enter into this Agreement, the
employees of the Company identified on Schedule B have entered into employment
agreements, conditioned on the consummation of the Merger (each, an "Employment
Agreement"), pursuant to which Parent has agreed to employ such individuals
following the Effective Time (as defined in Section 1.01) and such individuals
have agreed to be subject to certain non-compete and non-solicitation
obligations, in each case upon the terms and conditions set forth in the
applicable Employment Agreement;
WHEREAS, concurrently with the execution of this Agreement and as a
condition to the willingness of Parent to enter into this Agreement, each
employee of the Company identified on Schedule C has entered into a letter
agreement dated as of the date of this Agreement and conditioned on the
consummation of the Merger (each, an "Employment Terms Letter") with Parent and
the Company setting forth certain modifications to the terms and conditions of
such employees' employment arrangements with the Company; and
WHEREAS, concurrently with execution of this Agreement and as a condition to
the willingness of Parent to enter into this Agreement, each of the persons
identified on Schedules A, B and C have entered into Resale Restriction
Agreements with Parent dated as of the date of this Agreement and conditioned on
the consummation of the Merger, which agreements are in the form of Exhibit A
hereto (together with all such agreements entered into between Parent and
holders of outstanding shares of Company Capital Stock, Stock Options (as
defined in Section 3.03) or Warrants (as defined in Section 3.03) after the date
of this Agreement, the "Resale Restriction Agreements"), pursuant to which,
among other things, such holders have agreed (i) to certain restrictions on
their ability to
A-1
<PAGE>
transfer and sell any shares of Parent Common Stock to be received by such
holders in connection with the Merger or pursuant to the exercise of Adjusted
Options (as defined in Section 6.04) and (ii) to be deemed to be a party to, and
to be bound by the terms of, the Escrow Agreement (as defined in
Section 2.01(e)).
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth herein, the
parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.01. EFFECTIVE TIME OF THE MERGER. Subject to the provisions of
this Agreement, as soon as practicable on the Closing Date (as defined in
Section 1.02), a certificate of merger and all other appropriate documents
(collectively, the "Certificate of Merger") shall be duly prepared, executed,
acknowledged and filed with the Secretary of State of the State of Delaware by
the parties hereto as provided in the DGCL. The Merger shall become effective
upon the filing of the Certificate of Merger with the Secretary of State of the
State of Delaware or at such time thereafter as is agreed upon by Parent and the
Company and provided in the Certificate of Merger (the "Effective Time").
SECTION 1.02. CLOSING. The closing of the Merger (the "Closing") will take
place at 10:00 a.m., New York time, on a date to be specified by the parties,
which shall be not later than the second business day after satisfaction or
waiver (to the extent permitted by applicable law) of the conditions set forth
in Article VII (other than those conditions that by their terms are to satisfied
at the Closing, but subject to the fulfillment or waiver of those conditions),
at the offices of Cravath, Swaine & Moore, 825 Eighth Avenue, New York, New York
10019, unless another time, date or place is agreed to in writing by Parent and
the Company; PROVIDED, HOWEVER, that if all the conditions set forth in
Article VII shall not have been satisfied or (to the extent permitted by
applicable law) waived on such second business day, then the Closing will take
place on the first business day on which all such conditions shall have been
satisfied or (to the extent permitted by applicable law) waived. The date on
which the Closing occurs is referred to in this Agreement as the "Closing Date".
SECTION 1.03. EFFECT OF THE MERGER. At the Effective Time, Sub shall be
merged with and into the Company (the "Merger"), and the Company shall continue
as the surviving corporation in the Merger (the "Surviving Corporation"). The
Merger shall have the effects set forth in Section 259 of the DGCL.
SECTION 1.04. CERTIFICATE OF INCORPORATION AND BY-LAWS.
(a) The Certificate of Incorporation of Sub, as in effect immediately prior
to the Effective Time, shall be the Certificate of Incorporation of the
Surviving Corporation until thereafter changed or amended as provided
therein or by applicable law.
(b) The By-laws of Sub as in effect immediately prior to the Effective Time
shall be the By-laws of the Surviving Corporation until thereafter
changed or amended as provided therein or by applicable law.
SECTION 1.05. DIRECTORS. The directors of Sub immediately prior to the
Effective Time shall be the directors of the Surviving Corporation until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
SECTION 1.06. OFFICERS. The officers of the Sub immediately prior to the
Effective Time shall be the officers of the Surviving Corporation until the
earlier of their resignation or removal or until their respective successors are
duly elected and qualified, as the case may be.
A-2
<PAGE>
ARTICLE II
CONVERSION OF SECURITIES
SECTION 2.01. CONVERSION OF CAPITAL STOCK. At the Effective Time, by
virtue of the Merger and without any action on the part of the holder of any
shares of Company Capital Stock or any shares of capital stock of Parent or Sub:
(a) CAPITAL STOCK OF SUB. Each issued and outstanding share of common
stock, par value $0.01 per share, of Sub shall be converted into and
become one fully paid and nonassessable share of common stock, par value
$0.01 per share, of the Surviving Corporation.
(b) CANCELATION OF TREASURY STOCK AND PARENT-OWNED STOCK. All shares of
Company Capital Stock that are owned by the Company, as treasury stock,
or by Parent or Sub immediately prior to the Effective Time shall
automatically be cancelled and retired and shall cease to exist and no
consideration shall be delivered in exchange therefor.
(c) CONVERSION OF COMPANY CAPITAL STOCK.
(i) Subject to Sections 2.01(e), 2.01(f), 2.01(g), 2.02(e) and 2.03,
each share of common stock, par value $0.001 per share, of the
Company (the "Company Common Stock") issued and outstanding
immediately prior to the Effective Time (other than shares to be
cancelled in accordance with Section 2.01(b)) shall be converted
into the right to receive from the Surviving Corporation a number of
fully paid and nonassessable Common Shares, no par value per share,
of Parent (the "Parent Common Stock") equal to the Common Exchange
Ratio. For purposes of this Agreement, "Common Exchange Ratio" shall
mean the number of shares of Parent Common Stock (rounded to three
decimal places) obtained by dividing (x) 19,000,000 (the "Merger
Share Number") by (y) the sum of (A) the aggregate number of shares
of Company Common Stock issued and outstanding immediately prior to
the Effective Time (assuming for this purpose the exercise in full
for cash of all Warrants to purchase shares of Company Common Stock
outstanding immediately prior to the Effective Time), (B) the
aggregate number of shares of Company Common Stock into which the
shares of Company Preferred Stock (as defined in Section 3.03)
outstanding immediately prior to the Effective Time are convertible
at such time (assuming for this purpose the exercise in full for
cash of all Warrants to purchase shares of Company Preferred Stock
outstanding immediately prior to the Effective Time) and (C) the
aggregate number of shares of Company Common Stock that may be
acquired pursuant to the exercise of Stock Options (other than
Permitted Interim Period Stock Options (as defined in
Section 5.01(a)(xii))) outstanding immediately prior to the
Effective Time.
(ii) Subject to Sections 2.01(e), 2.01(f), 2.01(g), 2.02(e) and 2.03, if
immediately prior to the Effective Time there are any shares of
Company Preferred Stock issued and outstanding, each such share
(other than shares to be cancelled in accordance with
Section 2.01(b)) shall be converted into the right to receive from
the Surviving Corporation a number of fully paid and nonassessable
shares of Parent Common Stock equal to the product of (x) the
Common Exchange Ratio and (y) the number of shares of Company
Common Stock into which such share is convertible immediately prior
to the Effective Time.
(iii) The shares of Parent Common Stock into which the shares of Company
Capital Stock are converted into the right to receive pursuant to
the Merger are referred to herein collectively as the "Merger
Consideration". At the Effective Time, all such shares of Company
Capital Stock shall no longer be outstanding and shall
automatically be cancelled and shall cease to exist, and each
holder of a certificate that immediately prior to the Effective
Time represented any such shares (a "Certificate") shall cease to
have any rights with respect thereto, except the right to receive
the Merger Consideration with
A-3
<PAGE>
respect thereto and any cash in lieu of fractional shares of Parent
Common Stock to be issued or paid in consideration therefor upon
surrender of such Certificate in accordance with Section 2.02
(subject, in the case of such shares, to the terms of the Escrow
Agreement), without interest.
(d) [INTENTIONALLY OMITTED.]
(e) ESCROW OF MERGER SHARES. At the Closing, on behalf of the holders of
all outstanding shares of Company Capital Stock (the "Stockholders") and
pursuant to the terms of an Indemnification and Escrow Agreement to be
entered into by and among Parent, the Company, an escrow agent to be
named therein (the "Escrow Agent") and the Representative (as defined
therein), which agreement shall be in the form of Exhibit B hereto (the
"Escrow Agreement"), Parent will cause the Surviving Corporation to
deposit with the Escrow Agent a number of shares of Parent Common Stock
(which are part of, and not in addition to, the number of shares which
would otherwise have been issuable pursuant to Section 2.01(c)) issuable
in the Merger pursuant to Section 2.01(c) equal to 1,900,000 LESS 10% of
the number of shares of Parent Common Stock underlying Adjusted Options
(other than Permitted Interim Period Stock Options) held at the Effective
Time by holders of Stock Options (the "Optionholders") that have
consented in writing to be bound by the terms of the Escrow Agreement.
Such deposit shall be on behalf of the Stockholders and with the same
effect as if the Surviving Corporation had delivered such shares to the
Stockholders and the Stockholders had delivered such shares to the Escrow
Agent.
(f) ANTI-DILUTION PROVISIONS. In the event Parent changes (or establishes a
record date for changing) the number of shares of Parent Common Stock
issued and outstanding prior to the Effective Time as a result of a stock
split, stock dividend, recapitalization, subdivision, reclassification,
combination, exchange of shares or similar transaction with respect to
the outstanding Parent Common Stock and the record date therefor shall be
prior to the Effective Time, the Merger Share Number shall be
appropriately adjusted to reflect such stock split, stock dividend,
recapitalization, subdivision, reclassification, combination, exchange of
shares or similar transaction; PROVIDED, HOWEVER, if such stock split,
stock divided, recapitalization, subdivision, reclassification,
combination, exchange of shares or similar transaction is abandoned prior
to the Effective Time, the Merger Share Number shall be again adjusted to
be the Merger Share Number that was in effect prior to such initial
adjustment.
(g) APPRAISAL RIGHTS. Notwithstanding anything in this Agreement to the
contrary, shares (the "Appraisal Shares") of Company Capital Stock issued
and outstanding immediately prior to the Effective Time that are held by
any holder who is entitled to demand and properly demands appraisal of
such Appraisal Shares pursuant to, and who complies in all respects with,
the provisions of Section 262 of the DGCL ("Section 262") shall not be
converted into the right to receive the Merger Consideration as provided
in Section 2.01(c), but instead the holders of Appraisal Shares shall be
entitled to payment of the fair value of such Appraisal Shares in
accordance with the provisions of Section 262; PROVIDED, HOWEVER, that if
any such holder shall fail to perfect or otherwise shall waive, withdraw
or lose the right to appraisal under Section 262 or a court of competent
jurisdiction shall determine that such holder is not entitled to the
relief provided by Section 262, then the right of such holder to be paid
the fair value of such holder's Appraisal Shares under Section 262 shall
cease and such Appraisal Shares shall be deemed to have been converted at
the Effective Time into, and shall have become, the right to receive the
appropriate portion of the Merger Consideration as provided in
Section 2.01(c). At the Effective Time, all Appraisal Shares shall no
longer be outstanding and shall automatically be cancelled and shall
cease to exist, and each holder of Appraisal Shares shall cease to have
any rights with respect thereto, except, subject to the immediately
preceding sentence, the right to receive the fair value of such shares in
accordance with the
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provisions of Section 262. The Company shall serve prompt notice to
Parent of any demands for appraisal of any shares of Company Capital
Stock, and Parent shall have the right to participate in and direct all
negotiations and proceedings with respect to such demands. Prior to the
Effective Time, the Company shall not, without the prior written consent
of Parent, make any payment with respect to, or settle or offer to
settle, any such demands, or agree to do any of the foregoing. After the
Effective Time, the Surviving Corporation shall not, without the prior
written consent of the Representative, make any payment with respect to,
or settle or offer to settle, any such demands, or agree to do any of the
foregoing.
SECTION 2.02. EXCHANGE OF CERTIFICATES.
(a) EXCHANGE AGENT. As of the Effective Time, Parent shall cause the
Surviving Corporation to enter into an agreement with Computershare
Investor Services Inc. or a bank or trust company designated by Parent
and reasonably acceptable to the Company (the "Exchange Agent"), which
shall provide that the Surviving Corporation shall, subject to
Section 2.01(e), deposit with the Exchange Agent as of the Effective
Time, for the benefit of the holders of shares of Company Capital Stock,
for exchange in accordance with this Article II, through the Exchange
Agent, certificates representing the shares of Parent Common Stock
issuable pursuant to Section 2.01 in exchange for outstanding shares of
Company Capital Stock to be converted pursuant to Section 2.01(c). Parent
shall make available to the Exchange Agent from time to time as requested
after the Effective Time cash necessary to pay dividends and other
distributions in accordance with Section 2.02(c) and to make payments in
lieu of any fractional shares of Parent Common Stock in accordance with
Section 2.02(e). Such shares of Parent Common Stock and such cash are
hereinafter referred to as the "Exchange Fund".
(b) EXCHANGE PROCEDURES. As soon as reasonably practicable after the
Effective Time, the Exchange Agent shall mail to each holder of record of
a Certificate whose shares were converted into the right to receive a
portion of the Merger Consideration with respect thereto pursuant to
Section 2.01: (i) a form of letter of transmittal (which shall specify
that delivery shall be effected, and risk of loss and title to the
Certificates shall pass, only upon proper delivery of the Certificates to
the Exchange Agent and shall be in such form and have such other
provisions as Parent may reasonably specify) and (ii) instructions for
use in effecting the surrender of the Certificates in exchange for the
Merger Consideration in respect thereof, each of such letter of
transmittal and instructions to be in a form reasonably acceptable to the
Company. Upon surrender of a Certificate for cancellation to the Exchange
Agent, together with such letter of transmittal, duly completed and
validly executed, and such other documents as may reasonably be required
by the Exchange Agent or to such other agent or agents as may be
appointed by the Surviving Corporation (and which is or are reasonably
acceptable to the Company), the holder of such Certificate shall receive,
subject to Section 2.01(e), in exchange therefor a certificate
representing that number of whole shares of Parent Common Stock that such
holder has the right to receive pursuant to the provisions of this
Article II, certain dividends or other distributions as and to the extent
specified in Section 2.02(c) and cash in lieu of any fractional share of
Parent Common Stock as and to the extent specified in Section 2.02(e),
and the Certificate so surrendered shall forthwith be cancelled. In the
event of a transfer of ownership of Company Capital Stock that is not
registered in the stock transfer books of the Company, a certificate
representing the proper number of shares of Parent Common Stock, certain
dividends or other distributions as and to the extent specified in
Section 2.02(c) and cash in lieu of any fractional share of Parent
Company Stock as and to the extent specified in Section 2.02(e) may be
delivered and paid to a person other than the person in whose name the
Certificate so surrendered is registered if such Certificate shall be
properly endorsed or otherwise be in proper form for transfer and the
person requesting such delivery shall pay any transfer or other taxes
required by reason of the delivery of shares of Parent Common Stock and
payment of such sums to a person other than the registered holder
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of such Certificate or establish to the satisfaction of Parent that such
tax has been paid or is not applicable. Until surrendered as contemplated
by this Section 2.02(b), each Certificate shall be deemed at any time
after the Effective Time to represent only the right to receive upon such
surrender the Merger Consideration with respect thereto, certain
dividends or distributions as and to the extent specified in
Section 2.02(c) and cash in lieu of any fractional share of Parent Common
Stock as and to the extent specified in Section 2.02(e). No interest
shall be paid or will accrue on any cash payable to holders of any
Certificates.
(c) DISTRIBUTIONS WITH RESPECT TO UNEXCHANGED SHARES. No dividends or other
distributions with respect to Parent Common Stock with a record date
after the Effective Time shall be paid to the holder of any unsurrendered
Certificate with respect to the shares of Parent Common Stock represented
thereby, and no cash payment in lieu of fractional shares of Parent
Common Stock shall be paid to any such holder pursuant to
Section 2.02(e), in each case until the surrender of such Certificate in
accordance with this Article II. Subject to the effect of applicable
escheat or similar laws, following surrender of any such Certificate,
there shall be paid to the holder of the certificate representing whole
shares of Parent Common Stock issued in exchange therefor, without
interest, (i) promptly after the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective
Time theretofore paid with respect to such whole shares of Parent Common
Stock, and the amount of any cash payable in lieu of a fractional share
of Parent Common Stock to which such holder is entitled as and to the
extent specified in Section 2.02(e) and (ii) at the appropriate payment
date, the amount of dividends or other distributions with a record date
after the Effective Time but prior to such surrender and with a payment
date subsequent to such surrender payable with respect to such whole
shares of Parent Common Stock.
(d) NO FURTHER OWNERSHIP RIGHTS IN COMPANY CAPITAL STOCK. Subject to
Section 2.01(e), all shares of Parent Common Stock delivered upon the
surrender for exchange of Certificates in accordance with the terms of
this Article II (including any cash paid pursuant to this Article II)
shall be deemed to have been delivered (and paid) in full satisfaction of
all rights pertaining to the shares of Company Capital Stock theretofore
represented by such Certificates, and there shall be no further
registration of transfers on the stock transfer books of the Surviving
Corporation of the shares of Company Capital Stock that were outstanding
immediately prior to the Effective Time. If, after the Effective Time,
Certificates are presented to the Surviving Corporation or the Exchange
Agent for any reason, they shall be cancelled and exchanged as provided
in this Article II.
(e) NO FRACTIONAL SHARES.
(i) No certificates or scrip representing fractional shares of Parent
Common Stock shall be delivered upon the surrender for exchange of
Certificates, no dividend or distribution of Parent shall relate to
such fractional share interests and such fractional share interests
will not entitle the owner thereof to the right to vote or to any
other rights of a stockholder of Parent.
(ii) In lieu of such fractional share interests, Parent shall pay to
each former holder of Company Capital Stock an amount in cash equal
to the product obtained by multiplying (A) the fractional share
interest to which such former holder (after taking into account all
shares of Company Capital Stock held at the Effective Time by such
holder) would otherwise be entitled by (B) the last quoted sale
price for a share of Parent Common Stock on The Nasdaq National
Market ("Nasdaq"), as reported in THE WALL STREET JOURNAL, or, if
not reported therein, in any other authoritative source (the
"Closing Price") on the Closing Date.
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(f) TERMINATION OF EXCHANGE FUND. Any portion of the Exchange Fund that
remains undistributed to the holders of the Certificates for six months
after the Effective Time shall be delivered to the Surviving Corporation,
upon demand, and any holders of Certificates who have not theretofore
complied with this Article II shall thereafter look only to Parent for,
and Parent shall remain liable for, payment of their claim for Merger
Consideration applicable thereto, any dividends and other distributions
which such holder is entitled to receive to the extent specified in
Section 2.02(c) and cash in lieu of any fractional share of Parent Common
Stock to the extent specified in Section 2.02(e).
(g) NO LIABILITY. None of Parent, the Surviving Corporation, the Company or
the Exchange Agent shall be liable to any person in respect of any shares
of Parent Common Stock, any dividends or distributions with respect
thereto or any cash in lieu of fractional shares of Parent Common Stock,
in each case delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. If any Certificates shall not
have been surrendered prior to two years after the Effective Time (or
immediately prior to such earlier date on which any Merger Consideration
would otherwise escheat to or became the property of any Governmental
Entity (as defined in Section 3.02)), any such Merger Consideration in
respect thereof shall, to the extent permitted by applicable law, become
the property of the Parent, free and clear of all claims or interest of
any person previously entitled thereto.
(h) LOST CERTIFICATES. If any Certificate shall have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if
required by Parent, the posting by such person of a bond in such
reasonable amount as Parent may direct as indemnity against any claim
that may be made against it with respect to such Certificate, the
Exchange Agent shall issue in exchange for such lost, stolen or destroyed
Certificate the Merger Consideration with respect thereto and, if
applicable, any unpaid dividends and distributions on shares of Parent
Common Stock as and to the extent specified in Section 2.02(c) and any
cash in lieu of fractional shares of Parent Common Stock as and to the
extent specified in Section 2.02(e).
(i) WITHHOLDING RIGHTS. The Exchange Agent shall be entitled to deduct and
withhold from the consideration otherwise payable to any holder of
Company Capital Stock pursuant to this Agreement (including
Section 2.01(g)) such amounts as may be required to be deducted and
withheld with respect to the making of such payment under the Code, or
under any provision of state, local or foreign Tax (as defined in
Section 3.07) law. To the extent that amounts are so withheld and paid
over to the appropriate Taxing Authority (as defined in Section 3.07),
the Exchange Agent will be treated as though it withheld an appropriate
amount of the type of consideration otherwise payable pursuant to this
Agreement to any holder of Company Capital Stock, sold such consideration
for an amount of cash equal to the fair market value of such
consideration at the time of such deemed sale and paid such cash proceeds
to the appropriate Taxing Authority.
SECTION 2.03. MAXIMUM NUMBER OF SHARES TO BE ISSUED. For the avoidance of
doubt, subject to Section 2.01(f), the aggregate number of shares of Parent
Common Stock to be delivered as Merger Consideration and pursuant to the
exercise after the Effective Time of Adjusted Options (other than Permitted
Interim Period Stock Options) and Warrants shall not exceed 19,000,000.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
Except as set forth on the disclosure schedule (with specific reference to
the Section of this Agreement to which the information stated in such disclosure
relates; PROVIDED, HOWEVER, that to the extent that it is reasonably apparent
that such disclosure also relates to another Section of this
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Agreement, such other Section shall also be qualified by each such disclosure)
delivered by the Company to Parent prior to the execution and delivery of this
Agreement (the "Company Disclosure Schedule"), the Company represents and
warrants to Parent and Sub as follows:
SECTION 3.01. ORGANIZATION, STANDING AND CORPORATE POWER. Each of the
Company and its subsidiaries (as defined in Section 9.03) is duly organized,
validly existing and in good standing under the laws of its jurisdiction of
incorporation or organization. Each of the Company and its subsidiaries has all
requisite corporate or other power and authority necessary to enable it to use
its corporate name and to own, lease or otherwise hold and operate its
properties or assets and to carry on its business as presently conducted and
proposed to be conducted. Each of the Company and its subsidiaries is duly
qualified or licensed to do business as a foreign corporation and is in good
standing in each jurisdiction in which the nature of its business or the
ownership, leasing or operation of its properties or assets makes such
qualification or licensing necessary, except where the failure to be so
qualified, licensed or in good standing individually or in the aggregate is not
reasonably likely to have a material adverse effect (as defined in
Section 9.03) on the Company. The Company has delivered to Parent true and
complete copies of the Second Amended and Restated Certificate of Incorporation
of the Company, as amended through the date of this Agreement (the "Company
Certificate") and its By-laws and the certificates of incorporation and by-laws
or other similar organizational documents of each of its subsidiaries, in each
case as amended to the date hereof. The respective certificates of incorporation
and by-laws or other similar organizational documents of the subsidiaries of the
Company do not contain any provision limiting or otherwise restricting the
ability of (i) the Company to control such subsidiaries or (ii) the Company or
any of its subsidiaries to engage in any lawful business or activity. The
Company has made available to Parent and its representatives (i) true and
complete copies of the share certificate and stock transfer books of the Company
and each of its subsidiaries and (ii) copies of the minutes of all meetings of
the stockholders, the Board of Directors and each committee of the Board of
Directors of the Company and each of its subsidiaries held since their
respective dates of incorporation or organization, which, in the case of this
clause (ii), are true and complete in all material respects.
SECTION 3.02. AUTHORITY; NONCONTRAVENTION. (a) The Company has the
requisite corporate power and authority to execute and deliver this Agreement,
to consummate the transactions contemplated hereby (subject to obtaining the
Company Stockholder Approval (as defined in Section 3.20)) and to comply with
the provisions of this Agreement. The execution, delivery and performance of
this Agreement by the Company, the consummation by the Company of the
transactions contemplated hereby and the compliance by the Company with the
provisions of this Agreement have been duly authorized by all necessary
corporate action on the part of the Company, subject to obtaining the Company
Stockholder Approval, and no other corporate proceedings on the part of the
Company are necessary to authorize this Agreement, to consummate the
transactions contemplated hereby or to comply with the provisions of this
Agreement. This Agreement has been duly executed and delivered by the Company
and, when executed and delivered by Parent and Sub, will constitute a legal,
valid and binding obligation of the Company, enforceable against the Company in
accordance with its terms (subject to applicable bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and other similar laws affecting
creditors' rights generally from time to time in effect and to general
principles of equity). The Board of Directors of the Company, at a meeting duly
called and held at which all directors of the Company were present, duly and
unanimously adopted resolutions (i) approving and declaring advisable this
Agreement, the Merger and the other transactions contemplated hereby,
(ii) declaring that it is in the best interests of the Stockholders that the
Company enter into this Agreement and consummate the Merger on the terms and
subject to the conditions set forth in this Agreement, (iii) declaring that the
consideration to be received by the Stockholders in the Merger is fair to the
Stockholders, (iv) directing that this Agreement be submitted to a vote at a
meeting of the Stockholders and (v) recommending that the Stockholders adopt
this Agreement. The execution and delivery of this Agreement do not, and the
consummation of the
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transactions contemplated by this Agreement and compliance with the provisions
of this Agreement will not, conflict with, or result in any violation or breach
of, or default (with or without notice or lapse of time, or both) under, or give
rise to a right of, or result in, termination, cancellation or acceleration of
any obligation or to loss of a material benefit under, or result in the creation
of any pledge, claim, lien, charge, use restriction, encumbrance or security
interest of any kind or nature whatsoever (a "Lien") in or upon any of the
properties or assets of the Company or any of its subsidiaries under, or give
rise to any increased, additional, accelerated or guaranteed rights or
entitlements under, any provision of (i) the Company Certificate or the By-laws
of the Company or the certificates of incorporation or by-laws or other similar
organizational documents of any of its subsidiaries, in each case as amended
through the date hereof, (ii) any loan or credit agreement, bond, debenture,
note, mortgage, indenture, lease or other contract, commitment, agreement,
arrangement, understanding, obligation, undertaking, instrument, permit,
concession, franchise or license, whether oral or written, to which the Company
or any of its subsidiaries is a party or any of their respective properties or
assets is subject or (iii) subject to obtaining the Company Stockholder Approval
and to the governmental filings and other matters referred to in the following
sentence, any (A) statute, law, ordinance, rule or regulation or (B) order,
writ, injunction, decree, judgment or stipulation, in each case, applicable to
the Company or any of its subsidiaries or any of their respective properties or
assets, other than, in the case of clauses (ii) and (iii), any such conflicts,
violations, breaches, defaults, rights, losses or Liens that individually or in
the aggregate are not reasonably likely to (x) have a material adverse effect
(without giving effect to the exception in clause (B) of the definition thereof
in Section 9.03) on the Company, (y) impair in any material respect the ability
of the Company to perform its obligations under or comply with the provision of
this Agreement or (z) prevent or materially impede, interfere with, hinder or
delay the consummation of any of the transactions contemplated by this
Agreement. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Federal, state or local, domestic or foreign,
government or any court, administrative agency or commission or other
governmental or regulatory authority or agency, domestic, foreign or
supranational (a "Governmental Entity"), is required by or with respect to the
Company or any of its subsidiaries in connection with the execution and delivery
of this Agreement by the Company, the consummation by the Company of the Merger
or the other transactions contemplated by this Agreement or compliance by the
Company with the provisions of this Agreement, except for (1) the filing of a
premerger notification and report form by the Company under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"), (2) the filing of the Certificate of Merger with the Secretary of State
of the State of Delaware and the filing of appropriate documents with the
relevant authorities of other states in which the Company or any of its
subsidiaries is qualified to do business, (3) filings with the Securities and
Exchange Commission (the "SEC") under the Securities Act of 1933, as amended,
(the "Securities Act"), including pursuant to rules relating to the Form F-4 and
Rules 135, 165 and 425 promulgated under the Securities Act and (4) such other
consents, approvals, orders, authorizations, registrations, declarations and
filings the failure of which to be obtained or made individually or in the
aggregate are not reasonably likely to (x) have a material adverse effect on the
Company (without giving effect to the exception in clause (B) of the definition
thereof in Section 9.03), (y) impair in any material respect the ability of the
Company to perform its obligations under or comply with the provision of this
Agreement or (z) prevent or materially impede, interfere with, hinder or delay
the consummation of any of the transactions contemplated by this Agreement.
SECTION 3.03. CAPITALIZATION. The authorized capital stock of the Company
consists of 39,000,000 shares of Company Common Stock and 21,000,000 shares of
Preferred Stock, par value $0.001 per share, 14,000,000 of which have been
designated as Series A Preferred Stock, par value $0.001 per share ("Company
Series A Preferred Stock"), and 6,816,290 have been designated as Series B
Preferred Stock, par value $0.001 per share ("Company Series B Preferred Stock",
and, together with the Company Series A Preferred Stock, the "Company Preferred
Stock", with the Company Common Stock and the Company Preferred Stock being
referred to together as the "Company Capital Stock"). As of the date of this
Agreement (i) 7,700,916 shares of Company
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Common Stock are issued and outstanding, (ii) 210,884 shares of Company Common
Stock are held by the Company in its treasury, (iii) 12,850,000 shares of
Company Series A Preferred Stock are issued and outstanding, (iv) no shares of
Company Series A Preferred Stock are held by the Company in its treasury,
(v) 6,472,785 shares of Company Series B Preferred Stock are issued and
outstanding, (vi) no shares of Company Series B Preferred Stock are held by the
Company in its treasury, (vii) warrants to acquire (A) 20,000 shares of Company
Common Stock from the Company and (B) 310,880 shares of Company Preferred Stock
from the Company, in each case pursuant to the warrant agreements set forth on
Section 3.03(a) of the Company Disclosure Schedule (the "Warrants") are
outstanding, (viii) options to acquire 2,829,600 shares of Company Common Stock
from the Company pursuant to the Company's 1999 Stock Plan (the "Company Stock
Plan") are issued and outstanding and 3,525,192 shares of Company Common Stock
are reserved for issuance in connection with future grants thereunder and
(ix) options to acquire 50,000 shares of Company Common Stock from the Company
granted outside of the Company Stock Plan are issued and outstanding. Except as
set forth above, as of the date of this Agreement no shares of capital stock or
other voting securities of the Company or options, warrants or other rights to
acquire any such stock or securities are issued, reserved for issuance or
outstanding. There are no outstanding stock appreciation rights with respect to
shares of Company Capital Stock or other rights (excluding Stock Options and
Warrants) issued or granted by the Company or any of its subsidiaries that are
linked to the value of Company Capital Stock. The Company has delivered to
Parent true and complete copies of all Contracts (as defined in Section 3.10)
relating to Warrants. If any Warrant is exercised after the Effective Time, the
holder thereof shall be entitled to receive upon such exercise not more than the
number of shares of Parent Common Stock that such holder would have been
entitled to receive pursuant to Section 2.01(c) if such Warrant had been
exercised in full for cash immediately prior to the Effective Time. There are no
bonds, debentures, notes or other indebtedness of the Company or any of its
subsidiaries, and except for the Company Capital Stock, no securities or other
instruments or other obligations of the Company or any of its subsidiaries
(I) having the right to vote (or, except for the Stock Options, the Permitted
Interim Period Stock Options and Warrants, convertible into, or exchangeable or
exercisable for, securities having the right to vote) on any matters on which
stockholders of the Company may vote or (II) except for Permitted Interim Period
Stock Options, issued or granted by the Company or any of its subsidiaries the
value of which is in any way based upon or derived from any share of Company
Capital Stock, Stock Option or Warrant. Except as set forth above and except as
expressly permitted by Sections 5.01(a)(ii) and 5.01(a)(xii), there are no
securities, options, warrants, calls, rights or Contracts of any kind to which
the Company or any of its subsidiaries is a party, or by which the Company or
any of its subsidiaries is bound, obligating the Company or any of its
subsidiaries to issue, deliver or sell, or cause to be issued, delivered or
sold, shares of capital stock or other securities of the Company or any of its
subsidiaries or obligating the Company or any of its subsidiaries to issue,
grant, extend or enter into any such security, option, warrant, call, right or
Contract. There are no outstanding contractual or other obligations of the
Company or any of its subsidiaries to (i) repurchase, redeem or otherwise
acquire any shares of capital stock or other securities of the Company or
(ii) vote or to dispose of any shares of capital stock or other securities of
any of its subsidiaries. Each Stock Option that is intended to qualify as an
"incentive stock option" under Section 422 of the Code so qualifies thereunder.
Section 3.03(b) of the Company Disclosure Schedule sets forth a complete and
accurate list, as of the date hereof, of all outstanding stock options or other
rights to purchase or receive Company Capital Stock granted under the Company
Stock Plan or granted outside the Company Stock Plan (collectively, the "Stock
Options"), the Warrants, the number of shares subject to each such Stock Option
and Warrant, the grant dates, exercise prices and vesting periods of each such
Stock Option and Warrant and the names of the holders thereof. Section 3.03(c)
of the Company Disclosure Schedule sets forth a complete and accurate list, as
of the date hereof, of the identity of each holder of shares of Company Capital
Stock and the number of shares of each class of Company Capital Stock owned of
record by such holder. No shares of Company Capital Stock are owned by a
subsidiary of the Company. All outstanding shares of Company Capital Stock are,
and all shares that may be issued pursuant to the
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Company Stock Plan, the exercise of Stock Options granted outside the Company
Stock Plan and the exercise of the Warrants will be, when issued in accordance
with the terms thereof, duly authorized, validly issued, fully paid and
nonassessable and not subject to preemptive rights. All the outstanding
indebtedness for borrowed money of the Company or its subsidiaries is prepayable
without prepayment penalty or premium (other than the payment of customary LIBOR
breakage costs), and no indebtedness for borrowed money of the Company or its
subsidiaries contains any restriction upon the incurrence of indebtedness for
borrowed money by the Company or any of its subsidiaries or restricts the
ability of the Company or any of its subsidiaries to grant any Liens on its
properties or assets. The Company has outstanding indebtedness for borrowed
money in the aggregate principal amount of $5,000,000 as of the date of this
Agreement.
SECTION 3.04. EQUITY INTERESTS. Section 3.04 of the Company Disclosure
Schedule lists each subsidiary of the Company. All the outstanding shares of
capital stock or other voting or equity interests of each subsidiary of the
Company are owned by the Company, by another wholly owned subsidiary of the
Company or by the Company and another wholly owned subsidiary of the Company,
free and clear of all Liens, and are duly authorized, validly issued, fully paid
and nonassessable. Except for the capital stock of, or other voting or equity
interests in, its subsidiaries, the Company does not own, directly or
indirectly, any capital stock or other voting or equity interest in any person.
SECTION 3.05. FINANCIAL STATEMENTS. The Company has delivered to Parent
the audited balance sheet of the Company as of December 31, 1999, and the
related audited statement of income, statement of stockholders' equity (deficit)
and statement of cash-flows of the Company and its consolidated subsidiaries for
the fiscal year ended on such date (the financial statements described above are
collectively referred to as the "Financial Statements"). The Financial
Statements were derived from and are in accordance in all material respects with
the books and records of the Company and its consolidated subsidiaries, have
been prepared in conformity with generally accepted accounting principles
("GAAP") consistently applied (except as may be specifically described in the
notes thereto) and fairly present the financial condition of the Company and its
subsidiaries as of the dates thereof and the results of operations of the
Company and its subsidiaries for the periods then ended.
The Company has also delivered to Parent unaudited balance sheets and
related unaudited statements of income and statements of cash-flows of the
Company and its consolidated subsidiaries as of and for the three-month periods
ended March 31, June 30 and September 30, 2000 (collectively, the "Unaudited
Statements"). The Unaudited Statements have been prepared in accordance in all
material respects with GAAP and on a consistent basis with the Financial
Statements (except that they do not contain footnotes and are subject to normal
recurring year-end audit adjustments). There were no changes in the method of
application of the Company's accounting policies or changes in the method of
applying the Company's use of estimates in the preparation of the Unaudited
Statements as compared with the Financial Statements.
SECTION 3.06. UNDISCLOSED LIABILITIES. Except as set forth or reflected on
the Financial Statements or the Unaudited Statements (or specifically described
in the notes thereto), none of the Company or its subsidiaries has any
liabilities of any nature (whether accrued, absolute, contingent, unasserted or
otherwise) that could reasonably be expected to have a material adverse effect
on the Company.
SECTION 3.07. TAXES.
(a) As used in this Agreement, (i) "Taxes" shall mean all Federal, state and
local, domestic and foreign, income, franchise, property, sales, excise,
employment, payroll, social security, value-added, ad valorem, transfer,
capital, withholding and other taxes, including taxes based on or
measured by gross receipts, profits, sales, use or occupation, tariffs,
levies, impositions, assessments or other governmental charges of any
nature, including any interest, penalties or additions with respect
thereto and any obligations under any agreements or arrangements with
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any other person with respect to such amounts (with "Tax" having a
correlative meaning); (ii) "Taxing Authority" shall mean any Federal,
state or local, domestic or foreign, governmental body (including any
subdivision, agency or commission thereof), or any quasi-governmental
body, in each case, exercising regulatory authority in respect of Taxes;
and (iii) "Tax Return" shall mean all returns, reports and forms,
including information returns, with respect to Taxes.
(b) Neither the Company nor any of its subsidiaries has ever been a member
of any group of corporations with which the Company or any of its
subsidiaries was required to file an affiliated, consolidated, combined,
unitary or aggregate Tax Return. The Company and each of its subsidiaries
has timely filed or caused to be filed all income and franchise Tax
Returns and all other material Tax Returns required to be filed by each
such entity. All such Tax Returns are true and complete in all material
respects. The Company and each of its subsidiaries has timely paid or
caused to be timely paid (or the Company has timely paid on its
subsidiaries' behalf) all Taxes due from it or them with respect to the
taxable periods covered by such Tax Returns, and, in accordance with
GAAP, the balance sheets of the Company as of December 31, 1999 and
September 30, 2000, each reflect an adequate reserve for all Taxes
payable by the Company and each of its subsidiaries for all taxable
periods and portions thereof through its date. Neither the Company nor
any of its subsidiaries has requested any extension of time within which
to file any Tax Return which Tax Return has not yet been filed.
(c) No income or franchise or other material Tax Return of the Company or
any of its subsidiaries is or has ever been under audit or examination by
any Taxing Authority, and no written or, to the knowledge of the Company,
unwritten notice of such an audit or examination has been received by the
Company or any of its subsidiaries. Each material deficiency, if any,
resulting from any audit or examination relating to Taxes by any Taxing
Authority has been timely paid. The Company has not received notice of
any material issues relating to Taxes from the relevant Taxing Authority
during any presently pending audit or examination, nor has the Company
received notice of any material issues relating to Taxes from the
relevant Taxing Authority in any completed audit or examination that can
reasonably be expected to recur in a later taxable period. The relevant
statute of limitations is open with respect to all Federal income Tax
Returns of the Company and each of its subsidiaries. The Company has made
available to Parent documents, if any, setting forth the years in which
the statute of limitations has not yet expired for the income, franchise
and other material Tax Returns of the Company or any of its subsidiaries
and listing the last year in which the Company or any of its subsidiaries
is subject to audit with respect to all income, franchise and other
material Tax Returns.
(d) There is no currently effective agreement or other document extending,
or having the effect of extending, the period of assessment or collection
of any Taxes and no power of attorney with respect to any Taxes has been
executed or filed with any Taxing Authority.
(e) No material Liens for Taxes exist with respect to any assets or
properties of the Company or any of its subsidiaries, except for
statutory Liens for Taxes not yet due.
(f) None of the Company or any of its subsidiaries is a party to or bound by
any Tax sharing agreement, Tax indemnity obligation or similar agreement,
arrangement or practice with respect to Taxes (including any advance
pricing agreement, closing agreement or other agreement relating to Taxes
with any Taxing Authority).
(g) None of the Company or any of its subsidiaries will be required to
include in a taxable period ending after the Effective Time taxable
income attributable to income that accrued in a prior taxable period but
was not recognized in any prior taxable period as a result of the
installment method of accounting, the completed contract method of
accounting, the long-term contract
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method of accounting, the cash method of accounting or Section 481 of the
Code or any comparable provision of any other Tax law or for any other
reason.
(h) No amount or other entitlement or economic benefit that could be
received (whether in cash or property or the vesting of property) as a
result of any of the transactions contemplated by this Agreement or the
Resale Restriction Agreement by any current or former officer, director,
employee or consultant of the Company or its subsidiaries who is a
"disqualified individual" (as such term is defined in proposed Treasury
Regulation Section 1.280G-1) would be characterized as an "excess
parachute payment" or a "parachute payment" (as such terms are defined in
Section 280G(b)(1) of the Code) and no disqualified individual is
entitled to receive any additional payment from the Company or any of its
subsidiaries or any other person in the event that the excise tax under
Section 4999 of the Code is imposed on such disqualified individuals.
(i) Each of the Company and its subsidiaries has complied in all material
respects with all applicable laws relating to the payment and withholding
of Taxes (including withholding of Taxes pursuant to Sections 1441, 1442,
3121 and 3402 of the Code or similar provisions of state, local, domestic
or foreign Tax law) and has, within the time and the manner prescribed by
law, withheld from and paid over to the proper governmental authorities
all amounts required to be so withheld and paid over under applicable
laws.
(j) No consent under Section 341(f) of the Code has been filed with respect
to the Company or any of its subsidiaries.
(k) None of the Company or any of its subsidiaries has been a United States
real property holding corporation within the meaning of
Section 897(c)(2) of the Code during the applicable period specified in
Section 897(c)(1)(A)(ii) of the Code.
(l) No property owned by the Company or any of its subsidiaries
(i) constitutes "tax exempt use property" within the meaning of
Section 168(h)(1) of the Code or (ii) is tax exempt bond financed
property within the meaning of Section 168(g) of the Code.
(m) None of the Company or any of its subsidiaries has ever (i) made an
election under Section 1362 of the Code to be treated as an S corporation
for Federal income tax purposes or (ii) made a similar election under any
comparable provision of any state or local, domestic or foreign, Tax law.
(n) None of the Company or any of its subsidiaries is or ever has been a
personal holding company within the meaning of Section 542 of the Code.
(o) Section 3.07(o) of the Company Disclosure Schedule sets forth each state
or local, domestic or foreign, jurisdiction in which the Company and each
of its subsidiaries files, is required or has been required to file a Tax
Return relating to state and local income, franchise, license, excise,
net worth property and sales and use Taxes except in a case where the
Company or any of its subsidiaries is or has been required to file such a
Tax Return and such failure to file is not reasonably likely to have a
material adverse effect on the Company. No claim has ever been made by a
Taxing Authority in a jurisdiction where any of the Company or its
subsidiaries does not file a Tax Return that it is, or may be subject to,
taxation in that jurisdiction.
(p) None of the Company or any of its subsidiaries has constituted either a
"distributing corporation" or a "controlled corporation" (within the
meaning of Section 355(a)(1)(A) of the Code) in any distribution of stock
qualifying for tax-free treatment under Section 355 of the Code
(i) within the two-year period ending on the date of this Agreement or
(ii) in a distribution which could otherwise constitute part of a "plan"
or "series of related transactions" (within the meaning of
Section 355(e) of the Code) in conjunction with the transactions
contemplated by this Agreement.
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(q) None of the Company or any of its subsidiaries has taken or agreed to
take any action or knows of any fact, agreement, plan or other
circumstance that is reasonably likely to prevent the Merger from
qualifying as a reorganization within the meaning of
Section 368(a)(1)(B) of the Code or reasonably likely to cause the Merger
to fail to qualify for an exemption to gain recognition pursuant to
Section 367(a) of the Code.
SECTION 3.08. ASSETS.
(a) Each of the Company and its subsidiaries has good and marketable title
to, or good and valid leasehold interests in, all of its material
personal properties and assets (including with respect to all real
property and interests in real property leased by it), in each case free
and clear of any Liens, except for such property and assets as are no
longer used or useful in the conduct of its businesses and except for
defects in title, easements, restrictive covenants and similar
encumbrances and Liens that individually or in the aggregate are not
reasonably likely to materially affect the ability of the Company and its
subsidiaries to use such property or assets in their intended manner.
(b) Each of the Company and its subsidiaries has complied in all material
respects with the terms of all material leases to which it is a party and
under which it is in occupancy, and all such leases are in full force and
effect, except for such noncompliances or failures to be in full force
and effect that individually or in the aggregate are not reasonably
likely to materially affect the ability of the Company to obtain the
benefit of such leases. Each of the Company and its subsidiaries enjoys
peaceful and undisturbed possession in all material respects under all
material real property leases to which it is a party.
(c) None of the Company or any of its subsidiaries holds any fee or other
ownership interest in any real property. Section 3.08 of the Company
Disclosure Schedule sets forth a complete and accurate list of all real
property and interests in real property leased by the Company.
SECTION 3.09. INTELLECTUAL PROPERTY, ETC.
(a) Section 3.09(a) of the Company Disclosure Schedule sets forth a complete
and accurate list of all patents, patent applications, trademark
applications and registrations, trade names, service marks, domain names
and registered copyrights and mask work rights and applications therefor,
if any, owned by or licensed to the Company or any of its subsidiaries.
All patents, patent applications, trademark applications and
registrations, trade names, service marks, copyrights and mask work
rights of the Company or any of its subsidiaries have been duly
registered and/or filed with or issued by each appropriate Governmental
Entity in the jurisdictions indicated in Section 3.09(a) of the Company
Disclosure Schedule, all necessary affidavits of continuing use have been
filed, and all necessary maintenance fees have been paid to continue all
such rights in effect, except where the failure to take such actions or
pay such fees would not, individually or in the aggregate, materially
adversely affect any such rights. Each of the Company and each of its
subsidiaries owns or is validly licensed or otherwise has the right to
use, without payment to any other person except for fees set forth in
Section 3.09(b) of the Company Disclosure Schedule, all Intellectual
Property (as defined in Section 3.09(m)) used in or necessary for the
conduct of its business as presently conducted or as currently proposed
by management of the Company to be conducted, in each case free and clear
of all Liens, except for Liens that (i) individually or in the aggregate
are not reasonably likely to materially affect the ability of the Company
and its subsidiaries to use such Intellectual Property in its intended
manner and (ii) have been disclosed in writing to Parent in
Section 3.09(a) or 3.10(h) of the Company Disclosure Schedule. The
conduct of the Company's business, as presently conducted and as
currently proposed by management of the Company to be conducted, does not
in any material respect conflict with, or result in any violation of or
default (with or without notice or lapse of time, or both) under, or give
rise to
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a right of termination, cancellation or acceleration of any obligation or
loss of a material benefit under, or result in the creation of any
material Lien in or upon any of the properties or assets of the Company
or any of its subsidiaries under, any Contract between the Company or any
of its subsidiaries and any person relating to material Intellectual
Property or, to the knowledge of the Company, any material Intellectual
Property rights of any other person.
(b) Section 3.09(b) of the Company Disclosure Schedule sets forth a complete
and accurate list of all options, rights, licenses or interests of any
kind relating to Intellectual Property granted to the Company or any of
its subsidiaries, other than software licenses for generally available
software (such as Lotus Notes, WordPerfect and the like) and generally
available system development tools, or granted by the Company to any
other person.
(c) All software, other than generally available software (such as Lotus
Notes, WordPerfect and the like) and generally available system
development tools, that is either marketed to customers of the Company or
any of its subsidiaries as a program or as part of a product or service
or is used by the Company or any of its subsidiaries to support its
business:
(i) either is owned by the Company or any of its subsidiaries or the
Company or any of its subsidiaries has the right to use, modify,
copy, sell, distribute, sublicense and make Derivative Works (as
defined in Section 3.09(k)) from such software, free and clear of
any limitations or Liens that would materially impair the intended
use of such software; and
(ii) is free from any interest of any former or present employees of, or
contractors or consultants to, the Company or any of its
subsidiaries that would materially impair the intended use of such
software.
Section 3.09(c) of the Company Disclosure schedule sets forth a complete and
accurate list of all such software, together with a brief description by
name of each product or service to which such software relates.
(d) To the extent third-party software is marketed to customers of the
Company or any of its subsidiaries together with the Intellectual
Property of the Company or any of its subsidiaries, (i) the third-party
rights have been identified in Section 3.09(d) of the Company Disclosure
Schedule, (ii) all necessary licenses have been obtained and (iii) no
royalties or payments are due other than the royalties and payments that
are identified in Section 3.09(d) of the Company Disclosure Schedule.
(e) No material trade secret of the Company or any of its subsidiaries has
been published or disclosed by the Company or any of its subsidiaries or,
to the knowledge of the Company or any of its subsidiaries, by any other
person to any person except pursuant to licenses or Contracts requiring
such other persons to keep such trade secrets confidential.
(f) None of the Company and its subsidiaries is, and to the knowledge of the
Company, no other party to any licensing, distributorship or other
similar arrangements with the Company or any of its subsidiaries relating
to Intellectual Property is, in breach of or default under its
obligations under such arrangements in any material respect.
(g) No person has any marketing rights to the Intellectual Property of the
Company or any of its subsidiaries pursuant to a written agreement.
(h) None of the Company or any of its subsidiaries has received any written
communications, and no executive officer of the Company has received any
oral communication, alleging that the Company or any of its subsidiaries
has infringed or violated or, by conducting its businesses as presently
conducted or as currently proposed by management of the Company to be
conducted by the Company or any of its subsidiaries, would infringe or
violate any of the Intellectual Property of any other person.
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(i) To the knowledge of the Company, no person is infringing on or otherwise
violating any right of the Company or any of its subsidiaries in any
material respect with respect to any material Intellectual Property owned
by or licensed to the Company or any of its subsidiaries.
(j) Each of the Company and its subsidiaries has taken reasonable steps to
protect its Intellectual Property consistent with industry practice.
(k) No licenses or rights have been granted to distribute the source code
of, or to use source code to create Derivative Works of, any product
currently marketed by, commercially available from or under development
by the Company or any of its subsidiaries for which the Company or any of
its subsidiaries possesses the source code. As used herein, "Derivative
Work" shall mean a work that is based upon one or more preexisting works,
such as a revision, enhancement, modification, abridgement, condensation,
expansion or any other form in which such preexisting works may be
recast, transformed or adapted, and which, if prepared without
authorization of the owner of the copyright in such preexisting work,
would constitute a copyright infringement. For purposes hereof, a
Derivative Work shall also include any compilation that incorporates such
a preexisting work as well as translations from one human language to
another and from one type of code to another.
(l) None of the Company or any of its subsidiaries has assigned, sold or
otherwise transferred ownership of any Intellectual Property owned by the
Company.
(m) For purposes of this Agreement, "Intellectual Property" shall mean
patents, trademarks (registered or unregistered), trade names, service
marks, domain names, brand names, trade dress, copyrights, the goodwill
associated with the foregoing and registrations in any jurisdiction of,
and applications in any jurisdiction to register, the foregoing,
including any extension, modification or renewal of any such registration
or application; inventions, whether patented, patentable or not
patentable in any jurisdiction; mask works, trade secrets and
confidential proprietary information and rights in any jurisdiction to
limit the use or disclosure thereof by any person; writings and other
works of commercial value, whether copyrighted, copyrightable or not
copyrightable in any jurisdiction; registration or applications for
registration of copyrights in any jurisdiction, and any renewals or
extensions thereof; any similar intellectual property or proprietary
rights; any computer programs or software (including source code, object
code and data), other than commercially available computer programs and
software; and licenses relating to the foregoing.
SECTION 3.10. CONTRACTS. None of the Company or any of its subsidiaries is
a party to or bound by, and none of their properties or assets is bound by or
subject to, any written or oral:
(a) contract, commitment, agreement, lease or similar arrangement (each,
including all amendments thereto, a "Contract") not made in the ordinary
course of business;
(b) employment agreement or employment Contract that is not terminable at
will by the Company or such subsidiary both without any penalty and
without any obligation of the Company or any of its subsidiaries to pay
severance or other amounts (including any bonus) other than base salary,
accrued commissions, vacation pay and legally mandated benefits;
(c) (i) employee collective bargaining agreement or other Contract with any
labor union, (ii) Benefit Agreement (as defined in Section 3.12) or
(iii) Contract indemnifying any current or former director or officer of
the Company;
(d) Contract pursuant to which the Company or any of its subsidiaries has
agreed not to compete (or which, following the consummation of the
Merger, could restrict the ability of Parent or any of its subsidiaries
to compete) with any person or in any geographic area or to engage in any
activity or business, or pursuant to which any benefit is required to be
given or lost as a result of so competing or engaging;
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(e) Contract with (i) any stockholder of the Company or any of its
subsidiaries, (ii) any affiliate of the Company or any of its
subsidiaries or of any stockholder of the Company or any of its
subsidiaries or (iii) any director, officer or employee of the Company or
any of its subsidiaries or of any affiliate of the Company or any of its
subsidiaries (other than agreements covered by clause (b) or (c) above);
(f) license or franchise pursuant to which the Company or any such
subsidiary has agreed to refrain from granting license or franchise
rights to any other person;
(g) Contract under which the Company or such subsidiary has (i) incurred any
Indebtedness that is currently owing or (ii) given any Guarantee (as
defined below);
(h) Contract expressly creating or granting a Lien (including Liens upon
properties acquired under conditional sales, capital leases or other
title retention or security devices);
(i) Contract providing for future performance by the Company or such
subsidiary in consideration of amounts previously paid in excess of
$35,000;
(j) Contract providing for payments of royalties to third parties;
(k) Contract granting a third party any license to Intellectual Property
that is not limited to the internal use of such third party;
(l) Contract providing confidential treatment by the Company or such
subsidiary of material third-party information;
(m) Contract that is material in any respect containing (whether in the
Contract itself or by operation of law) any provisions dealing with a
"change of control" or similar event with respect to the Company or such
subsidiary;
(n) Contract granting the other party or any third person "most favored
nation" status;
(o) Contract providing for monetary liquidated damages (but not including
other kinds of provisions that provide for limiting the maximum amounts
payable or for refunds of amounts in the event of a breach or termination
of the Contract);
(p) Contract that (i) has aggregate future sums due from the Company or such
subsidiary in excess of $35,000 and is not terminable by the Company or
such subsidiary for a cost of less than $35,000, (ii) has aggregate
future sums due to the Company or such subsidiary in excess of $35,000 or
(iii) is otherwise material to the business of the Company or such
subsidiary as presently conducted or as currently proposed by management
of the Company to be conducted;
(q) Contract providing for future performance by the Company or such
subsidiary with less than the standard Company or subsidiary charges to
be due for such performance;
(r) joint venture, partnership or other similar agreement;
(s) agreement entered into in connection with the settlement or other
resolution of any suit, claim, action, investigation or proceeding; or
(t) beta test agreement, trial agreement or limited license agreement the
terms and conditions of which differ in any significant respect from the
terms and conditions of the form of trial agreement attached as
Exhibit A to Section 3.10 of the Company Disclosure Schedule (which
Exhibit A also sets forth a complete and accurate list of all customers
that have entered into a beta test agreement, trial agreement or limited
license agreement with the Company).
Each material Contract of the Company and each of its subsidiaries is in
full force and effect and is a legal, valid and binding agreement of the Company
or such subsidiary and, to the knowledge of the Company or such subsidiary, of
each other party thereto, enforceable against the Company or any of its
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subsidiaries, as the case may be, and, to the knowledge of the Company, against
the other party or parties thereto, in each case, in accordance with its terms.
The Company and each of its subsidiaries has performed or is performing all
material obligations required to be performed by it under each of its Contracts
and is not (with or without notice or lapse of time or both) in breach or
default in any material respect thereunder. To the knowledge of the Company or
such subsidiary, no other party to any of its Contracts is (with or without
notice or lapse of time or both), as of the date hereof, in breach or default in
any material respect thereunder. Neither the Company nor any of its subsidiaries
knows of any circumstances that are reasonably likely to materially adversely
affect its ability to perform its obligations under any material Contract.
"Guarantee" of or by any person shall mean any obligation, contingent or
otherwise, of such person guaranteeing any Indebtedness of any other person (the
"primary obligor") in any manner, whether directly or indirectly, and including
any obligation of such person, direct or indirect, (a) to purchase or pay (or
advance or supply funds for the purchase or payment of) such Indebtedness or to
purchase (or to advance or supply funds for the purchase of) any security for
the payment of such Indebtedness, (b) to purchase property, securities or
services for the purpose of assuring the owner of such Indebtedness of the
payment of such Indebtedness or (c) to maintain working capital, equity capital
or other financial statement condition or liquidity of the primary obligor so as
to enable the primary obligor to pay such Indebtedness; PROVIDED, HOWEVER, that
the term Guarantee shall not include endorsements for collection or deposit, in
each case in the ordinary course of business.
"Indebtedness" of any person shall mean, without duplication, (a) all
obligations of such person for borrowed money or with respect to deposits or
advances of any kind, (b) all obligations of such person evidenced by bonds,
debentures, notes or similar instruments, (c) all obligations of such person
upon which interest charges are customarily paid, (d) all obligations of such
person under conditional sale or other title retention agreements relating to
property or assets purchased by such person, (e) all obligations of such person
issued or assumed as the deferred purchase price of property or services,
(f) all indebtedness of others secured by (or for which the holder of such
indebtedness has an existing right, contingent or otherwise, to be secured by)
any Lien on property owned or acquired by such person, whether or not the
obligations secured thereby have been assumed, (g) all Guarantees by such
person, (h) all capital lease obligations of such person, (i) all obligations of
such person in respect of interest rate protection agreements, foreign currency
exchange agreements or other interest or exchange rate hedging arrangements and
(j) all obligations of such person as an account party in respect of letters of
credit and bankers' acceptances to the extent of any drawdowns thereon.
SECTION 3.11. LITIGATION; DECREES. There is no suit, claim, action,
arbitration, investigation or other proceeding ("Litigation"), other than
investigations, pending or, to the knowledge of the Company, threatened, nor, to
the knowledge of the Company, is there any investigation pending or threatened,
in each case by or against or affecting the Company or any of its subsidiaries
or any of their respective properties or assets. There is no outstanding order,
writ, injunction, decree, judgment or stipulation applicable to the Company or
any of its subsidiaries or any of their respective properties, assets or
businesses having, or that individually or in the aggregate is reasonably likely
to have, a material adverse effect on the Company. Section 3.11 of the Company
Disclosure Schedule sets forth a complete and accurate list of (a) all
Litigation in respect of which legal process has been served upon the Company or
any of its subsidiaries and (b) all Litigation that has been commenced by the
Company or any of its subsidiaries against any third party, in each case which
has not been settled or disposed as of the date hereof.
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SECTION 3.12. OPERATION OF THE BUSINESS; ABSENCE OF CHANGES OR EVENTS.
(a) Since December 31, 1999 (or, in the case of clauses (iv) and (ix), since
September 30, 2000), the Company and each of its subsidiaries has
conducted its business only in the ordinary course consistent with past
practice, and there has not been (i) any material adverse effect on the
Company, (ii) any declaration, setting aside or payment of any dividend
on, or other distribution (whether in cash, stock or property) in respect
of, any shares of capital stock of the Company or any of its subsidiaries
except for dividends by a direct or indirect wholly owned subsidiary of
the Company to its parent, or any purchase, redemption or other
acquisition (other than repurchases of shares of Company Common Stock
that are subject to vesting requirements, transfer restrictions and a
right of repurchase in favor of the Company under specified circumstances
("Restricted Stock") pursuant to the exercise of repurchase rights in
favor of the Company) of any shares of capital stock of the Company or
any of its subsidiaries or any other securities of the Company or any of
its subsidiaries or any options, warrants, calls or rights (other than
repurchase rights in favor of the Company with respect to shares of
Restricted Stock) to acquire any such shares or other securities,
(iii) any split, combination or reclassification of any shares of capital
stock of the Company or any of its subsidiaries or any issuance or the
authorization of any issuance of any other securities in respect of, in
lieu of or in substitution for shares of capital stock or other
securities (other than pursuant to the exercise of Stock Options or
Warrants) of the Company or any of its subsidiaries, (iv) (A) any
granting by the Company or any of its subsidiaries of any increase in
compensation or fringe benefits, except for normal increases of cash
compensation in the ordinary course of business consistent with past
practice, or any payment by (or entering into of any obligation or
Contract with respect to any payment by) the Company or any of its
subsidiaries of any bonus, except for bonuses made in the ordinary course
of business consistent with past practice, in each case to any current or
former director, officer, employee or consultant, (B) any granting by the
Company or any of its subsidiaries to any current or former director,
officer or employee of the right to receive severance or termination pay
or any increases therein, (C) any entry by the Company or any of its
subsidiaries into, or any amendment of, (1) any employment, severance,
deferred compensation, termination, indemnification or consulting
agreement with any current or former director, officer, employee or
consultant in effect as of the date of this Agreement or (2) any
agreement with any current or former director, officer, employee or
consultant the benefits of which are contingent, or the terms of which
are materially altered, upon the occurrence of a transaction involving
the Company of the nature contemplated by this Agreement or (all such
agreements under this clause (C), collectively, "Benefit Agreements") or
(D) any adoption of, or amendment to, a Benefit Plan (as defined in
Section 3.15) (other than amendments required by law or required to
maintain the qualified status of a Benefit Plan), (v) any damage,
destruction or loss, whether or not covered by insurance, that
individually or in the aggregate is reasonably likely to have a material
adverse effect on the Company, (vi) any change in financial or tax
accounting methods, principles or practices by the Company or any of its
subsidiaries, except insofar as may have been required by a change in
GAAP or applicable law, (vii) any material election with respect to the
Tax liabilities or Tax attributes of the Company or any of its
subsidiaries or any settlement or compromise with respect to any material
income Tax liability or refund, (viii) any revaluation by the Company or
any of its subsidiaries of any of its material assets or (ix) any
Contract with regard to the acquisition or disposition of any material
Intellectual Property or rights thereto other than licenses in the
ordinary course of business consistent with past practice.
(b) Since September 30, 2000, each of the Company and its subsidiaries has
continued all pricing, sales, receivables and payables production
practices substantially in accordance with the ordinary course of
business and in accordance with the Company's Contracts and has not
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engaged in (i) any trade loading practices or any other promotional sales
or discount activity with any customers or distributors with the intent
to accelerate to pre-Closing periods sales to the trade or otherwise that
would otherwise be expected (based on past practice) to occur in
post-Closing periods, (ii) any practice intended to have the effect of
accelerating to pre-Closing periods collections of receivables that would
otherwise be expected (based on past practice) to be made in post-Closing
periods or (iii) any practice intended to have the effect of postponing
to post-Closing periods payments by the Company or any of its
subsidiaries that would otherwise be expected (based on past practice) to
be made in pre-Closing periods.
SECTION 3.13. COMPLIANCE WITH APPLICABLE LAWS.
(a) The Company and each of its subsidiaries and their respective
properties, assets, operations, personnel and businesses have been and
are being operated and have been and are in compliance with all
applicable statutes, laws, ordinances, rules, regulations, orders, writs,
injunctions, decrees, judgments and stipulations except for such failures
to so comply that individually or in the aggregate are not reasonably
likely to have a material adverse effect on the Company. Neither the
Company nor any of its subsidiaries has received, since their respective
dates of incorporation or organization, a notice or other written
communication alleging or relating to a possible violation of any
statute, law, ordinance, rule, regulation, order, writ, injunction,
decree, judgment or stipulation of any Governmental Entity applicable to
its properties, assets, operations, personnel and businesses except for
such violations that individually or in the aggregate are not reasonably
likely to have a material adverse effect on the Company.
(b) The Company and each of its subsidiaries has obtained and has in effect
all Federal, state and local, domestic and foreign, governmental
consents, approvals, orders, authorizations, certificates, filings,
notices, permits, concessions, franchises, licenses and rights
(collectively, "Permits") necessary for it to own, lease or operate its
properties and assets and to carry on its business as presently conducted
and as currently proposed by management of the Company to be conducted,
and there has occurred no violation of, or default under, any such
Permit, except for such failures to obtain and keep in effect Permits and
except for such violations or defaults under any Permits that
individually or in the aggregate are not reasonably likely to have a
material adverse effect on the Company. The Merger, in and of itself,
could not reasonably be expected to cause the revocations or
cancellations of any such Permit except for such revocations or
cancellations that individually or in the aggregate are not reasonably
likely to have a material adverse effect on the Company.
(c) To the Company's knowledge, there are no past or present conditions,
circumstances, activities, practices, incidents, actions or plans that
are reasonably likely to (i) interfere with or prevent compliance or
continued compliance by the Company or any of its subsidiaries with any
environmental or health and safety laws governing the Company's or any of
its subsidiaries' businesses as presently conducted or as currently
proposed by management of the Company to be conducted or with any
statute, law, ordinance, rule, regulation, order, writ, injunction,
decree, judgment, stipulation or notice or demand letter issued, entered,
promulgated or approved thereunder or (ii) give rise to any liability of
the Company or any of its subsidiaries under any environmental or health
and safety laws governing the Company's or any of its subsidiaries' past,
present or future operations as currently proposed by management of the
Company to be conducted, other than, in each case circumstances,
activities, practices, incidents, actions or plans that individually or
in the aggregate are not reasonably likely to have a material adverse
effect on the Company.
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SECTION 3.14. CERTAIN EMPLOYEE MATTERS.
(a) To the knowledge of the Company, no director, officer or other employee
of the Company or any of its subsidiaries is a party to or bound by any
Contract, or subject to any order, writ, injunction, decree, judgment or
stipulation of or issued by any Governmental Entity, that may interfere
with the use of such director's, officer's or other employee's best
efforts to promote the interests of the Company and its subsidiaries,
conflict with the business of the Company or any of its subsidiaries (as
presently conducted or as currently proposed by management of the Company
to be conducted) or the transactions contemplated by this Agreement or
that is reasonably likely to have a material adverse effect on the
Company. To the knowledge of the Company, no activity of any employee of
the Company or any of its subsidiaries as or while an employee of the
Company or any such subsidiary has caused a violation of any employment
agreement, confidentiality agreement, patent disclosure agreement or
other Contract.
(b) All former and current employees, contractors and consultants of the
Company and each of its subsidiaries, including all employees,
contractors and consultants involved in the development of Intellectual
Property of the Company and each of its subsidiaries, have executed and
delivered to the Company a confidential information agreement that is in
substance substantially consistent with the form of agreement set forth
in Section 3.14(b) of the Company Disclosure Schedule restricting such
person's right to use and disclose confidential information of the
Company and its subsidiaries. All such persons have been party to such a
proprietary rights agreement with the Company or its applicable
subsidiary during the entire term of each such person's employment with
or retention by the Company or by such subsidiary, pursuant to which
either (i) in accordance with any applicable Federal, state or local,
domestic or foreign, law, the Company or such subsidiary has been
accorded full, effective, exclusive and original ownership of all
material Intellectual Property thereby arising or (ii) there has been
conveyed to the Company or such subsidiary by appropriately executed
instruments of assignment full, effective and exclusive ownership of all
tangible and intangible property, including inventions relating to the
business of the Company and its subsidiaries and thereby arising within
the scope of their employment or engagement by or with the Company or
such subsidiary, and true and correct copies of such agreements have been
made available by the Company to Parent prior to the date of this
Agreement. No employee, contractor or consultant of the Company has made
any material alteration or modification to the form of agreement set
forth in Section 3.14(b) of the Company Disclosure Schedule. No employee,
contractor or consultant of the Company who has contributed to, or
participated in, the conception and development of Intellectual Property
for the Company or any of its subsidiaries has asserted or threatened any
claim against the Company or such subsidiary in connection with such
person's involvement in the conception and development of such
Intellectual Property and, to the knowledge of the Company, no such
person has a reasonable basis for any such claim.
(c) None of the officers, employees or (to the knowledge of the Company)
contractors or consultants of the Company or any of its subsidiaries has
any patents issued or applications pending for any device, process,
method, design or invention of any kind that was developed after the date
on which such person became an officer, employee, contractor or
consultant of the Company or any of its subsidiaries or, to the knowledge
of the Company, prior to the date on which such person became such an
officer, employee, contractor or consultant in each case that is now used
or needed by the Company or such subsidiary in the furtherance of its
business operations as presently conducted or as currently proposed by
management of the Company to be conducted by the Company or such
subsidiary, which patents or applications have not been assigned to the
Company or such subsidiary with such assignment duly recorded in the
United States Patent and Trademark Office or with the applicable foreign
Governmental Entity.
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(d) None of the employees of the Company or any of its subsidiaries are
represented by any union with respect to their employment by the Company
or such subsidiary. Since the date of its incorporation, neither the
Company nor any of its subsidiaries has experienced any labor disputes,
union organization attempts or work stoppage due to labor disagreements.
Each of the Company and its subsidiaries is in compliance in all material
respects with all applicable statutes, laws, ordinances, rules and
regulations relating to employment and employment practices, occupational
safety and health standards, terms and conditions of employment and wages
and hours, and is not engaged in any unfair labor practice. The Company
has not received notice of any unfair labor practice charge or complaint
against the Company or any of its subsidiaries which is pending and, to
the knowledge of the Company, there is no unfair labor practice charge or
complaint against the Company threatened before the National Labor
Relations Board or any comparable state or foreign agency or authority.
There is no labor strike, dispute, request for representation, slowdown
or stoppage actually pending or threatened against or affecting the
Company or any of its subsidiaries. No question concerning representation
has been raised or is, to the knowledge of the Company, threatened with
respect to the employees of the Company or any of its subsidiaries. No
employment-related grievances that are individually or in the aggregate
reasonably likely to have a material adverse effect on the Company, nor
any arbitration proceedings arising out of collective bargaining
agreements, are pending or, to the knowledge of the Company, threatened
against the Company or any of its subsidiaries.
(e) Section 3.14(e) of the Company Disclosure Schedule sets forth a complete
and accurate list of all current employees of the Company and each of its
subsidiaries, including their title, current compensation, bonus and
commission structure.
(f) Section 3.14(f) of the Company Disclosure Schedule sets forth (i) the
name of each employee of the Company entitled to severance benefits
(other than the acceleration of Stock Options) payable as of the
Effective Time or upon termination of employment after the Effective Time
pursuant to any individual employment, severance, termination or change
of control agreement or arrangement between the Company or any of its
subsidiaries and such employee, (ii) the category or type of each such
severance benefit (other than the acceleration of Stock Options) to which
such employee is entitled, (iii) the aggregate value of each such
severance benefit payable as of the Effective Time and each such
severance benefit that would be payable upon termination of employment
after the Effective Time, other than the acceleration of Stock Options
and (iv) the aggregate value of severance that would be paid to each
employee set forth on Section 3.14(f) of the Company Disclosure Schedule
upon termination of employment based on the terms of any severance plan
or plans applicable to such employee in effect at the Effective Time,
other than the acceleration of Stock Options.
SECTION 3.15. BENEFIT PLANS.
(a) Section 3.15(a) of the Company Disclosure Schedule contains a complete
and accurate list of each "employee pension benefit plan" (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as
amended ("ERISA")) (hereinafter a "Pension Plan"), "employee welfare
benefit plan" (as defined in Section 3(1) of ERISA, hereinafter a
"Welfare Plan"), bonus, pension, profit sharing, deferred compensation,
incentive compensation, stock ownership, stock purchase, stock
appreciation, restricted stock, stock option, phantom stock, performance,
retirement, thrift, savings, stock bonus, cafeteria, paid time off,
perquisite, fringe benefit, vacation, severance, disability, death
benefit, hospitalization, medical, welfare benefit or other plan,
program, policy, arrangement or understanding (whether or not legally
binding) maintained, contributed to or required to be maintained or
contributed to by the Company and its subsidiaries or any other person or
entity that, together with the Company, is treated as a single employer
under Section 414(b), (c), (m) or (o) of the Code (each, a "Commonly
Controlled Entity") or any entity that is considered a co-employer with
the Company or any
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Commonly Controlled Entity, in each case for the benefit of any present
or former directors, officers, employees or independent contractors of
the Company or any of its subsidiaries (all the foregoing being herein
called "Benefit Plans"). The Company has delivered to Parent true and
complete copies of (1) each Benefit Plan (or, in the case of any
unwritten Benefit Plans, descriptions thereof), (2) the two most recent
annual reports on Form 5500 filed with the Internal Revenue Service with
respect to each Benefit Plan (if any such report was required by
applicable law), (3) the most recent summary plan description for each
Benefit Plan for which such a summary plan description is required by
applicable law and (4) each trust agreement and insurance or annuity
contract relating to any Benefit Plan. No Benefit Plan is a defined
benefit plan (within the meaning of Section 3(35) of ERISA) or is subject
to Title IV of ERISA or the minimum funding requirements of Section 412
of the Code or Section 302 of ERISA.
(b) Each Benefit Plan has been administered in all material respects in
accordance with its terms. The Company, its subsidiaries and all the
Benefit Plans are in compliance in all material respects with the
applicable provisions of ERISA and the Code, and all other applicable
laws and the terms of all collective bargaining agreements or other labor
union contracts applicable to any employees of the Company or any of its
subsidiaries. All reports, returns and similar documents with respect to
all Benefit Plans required to be filed with any Governmental Entity or
distributed to any Benefit Plan participant have been duly and timely
filed or distributed. The Company has received no notice of, and to the
Company's knowledge, there are no investigations by any Governmental
Entity with respect to, termination proceedings or other claims (except
claims for benefits payable in the normal operation of the Benefit
Plans), suits or proceedings against or involving any Benefit Plan or
asserting any rights or claims to benefits under any Benefit Plan that
could give rise to any material liability, and, to the Company's
knowledge, there are not any facts that could give rise to any material
liability in the event of any such investigation, claim, suit or
proceeding.
(c) All contributions to, and payments from, the Benefit Plans that may have
been required to be made in accordance with the terms of the Benefit
Plans and any applicable collective bargaining agreement have been timely
made in all material respects.
(d) Each Benefit Plan that is a Pension Plan (hereinafter, a "Company
Pension Plan") has been the subject of a determination letter from the
Internal Revenue Service to the effect that such Company Pension Plan, or
the prototype document on which it is based, is qualified and exempt from
Federal income taxes under Sections 401(a) and 501(a), respectively, of
the Code; no such determination letter has been revoked, and, to the
knowledge of the Company, revocation has not been threatened; and no
Company Pension Plan has been amended since the effective date of its
most recent determination letter in any respect that might adversely
affect its qualification, materially increase its cost or require
security under Section 307 of ERISA. The Company has delivered to Parent
a true and complete copy of the most recent determination letter received
with respect to each Company Pension Plan for which such a letter has
been issued, as well as a true and complete copy of each pending
application for a determination letter, if any. The Company has also
provided to Parent a complete and accurate list of all Company Pension
Plan amendments as to which a favorable determination letter has not yet
been received. No event has occurred that could subject any Company
Pension Plan to tax under Section 511 of the Code.
(e) With respect to each Benefit Plan, (i) there has not occurred any
prohibited transaction in which the Company or any of its employees has
engaged that could subject the Company or any of its employees, or, to
the knowledge of the Company, a trustee, administrator or other fiduciary
of any trust created under any Benefit Plan to the tax or penalty on
prohibited transactions imposed by Section 4975 of ERISA or the sanctions
imposed under Title I of ERISA and (ii) neither the Company nor, to the
knowledge of the Company, any trustee,
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administrator or other fiduciary of any Benefit Plan nor any agent of any
of the foregoing has engaged in any transaction or acted in a manner that
could, or failed to act so as to, subject the Company or, to the
knowledge of the Company, any trustee, administrator or other fiduciary
to any liability for breach of fiduciary duty under ERISA or any other
applicable law.
(f) The list of Welfare Plans in Section 3.15(f) of the Company Disclosure
Schedule discloses whether each Welfare Plan is (i) unfunded,
(ii) funded through a "welfare benefit fund", as such term is defined in
Section 419(e) of the Code, or other funding mechanism or (iii) insured.
Each such Welfare Plan may be amended or terminated without material
liability to the Company at any time after the Closing Date. The Company
and its subsidiaries comply in all material respects with the applicable
requirements of Section 4980B(f) of the Code with respect to each Benefit
Plan that is a group health plan, as such term is defined in
Section 5000(b)(1) of the Code. Neither the Company nor any of its
subsidiaries has any material obligations for retiree health or life
benefits under any Benefit Plan.
(g) Neither the execution and delivery of this Agreement nor the obtaining
of the Company Stockholder Approval nor the consummation of the Merger
nor any other transaction contemplated by this Agreement will
(x) entitle any current or former director, officer, employee or
consultant of the Company or any of its subsidiaries to severance pay,
(y) accelerate the time of payment or vesting or trigger any payment or
funding (through a grantor trust or otherwise) of compensation or
benefits under, increase the amount payable or trigger any other material
obligation pursuant to, any Benefit Plan (other than the acceleration of
Stock Options) or (z) result in any breach or violation of, or a default
under, any Benefit Plan.
(h) The Company has no material liability or obligations, including under or
on account of a Benefit Plan, arising out of the Company's hiring of
persons to provide services to the Company and treating such persons as
consultants or independent contractors and not as employees of the
Company.
SECTION 3.16. INSURANCE. Section 3.16 of the Company Disclosure Schedule
sets forth a complete and accurate list and description, including annual
premiums and deductibles, of all policies of fire, liability, product liability,
workmen's compensation, health and other forms of insurance presently in effect
on the date hereof with respect to the Company's and its subsidiaries' business,
true and complete copies of which have been delivered to, or made available for
review by, Parent. All such policies are valid, outstanding and enforceable
policies. The Company reasonably believes that such policies are sufficient to
protect the properties, assets, operations and business of the Company and each
of its subsidiaries against the risks of the sort normally insured by similar
businesses. No notice of cancellation or termination has been received with
respect to any such policy.
SECTION 3.17. CUSTOMERS.
(a) The Company does not have any customer to whom it made more than 5% of
its sales during the Company's two most recent fiscal quarters. During
the past two years, the Company has received no customer complaints
concerning its products and services, nor has it had any of its products
returned by a purchaser thereof, other than complaints and returns in the
ordinary course of business.
(b) As of the date of this Agreement, no material customer of the Company or
any of its subsidiaries has informed any officer of the Company or such
subsidiary orally or in writing that such person intends to materially
change its relationship with the Company or such subsidiary.
SECTION 3.18. DISCLOSURE. The representations or warranties of the Company
contained in this Agreement, together with the statements contained in the
Company Disclosure Schedule, and the certificates and other documents or
instruments delivered or to be delivered pursuant to this
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Agreement by or on behalf of the Company or any of its subsidiaries to Parent or
any of its representatives, taken as a whole, do not contain any untrue
statement of a material fact, or omit to state any material fact necessary, in
light of the circumstances under which they were or will be made, in order to
make the statements herein or therein not misleading.
SECTION 3.19. INFORMATION SUPPLIED. None of the information supplied by or
on behalf of, or to be supplied by or on behalf of, the Company specifically for
inclusion in (i) the registration statement on Form F-4 to be prepared and filed
with the SEC in connection the issuance of Parent Common Stock in the Merger, in
which an information statement relating to the solicitation by the Company of
the Company Stockholder Approval (the "Information Statement") will be included
(the "Form F-4") will, at the time the Form F-4 is filed or becomes effective
under the Securities Act, or at the date the Information Statement is first
mailed to the Stockholders or at the time of the Company Stockholders' Meeting
(as defined in Section 6.01(b)), contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary to
make the statements therein, in light of the circumstances in which they are
made, not misleading. The Form F-4, insofar as relates to the Company, will
comply as to form in all material respects with the requirements of the
Securities Act and the rules and regulations thereunder.
SECTION 3.20. VOTING REQUIREMENTS; COMPANY VOTING AGREEMENT AND RESALE
RESTRICTION AGREEMENT. The affirmative vote or consent of (a) the holders of a
majority of the outstanding shares of each of (i) Company Series A Preferred
Stock and (ii) Company Series B Preferred Stock, voting as distinct and separate
classes, in each case in favor of adopting this Agreement and (b) the holders of
a majority of the voting power of (i) Company Common Stock, (ii) Company
Series A Preferred Stock and (iii) Company Series B Preferred Stock, voting
together as a single class in favor of adopting this Agreement (the approvals
set forth in this sentence begin collectively referred to as the "Company
Stockholder Approval"), are the only votes or consents of the holders of any
class or series of Company Capital Stock necessary to adopt this Agreement and
consummate the transactions contemplated by this Agreement. Stockholders holding
shares of Company Capital Stock representing 79.1% of the combined voting power
on the date hereof (including 95.3% of the outstanding Shares of Company
Series A Preferred Stock, 73.7% of the outstanding shares of Company Series B
Preferred Stock and 56.5% of the outstanding shares of Company Common Stock) of
the Company Capital Stock have entered into a Company Voting Agreement, and the
affirmative vote of such holders is sufficient for the adoption of this
Agreement under the Company Certificate and the DGCL. Stockholders holding
shares of Company Capital Stock representing 84.0% of the shares of Company
Capital Stock outstanding on the date hereof (and Stockholders and Optionholders
holding shares of Company Capital Stock or Stock Options, as the case may be,
representing in the aggregate 79.2% of the shares of Company Capital Stock on a
fully diluted basis) have entered into a Resale Restriction Agreement.
SECTION 3.21. BROKERS. No broker, investment banker, financial advisor or
other person, other than Goldman Sachs & Co., the fees and expenses of which
will be paid in accordance with Section 6.06, is entitled to any broker's,
finder's, financial advisor's or other similar fee or commission in connection
with the transactions contemplated by this Agreement based upon arrangements
made by or on behalf of the Company. The Company has delivered to Parent true
and complete copies of all agreements under which any such fees or expenses are
payable and all indemnification and other agreements related to the engagement
of the persons to who such fees are payable, and the fees and expenses of
Goldman Sachs & Co. referred to in the previous sentence do not exceed 1% of the
aggregate fair market value of the Merger Consideration as of the date of this
Agreement.
SECTION 3.22. STATE TAKEOVER STATUTES. The Board of Directors of the
Company has approved the Merger and this Agreement and the other transactions
contemplated by this Agreement, and such approval is sufficient to render
inapplicable to the Merger and this Agreement and the other transactions
contemplated by this Agreement, any state takeover statute or similar law that
would otherwise be applicable to the Merger and this Agreement and the other
transactions contemplated by this Agreement.
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SECTION 3.23. CUSTOMER ACCOUNTS RECEIVABLE. All customer accounts
receivable of the Company, whether reflected on the Unaudited Statements or
subsequently created, have arisen from bona fide transactions in the ordinary
course of business. The Company reasonably believes that all such customer
accounts receivable are good and collectible at the aggregate recorded amounts
thereof, net of any applicable reserves for doubtful accounts reflected on the
Unaudited Statements. The Company has good and marketable title to its accounts
receivable, free and clear of all Liens. Since December 31, 1999, there have not
been any write-offs as uncollectible of any accounts receivable of the Company,
except for write-offs in the ordinary course of business.
SECTION 3.24. CORPORATE NAME. The Company (i) has, to its knowledge, the
exclusive right to use its name as the name of a corporation in each
jurisdiction in which the Company is incorporated or qualified as a foreign
corporation and (ii) has not received any notice of conflict during the past two
years with respect to the rights of others regarding the corporate name of the
Company. To the knowledge of the Company, no person is presently authorized by
the Company to use the name of the Company.
SECTION 3.25. ACCOUNTS; SAFE DEPOSIT BOXES; POWERS OF ATTORNEY; OFFICERS
AND DIRECTORS. Section 3.25 of the Company Disclosure Schedule sets forth (i) a
complete and accurate list of all bank and savings accounts, certificates of
deposit and safe deposit boxes of the Company and its subsidiaries and those
persons authorized to sign thereon, (ii) a complete and accurate list of all
powers of attorney granted by the Company and its subsidiaries and those persons
authorized to act thereunder and (iii) a complete and accurate list of all
officers and directors of the Company and its subsidiaries.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND SUB
Except as set forth on the disclosure schedule (with specific reference to
the Section of this Agreement to which the information stated in such disclosure
relates; PROVIDED, HOWEVER, that to the extent that it is reasonably apparent
that such disclosure also relates to another Section of this Agreement, such
other Section shall also be qualified by each such disclosure) delivered by
Parent to the Company prior to the execution and delivery of this Agreement (the
"Parent Disclosure Schedule"), Parent and Sub represent and warrant to the
Company as follows:
SECTION 4.01. ORGANIZATION. Each of Parent and Sub is a corporation duly
organized, validly existing and in good standing under the laws of its
jurisdiction of incorporation and has all requisite power and authority to own,
lease and otherwise hold and operate its assets and to carry on its business as
presently conducted.
SECTION 4.02. AUTHORITY; NONCONTRAVENTION. Each of Parent and Sub has the
requisite corporate power and authority to enter into this Agreement, to
consummate the transactions contemplated hereby and to comply with the
provisions of this Agreement. The execution, delivery and performance of this
Agreement, the consummation by Parent and Sub of the transactions contemplated
hereby and the compliance by Parent with the provisions of this Agreement have
been duly authorized by all necessary corporate action on the part of Parent and
Sub, and no other corporate proceedings on the part of Parent or Sub are
necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly executed and delivered by each
of Parent and Sub and, when executed and delivered by the Company, will
constitute a legal, valid and binding obligation of each of Parent and Sub,
enforceable against Parent and Sub in accordance with its terms (subject to
applicable bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and other similar laws affecting creditors' rights generally from
time to time in effect and to general principles of equity). The Board of
Directors of Parent, at a meeting duly called and held at which a quorum was
present, duly adopted resolutions approving this Agreement, the Merger and the
other transactions contemplated hereby. The execution and delivery of this
Agreement does not, and the consummation of the transactions contemplated by
this Agreement and compliance with the provisions hereof will not,
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conflict with, or result in any violation or breach of, or default (with or
without notice or lapse of time, or both) under, or give rise to a right of, or
result in, termination, cancellation or acceleration of any obligation or to
loss of a material benefit under, or result in the creation of any Lien in or
upon any of the properties or assets of Parent under, or give rise to any
increased, additional, accelerated or guaranteed rights or entitlements under,
any provision of (i) the Articles of Amalgamation or by-laws of Parent or the
certificate of incorporation or by-laws of Sub, in each case as amended through
the date hereof, (ii) any loan or credit agreement, bond, debenture, note,
mortgage, indenture, lease or other contract, commitment, agreement,
arrangement, understanding, obligation, undertaking, instrument, permit,
concession, franchise or license, whether written or oral, to which Parent or
Sub is a party or any of their respective properties or assets is subject or
(iii) subject to the governmental filings and other matters referred to in the
following sentence, any (A) statute, law, ordinance, rule or regulation or
(B) order, writ, injunction, decree, judgment or stipulation, in each case
applicable to Parent or Sub or their respective properties or assets, other
than, in the case of clauses (ii) and (iii), any such conflicts, violations,
breaches, defaults, rights, losses or Liens that individually or in the
aggregate are not reasonably likely to (x) have a material adverse effect
(without giving effect to the exception in clause (B) of the definition thereof
in Section 9.03) on Parent, (y) impair in any material respect the ability of
Parent or Sub to perform its obligations under or comply with the provisions of
this Agreement or (z) prevent or materially impede, interfere with, hinder or
delay the consummation of any of the transactions contemplated by this
Agreement. No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to Parent or Sub in connection with the execution and delivery of this
Agreement by Parent or Sub, the consummation by Parent or Sub of the Merger or
the other transactions contemplated by this Agreement or compliance by Parent or
Sub with the provisions of this Agreement, except for (1) the filing of a
premerger notification and report form by Parent under the HSR Act, (2) the
filing with the SEC of (i) the Form F-4, (ii) such communications and other
filings as may be required under Rules 135, 165 and 425 under the Securities Act
and (iii) such reports under Sections 13(a), 13(d) or 15(d) of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") as may be required in
connection with this Agreement and the transactions contemplated hereby, and the
declaration of the effectiveness of the Form F-4 by the SEC, (3) the filing of
the Certificate of Merger with the Secretary of State of the State of Delaware,
(4) the approval for listing on The Toronto Stock Exchange (the "TSE") of the
shares of Parent Common Stock to be issued in connection with the Merger and the
shares of Parent Common Stock issuable in connection with the Adjusted Options
and the Warrants, (5) the filing with Nasdaq of a Notification Form for Listing
of Additional Shares and ancillary documentation with respect to the shares of
Parent Common Stock to be issued in connection with the Merger and the shares of
Parent Common Stock issuable in connection with the Adjusted Options and the
Warrants, (6) filings required by Rule 45-501 of the Ontario Securities
Commission and (7) such other consents, approvals, orders, authorizations,
registrations, declarations and filings the failure of which to be obtained or
made individually or in the aggregate are not reasonably likely to (x) have a
material adverse effect (without giving effect to the exception in clause (B) of
the definition thereof in Section 9.03) on Parent, (y) impair in any material
respect the ability of Parent or Sub to perform its obligations under or comply
with the provisions of this Agreement or (z) prevent or materially impede,
interfere with, hinder or delay the consummation of any of the transactions
contemplated by this Agreement.
SECTION 4.03. CAPITAL STOCK OF PARENT.
(a) The authorized capital stock of Parent consists of an unlimited number
of shares of Parent Common Stock and an unlimited number of Preference
Shares, issuable in series, none of which are issued or outstanding as of
the date of this Agreement. As of the close of business on November 15,
2000, 39,091,765 shares of Parent Common Stock were issued and
outstanding. All the issued and outstanding shares of Parent Common Stock
are (and all shares of Parent Common Stock to be issued in connection
with the Merger, including shares
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to be issued upon the exercise of the Adjusted Options when issued in
accordance with this Agreement, shall be) duly authorized, validly
issued, fully paid and nonassessable. As of November 15, 2000, options to
acquire 4,028,554 shares of Parent Common Stock from Parent pursuant to
Parent's stock incentive plans were issued and outstanding and 2,019,817
shares of Parent Common Stock were reserved for issuance in connection
with future grants thereunder. Except as set forth above, as of
November 15, 2000, there were outstanding (i) no shares of capital stock
or other voting securities of Parent, (ii) no securities of Parent or any
of its subsidiaries convertible into or exchangeable for shares of
capital stock or voting securities of Parent, (iii) no options or other
rights to acquire from Parent or any of its subsidiaries, and no
obligations of Parent or any of its subsidiaries to issue, any capital
stock, voting securities or securities convertible into or exchangeable
for capital stock or voting securities of Parent, and (iv) no equity
equivalents, interests in the ownership or earnings of Parent or any of
its subsidiaries or other similar rights (including stock appreciation
rights) (collectively, "Parent Securities"). As of the date of this
Agreement, there are no outstanding obligations of Parent or any of its
subsidiaries to repurchase, redeem or otherwise acquire any Parent
Securities.
(b) The authorized capital stock of Sub consists of 15,000 shares of common
stock, par value $0.01 per share, of which 1,000 shares are issued and
outstanding, all of which shares are owned beneficially and of record by
Parent.
(c) All of the outstanding shares of capital stock of Parent's subsidiaries
are owned by Parent, directly or indirectly, free and clear of any Lien
or limitation or restriction (including any restriction on the right to
vote or sell the same, except as may be provided as a matter of law), and
are duly authorized, validly issued, fully paid and nonassessable. As of
the date of this Agreement, there are no securities of Parent or its
subsidiaries convertible into or exchangeable for, no options or other
rights to acquire from Parent or its subsidiaries, and no other Contract,
arrangement or obligation (whether or not contingent) providing for the
issuance or sale, directly or indirectly, of, any capital stock or other
ownership interests in, or any other securities of, any subsidiary of
Parent. As of the date of this Agreement, there are no outstanding
contractual obligations of Parent or its subsidiaries to repurchase,
redeem or otherwise acquire any outstanding shares of capital stock or
other ownership interests in any subsidiary of Parent.
SECTION 4.04. PARENT PUBLIC DISCLOSURE DOCUMENTS. Parent has filed with
the SEC and the Canadian Securities Administrators all reports, schedules,
forms, statements and other documents required to be filed with the SEC since
January 27, 2000 (collectively, the "Parent Public Disclosure Documents"). As of
their respective dates, the Parent Public Disclosure Documents complied in all
material respects with the requirements of the Securities Act or the Exchange
Act and the applicable Canadian securities legislation, as the case may be, and
the rules and regulations of the SEC or the Canadian Securities Administrators,
as applicable, promulgated thereunder applicable to such Parent Public
Disclosure Documents, and none of the Parent Public Disclosure Documents at the
time they were filed or as of the date of this Agreement contained or contain
any untrue statement of a material fact or omitted or omit to state a material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Parent included in the Parent Public
Disclosure Documents complied, as of their respective dates of filing with the
SEC and the Canadian Securities Administrators, in all material respects with
applicable accounting requirements and the published rules and regulations of
the SEC and the Canadian Securities Administrators with respect thereto, have
been prepared in accordance with GAAP as applied in Canada (except, in the case
of unaudited statements, as permitted by the applicable rules and regulations of
the SEC and the Canadian Securities Administrators), applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and fairly presented in all material respects the consolidated
financial position of Parent and its consolidated subsidiaries as of the dates
thereof and the consolidated results of their operations and cash flows for
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the periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments and the absence of notes). As of the date of this
Agreement, since the date of the most recent audited financial statements
included in the Parent Public Disclosure Documents, there has not been any
change, or application or request for any change, by Parent or any of its
subsidiaries in accounting principles, methods or policies for financial
accounting or Tax purposes. As of the date of this Agreement, Parent has not
filed any material change report on a confidential basis with the Canadian
Securities Administrators.
SECTION 4.05. UNDISCLOSED LIABILITIES. Except as set forth in or reflected
on the financial statements of Parent included in the Parent Public Disclosure
Documents (or specifically described in the notes thereto), none of Parent or
its subsidiaries has any liabilities of any nature (whether accrued, absolute,
contingent, unasserted or otherwise) that could reasonably be expected to have a
material adverse effect on Parent.
SECTION 4.06. ABSENCE OF CERTAIN CHANGES OR EVENTS. Except for its
obligations under this Agreement or the transactions contemplated hereby or in
connection with any year-end Tax planning matters and except as disclosed in the
Parent Public Disclosure Documents filed and publicly available prior to the
date of this Agreement (the "Parent Filed Public Disclosure Documents"), since
the date of the most recent audited financial statements included in the Parent
Filed Public Disclosure Documents, Parent has conducted its business only in the
ordinary course consistent with past practice and there has not been any
material adverse effect on Parent.
SECTION 4.07. LITIGATION; DECREES. Except as disclosed in the Parent Filed
Public Disclosure Documents, there is no Litigation (other than investigations)
pending, or, to the knowledge of Parent, threatened, nor, to the knowledge of
Parent, is there any investigation pending or threatened, in each case against
or affecting Parent or any of its subsidiaries or any of their respective
properties or assets that individually or in the aggregate is reasonably likely
to have a material adverse effect on Parent; and neither Parent nor any of its
subsidiaries has received any notice that in any manner challenges or seeks to
prevent, enjoin, alter or delay the Merger. There is no outstanding order, writ,
injunction, decree, judgment or stipulation applicable to Parent or any of its
subsidiaries or any of their respective properties, assets or businesses having,
or that individually or in the aggregate is reasonably likely to have, a
material adverse effect on Parent.
SECTION 4.08. NO VOTE REQUIRED. As permitted by the rules and regulations
of the TSE and the National Association of Securities Dealers, Inc., certain
holders of shares of Parent Common Stock have executed a letter or other
instrument setting forth such holder's acknowledgment and support of the
issuance of shares of Parent Common Stock in the Merger as contemplated by this
Agreement and the assumption by Parent of the Company Stock Plan pursuant to
Section 6.04(c). No vote of, or other action by, the holders of any class or
series of the capital stock of Parent is necessary to approve this Agreement,
the Merger or the other transactions contemplated hereby.
SECTION 4.09. TAXES. Neither Parent nor any of its subsidiaries has taken
or agreed to take any action or knows of any fact, agreement, plan or other
circumstance that is likely (i) to prevent the Merger from qualifying as a
reorganization within the meaning of Section 368(a)(1)(B) of the Code or
(ii) reasonably likely to cause the Merger to fail to qualify for an exemption
to gain recognition pursuant to Section 367(a) of the Code. Neither Parent nor
Sub will have any obligation to withhold any amounts from the Merger
Consideration payable to the Stockholders pursuant to any Canadian Tax law.
Parent will not be a "passive foreign investment company" as defined in
Section 1297(a) of the Code for the year ending December 31, 2000, and Parent
has no current plan or intention to take any action that would cause it to
become a "passive foreign investment company" as so defined for the year ending
December 31, 2001.
SECTION 4.10. INTERIM OPERATIONS OF SUB. Sub was formed solely for the
purpose of engaging in the transactions contemplated hereby, has engaged in no
other business activities and has conducted its operations only as contemplated
hereby.
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SECTION 4.11. INFORMATION SUPPLIED. None of the information supplied by or
on behalf of, or to be supplied by or on behalf of, Parent or Sub specifically
for inclusion or incorporation by reference in (i) the Form F-4 will, at the
time the Form F-4 is filed or becomes effective under the Securities Act, or at
the date the Information Statement is first mailed to the Stockholders or at the
time of the Company Stockholders' Meeting, contain any untrue statement of a
material fact or omit to state any material fact required to be stated therein
or necessary to make the statements therein, in light of the circumstances in
which they are made, not misleading. The Form F-4, insofar as it relates to
Parent or Sub, will comply as to form in all material respects with the
requirements of the Securities Act and the rules and regulations thereunder.
SECTION 4.12. BROKERS. No broker, investment banker, financial advisor or
other person, other than Credit Suisse First Boston Corporation and Salomon
Smith Barney, the fees and expenses of which will be paid by Parent, is entitled
to any broker's, finder's, financial advisor's or similar fee or commission, in
connection with the transactions contemplated by this Agreement based upon
arrangements made by or on behalf of Parent or Sub.
SECTION 4.13. ASSETS. Each of Parent and its subsidiaries has good and
marketable title to, or good and valid leasehold interests in, all of its
material personal properties and assets (including with respect to all real
property and interests in real property leased by it), in each case free and
clear of any Liens, except for such property and assets as are no longer used or
useful in the conduct of its businesses and except for defects in title,
easements, restrictive covenants and similar encumbrances and Liens that
individually or in the aggregate are not reasonably likely to materially affect
the ability of Parent and its subsidiaries to use such property or assets in
their intended manner.
SECTION 4.14. INTELLECTUAL PROPERTY, ETC.
(a) All material patents, patent applications, trademark applications and
registrations, trade names, service marks, copyrights and mask work
rights of Parent or any of its subsidiaries have been duly registered
and/or filed with or issued by each appropriate Governmental Entity in
the jurisdictions indicated in Section 4.14(a) of the Parent Disclosure
Schedule, all necessary affidavits of continuing use have been filed, and
all necessary maintenance fees have been paid to continue all such rights
in effect, except where the failure to take such actions or pay such fees
would not, individually or in the aggregate, materially adversely affect
any such rights. Each of Parent and each of its subsidiaries owns or is
validly licensed or otherwise has the right to use all Intellectual
Property used in or necessary for the conduct of its business as
presently conducted or as currently proposed by management of Parent to
be conducted, in each case free and clear of all Liens, except for Liens
that, individually or in the aggregate, are not reasonably likely to
materially affect the ability of Parent and its subsidiaries to use such
Intellectual Property in its intended manner. The conduct of Parent's
business, as presently conducted or as currently proposed by management
of Parent to be conducted, does not in any material respect conflict
with, or result in any violation of or default (with or without notice or
lapse of time, or both) under, or give rise to a right of termination,
cancellation or acceleration of any obligation or loss of a material
benefit under, or result in the creation of any Lien in or upon any of
the properties or assets of Parent or any of its subsidiaries under, any
Contract between Parent or any of its subsidiaries and any person
relating to Intellectual Property or, to the knowledge of Parent, any
Intellectual Property rights of any other person, other than any such
conflicts, violations, defaults, rights, losses or Liens that,
individually or in the aggregate, are not reasonably likely to have a
material adverse effect on Parent.
(b) All software, other than generally available software (such as Lotus
Notes, WordPerfect and the like) and generally available system
development tools, that is either marketed to
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customers of Parent or any of its subsidiaries as a program or as part of
a product or service or is used by Parent or any of its subsidiaries to
support its business:
(i) either is owned by Parent or any of its subsidiaries or Parent or
any of its subsidiaries has the right to use, modify, copy, sell,
distribute, sublicense and make Derivative Works from such software,
free and clear of any limitations or Liens that would materially
impair the intended use of such software; and
(ii) is free from any interest of any former or present employees of, or
contractors or consultants to, Parent or any of its subsidiaries
that would materially impair the intended use of such software.
(c) To the extent third-party software is marketed to customers of Parent or
any of its subsidiaries together with the Intellectual Property of the
Company or any of its subsidiaries, all necessary licenses have been
obtained.
(d) None of Parent and its subsidiaries is, and to the knowledge of Parent,
no other party to any licensing, distributorship or other similar
arrangements with Parent or any of its subsidiaries relating to
Intellectual Property is, in breach of or default under its obligations
under such arrangements in any material respect.
(e) None of Parent or any of its subsidiaries has received any written
communications, and no executive officer of Parent has received any oral
communication, alleging that Parent or any of its subsidiaries has
infringed or violated or, by conducting its businesses as presently
conducted or as currently proposed by management of Parent to be
conducted by Parent or any of its subsidiaries, would infringe or violate
any of the Intellectual Property of any other person.
(f) To the knowledge of Parent, no person is infringing on or otherwise
violating any right of Parent or any of its subsidiaries in any material
respect with respect to any material Intellectual Property owned by or
licensed to Parent or any of its subsidiaries.
SECTION 4.15. MATERIAL CONTRACTS. Each material Contract of Parent and
each of its subsidiaries is in full force and effect and is a legal, valid and
binding agreement of Parent or such subsidiary and, to the knowledge of Parent
or such subsidiary, of each other party thereto, enforceable against Parent or
any of its subsidiaries, as the case may be, and, to the knowledge of Parent,
against the other party or parties thereto, in each case, in accordance with its
terms. Parent and each of its subsidiaries has performed or is performing all
material obligations required to be performed by it under each of its Contracts
and is not (with or without notice or lapse of time or both) in breach or
default in any material respect thereunder. To the knowledge of Parent or such
subsidiary, no other party to any of its Contracts is (with or without notice or
lapse of time or both), as of the date hereof, in breach or default in any
material respect thereunder. Neither Parent nor any of its subsidiaries knows of
any circumstances that are reasonably likely to materially adversely affect its
ability to perform its obligations under any material Contract.
SECTION 4.16. COMPLIANCE WITH APPLICABLE LAWS. Parent and each of its
subsidiaries and their respective properties, assets, operations, personnel and
businesses have been and are being operated and have been and are in compliance
with all applicable statutes, laws, ordinances, rules, regulations orders,
writs, injunctions, decrees, judgments and stipulations except for such failures
to so comply that individually or in the aggregate are not reasonably likely to
have a material adverse effect on Parent. Neither Parent nor any of its
subsidiaries has received, since their respective dates of incorporation or
organization, a notice or other written communication alleging or relating to a
possible violation of any statute, law, ordinance, rule, regulation, order,
writ, injunction, decree, judgment or stipulation of any Governmental Entity
applicable to its properties, assets, operations, personnel and businesses
except for such violations that individually or in the aggregate are not
reasonably likely to have a material adverse effect on Parent.
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ARTICLE V
COVENANTS
SECTION 5.01. COVENANTS OF THE COMPANY.
(a) INTERIM PERIOD OPERATIONS. During the period from the date of this
Agreement to the Effective Time, except as consented to in writing by
Parent or as specifically contemplated by this Agreement, the Company
shall, and shall cause its subsidiaries to, carry on their respective
businesses in the ordinary course consistent with past practice
(including in respect of research and development activities and hiring
of new employees) and use their reasonable best efforts to comply with
all applicable laws and, to the extent consistent therewith, use their
reasonable best efforts to preserve their assets and technology and
preserve their relationships with customers, suppliers, licensors,
licensees, distributors and others having business dealings with them.
Without limiting the generality of the foregoing, during the period from
the date of this Agreement to the Effective Time, except as consented to
in writing by Parent or as specifically contemplated by this Agreement or
Section 5.01(a) of the Company Disclosure Schedule, the Company shall
not, and shall not permit any of its subsidiaries to:
(i) (x) declare, set aside or pay any dividends on, or make other
distributions (whether in cash, stock or property) in respect of,
any of its capital stock (except for dividends by a direct or
indirect wholly owned subsidiary of the Company to its parent),
other than dividends (paid solely in capital stock of the Company)
pursuant to the respective terms in effect as of the date of this
Agreement of the Company Preferred Stock issued and outstanding on
the date of this Agreement, (y) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of
any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or any of its other securities or
(z) purchase, redeem or otherwise acquire any shares of capital
stock or any other securities of the Company or any of its
subsidiaries, or any options, warrants, calls or rights to acquire
any such shares or other securities;
(ii) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock, or any other
equity or voting interests or any other securities of any class or
any securities convertible into, or exchangeable for, or any
options, warrants, calls or rights to acquire, any such shares,
equity or voting interests or other securities or any stock
appreciation rights or other rights that are linked to the value of
Company Capital Stock, other than (x) the conversion of shares of
Company Preferred Stock in accordance with their terms as of the
date of such conversion, (y) the issuance of Company Common Stock
upon the exercise of Stock Options or Warrants in accordance with
their respective terms as of the date of this Agreement or (z) the
granting of Permitted Interim Period Stock Options;
(iii) amend or propose to amend its certificate of incorporation or
by-laws or similar organizational documents;
(iv) directly or indirectly acquire or agree to acquire (x) by merging
or consolidating with, or by purchasing a substantial portion of
the assets of, or by any other manner, any business or any
corporation, partnership, joint venture, association or other
entity or division thereof or (y) any assets that, in the
aggregate, have a purchase price in excess of $250,000;
(v) directly or indirectly sell, lease, license, mortgage, sell and
leaseback or otherwise encumber or subject to any Lien or otherwise
dispose of any of its properties or assets or any interest therein
(including in the case of the Company, any shares of capital stock
of
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any of its subsidiaries), except (A) in the ordinary course of
business consistent with past practice or (B) as contemplated by
Section 5.01(g);
(vi) repurchase, pay, prepay or incur any Indebtedness or Guarantee any
Indebtedness of another person, issue or sell any options,
warrants, calls or other rights to acquire any Indebtedness of the
Company or any of its subsidiaries, enter into any "keep well" or
other agreement to maintain any financial statement condition of
another person or enter into any arrangement having the economic
effect of any of the foregoing, or make any loans, advances or
capital contributions to, or investments in, any other person;
(vii) incur or commit to incur any capital expenditures, or any
obligations or liabilities in connection therewith, which, in the
aggregate, are in excess of $250,000;
(viii) enter into any Contract to the extent consummation of the
transactions contemplated hereby or compliance by the Company with
the provisions of this Agreement will violate or conflict with, or
result in any violation or breach of, or default (with or without
notice or lapse of time, or both) under, or give rise to a right
of, or result in, termination, cancellation or acceleration of any
obligation or to loss of a material benefit under, or result in the
creation of any Lien in or upon any of the properties of the
Company or Parent or any of their respective subsidiaries under, or
give rise to any increased, additional, accelerated or guaranteed
rights or entitlements under, any provision of such Contract;
(ix) (A) pay, discharge, settle or satisfy any claims, liabilities or
obligations (whether absolute, accrued, asserted or unasserted,
contingent or otherwise), other than the payment, discharge or
satisfaction in the ordinary course of business consistent with
past practice or in accordance with their terms as of the date of
this Agreement, of claims, liabilities or obligations reflected or
reserved against on the balance sheet of the Company as contained
in the Financial Statements (for amounts not in excess of such
reserves), or incurred since the date of such balance sheet in the
ordinary course of business consistent with past practice or
pursuant to the transactions contemplated by this Agreement,
(B) waive, release, grant or transfer any right of material value
outside the ordinary course of business consistent with past
practice or (C) waive any material benefits of, or agree to modify
in any adverse respect, or fail to enforce, any confidentiality,
standstill or similar agreement to which the Company or any of its
subsidiaries is a party;
(x) modify, amend or terminate any material Contract to which the
Company or such subsidiary is a party or waive, release or assign
any material rights or claims thereunder;
(xi) enter into any material Contract, including any Contract relating
to any material Intellectual Property, other than in the ordinary
course of business consistent with past practice;
(xii) except as otherwise specifically contemplated by this Agreement or
as required to comply with applicable law or agreements, plans or
arrangements existing on the date hereof, (A) terminate, adopt,
enter into or amend any collective bargaining agreement or Benefit
Plan, (B) increase in any manner the compensation or fringe
benefits of, or pay any bonus to, any director, officer, employee
or consultant (other than compensation increases for non-executive
employees not to exceed for any non-executive employee 10% of such
employee's current base salary, PROVIDED that the purpose of such
increase is to bring such employee's compensation in line with
market compensation rates for comparable employees in similar
companies, and PROVIDED FURTHER that all such compensation
increases are immaterial to the Company and that the Company
consults
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with Parent a reasonable amount of time prior to awarding any such
compensation increase), (C) pay any material benefit not provided
for under any Benefit Plan, (D) increase in any manner the
severance or termination pay of any director, officer or employee,
(E) enter into (I) any employment, severance, termination, deferred
compensation, indemnification or consulting agreement (other than
in the ordinary course of business), with any current or former
director, officer, employee or consultant or (II) any agreement
with any current or former director, officer, employee or
consultant the benefits of which are contingent, or the terms of
which are materially altered, upon the occurrence of a transaction
involving the Company or any of its subsidiaries of the nature
contemplated by this Agreement, (F) grant any awards under any
Benefit Plan (including the grant of Stock Options, stock
appreciation rights, stock based or stock related awards,
performance units or restricted stock or the removal of existing
restrictions in any Benefit Plans or agreements or awards made
thereunder), other than grants of options pursuant to the Company
Stock Plans in the ordinary course of business consistent with past
practice and grants of options to acquire (I) up to 500,000 shares
of Company Common Stock, which options shall (a) be granted (1) to
employees newly hired or promoted between the date of this
Agreement and the Closing Date and (2) in accordance with Parent's
customary policies and practices in respect of employee stock
options as set forth in Section 5.01(a) of the Parent Disclosure
Schedule, (b) have an exercise price per share equal to the product
obtained by multiplying the Closing Price on the most recently
ended trading day prior to the grant date by the Common Exchange
Ratio (assuming for purposes of determining the Common Exchange
Ratio that the end of such trading day is the Effective Time) and
(c) be governed by option agreements which shall be in a form
agreed to by Parent and the Company (the "Permitted New
Hire/Promotion Options") and (II) up to a number of shares of
Company Common Stock equal to the quotient (rounded down to the
nearest whole number) of (x) 1,500,000 divided by (y) the Common
Exchange Ratio, which options shall (a) be contingent upon the
consummation of the Merger, (b) be granted immediately prior to the
Effective Time as incentive compensation to certain key employees
of the Company to be mutually identified by Parent and the Company,
(c) have an exercise price per share equal to the product obtained
by multiplying the Closing Price on the most recently ended trading
day prior to the Effective Time by the Common Exchange Ratio
(assuming for purposes of determining the Common Exchange Ratio
that the end of such trading day is the Effective Time), (d) have a
term of ten years and (e) vest ratably in four equal annual
installments on each of the second, third, fourth and fifth
anniversaries of the Closing Date and will have other terms and
conditions that are generally applicable under Parent's stock
incentive plans in effect at the time of grant (the "Permitted
Incentive Options" and, together with the Permitted New
Hire/Promotion Options, the "Permitted Interim Period Stock
Options"); PROVIDED, HOWEVER, that (a) the Company shall take all
actions necessary to amend the Company Stock Plan so that the
Permitted New Hire/ Promotion Options and the Permitted Incentive
Options have terms and conditions that are the same in all material
respects as would have applied had the Permitted New Hire/
Promotion Options and the Permitted Incentive Options been granted
under Parent's stock incentive plans and (b) all of the Permitted
New Hire/Promotion Options and all of the Permitted Incentive
Options shall expressly provide (i) for conversion thereof into an
option to acquire Parent Common Stock in accordance with the terms
of this Agreement and (ii) that the existence of this Agreement,
the consummation of the transactions contemplated by this Agreement
and compliance by the parties hereto with the provisions of this
Agreement will not give rise to a right of, or result in,
acceleration of such options or give rise to, or result in, any
additional rights for the holders of such options, (G) take any
action to fund or in any other way secure the payment of
compensation or benefits
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under any employee plan, contract, agreement or arrangement or
Benefit Plan or (H) take any action to accelerate the vesting or
payment of any compensation or benefit under any Benefit Plan;
(xiii) revalue any of its material assets or, except as required by GAAP,
make any change in accounting methods, principles or practices;
(xiv) commence any Litigation (other than Litigation relative to the
collection of accounts receivable or as a result of Litigation
commenced against the Company or any of its subsidiaries); or
(xv) authorize any of, or commit, resolve or agree to take any of, the
actions prohibited by clauses (i) through (xiv) above.
(b) CERTAIN TAX MATTERS.
(i) TAX RETURNS.
(A) During the period from the date of this Agreement to the
Effective Time, each of the Company, its subsidiaries and Company
Consolidated Groups shall timely file or cause to be timely filed
all Tax Returns ("Post-Signing Returns") required to be filed by
it (after taking into account any applicable extensions) (at the
Company's own cost and expense and in a manner that is consistent
with past practice and that is not reasonably likely to defer
income to a taxable period that ends after the Closing Date).
(B) The Company and each of its subsidiaries shall timely pay all
Taxes due and payable in respect of such Post-Signing Returns
that are filed pursuant to Section 5.01(b)(i)(A) of this
Agreement.
(ii) COMPANY COVENANTS.
(A) The Company shall accrue a reserve in its books and records and
financial statements in accordance with GAAP for all Taxes
payable by the Company and each of its subsidiaries for which no
Post-Signing Return is due prior to the Effective Time.
(B) Prior to the Effective Time, the Company and each of its
subsidiaries shall promptly notify Parent of any suit, claim,
action, investigation, proceeding or audit pending against or
with respect to the Company or any of its subsidiaries in respect
of any Tax. None of the Company or any of its subsidiaries shall
settle or compromise any such suit, claim, action, investigation,
proceeding or audit without Parent's prior written consent.
(C) Prior to the Effective Time, none of the Company or any of its
subsidiaries shall make or change any material Tax election,
amend any Tax Return or take any other action (or fail to take
any other action) in respect of Taxes, in each case, if such
action (or failure to take action) could reasonably be expected
to have the effect of increasing the Tax liability of Parent or
any of its affiliates (including, after the Closing Date, the
Company and its subsidiaries) with respect to a taxable period
that ends after the Closing Date.
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(iii) ADDITIONAL TAX MATTERS.
(A) Any and all existing Tax sharing agreements or arrangements
(other than rights and obligations under Sections 8.3 and 8.4 of
the Asset Transfer Agreement, dated March 31, 1999, between the
Company and Compaq Computer Corporation (the "Asset Transfer
Agreement")) between the Company and/or any subsidiary, on the
one hand, and any other party, on the other hand, shall be
terminated as of the Closing Date. After such date, none of the
Company or any of its subsidiaries shall have any obligations
thereunder.
(B) All stock transfer, real property transfer, documentary, sales,
use, registration, value-added and other similar Taxes (including
interest, penalties and additions thereto) incurred in connection
with the transactions contemplated by the Agreement shall be
borne by the Company, and the Company shall indemnify Parent or
any of its affiliates for any such Taxes incurred as a result of
the Company's failure timely to pay such Taxes.
(C) The Company shall deliver to Parent at or prior to the Closing a
certificate, in form and substance reasonably satisfactory to
Parent, certifying that the transactions contemplated by this
Agreement are not subject to the Foreign Investment in Real
Property Tax Act.
(c) NO SOLICITATION. The Company shall not, and shall not permit any of its
subsidiaries to, nor shall it authorize or permit any of the directors,
officers or employees of the Company or any of its subsidiaries or any
investment banker, financial advisor, attorney, accountant or other agent
or representative retained by it or any of its subsidiaries to, directly
or indirectly through another person, (i) take any action to solicit,
initiate or encourage the making or submission of any Takeover Proposal
(as defined below) or (ii) participate in any way in discussions or
negotiations with, or furnish any information to, any person in
connection with, or take any other action to facilitate any inquiries or
the making of any proposal that constitutes, or may reasonably be
expected to lead to, any Takeover Proposal. The Company shall promptly
notify Parent, orally and in writing, of any request for information
relating to the Company or the receipt of any Takeover Proposal, the
principal terms and conditions of such request or Takeover Proposal and
the identity of the person making such request or Takeover Proposal. The
Company shall keep Parent reasonably informed of the status and details
(including any amendments or proposed amendments) of any such request or
Takeover Proposal. For purposes of this Agreement, "Takeover Proposal"
shall mean any inquiry, proposal or offer from any person relating to any
direct or indirect acquisition or purchase of a business (a "Material
Business") that constitutes 15% or more of the net revenues, net income
or the assets (including equity securities) of the Company and its
subsidiaries, taken as a whole, or 15% or more of any class of voting
securities of the Company or any subsidiary of the Company that owns,
operates or controls a Material Business, any tender offer or exchange
offer that if consummated would result in any person beneficially owning
15% or more of any class of voting securities of the Company or any such
subsidiary, or any merger, amalgamation, consolidation, business
combination, recapitalization, liquidation, dissolution or similar
transaction involving the Company or any such subsidiary, other than the
transactions contemplated by this Agreement.
(d) ESCROW AGREEMENT. The Company shall use its best efforts to cause each
Stockholder and each Optionholder to consent in writing prior to the
Closing Date to be deemed to be a party to, and to bound by the terms of,
the Escrow Agreement.
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(e) FINANCIAL STATEMENTS. The Company shall use its best efforts to cause
to be prepared all financial statement information relating to the
Company (including its predecessors) as is required to be included in the
Form F-4 pursuant to Article 3-05 of Regulation S-X promulgated under the
Securities Act. In addition, the Company shall use its best efforts to
obtain all financial information relating to the Company and its business
for the first quarter of 1999 necessary in order to enable the Company
and Parent to create auditable financial statements.
(f) APPRAISAL RIGHTS. The Company shall use its reasonable best efforts to
ensure that the condition set forth in Section 7.02(e) is satisfied. If
(i) a Takeover Proposal shall have been announced or otherwise publicly
disclosed (or disclosed to the Stockholders generally) and (ii) the
Merger is not consummated because of a failure of the condition set forth
in Section 7.02(e) to be satisfied, then the Company shall pay Parent an
amount equal to $12,000,000 in immediately available funds promptly upon
the Company's receipt of a written demand therefor from Parent.
(g) SALE OF ACCRUE SOFTWARE SHARES. The Company shall sell the 1,432,000
shares of common stock, par value $0.001 per share, of Accrue
Software Inc. that the Company holds.
(h) OBTAINING CERTAIN WAIVERS. The Company shall obtain (i) a waiver of any
default that would otherwise occur as a result of the consummation of the
Merger under the Loan and Security Agreement, dated as of February 10,
2000, between the Company and Imperial Bank, (ii) a waiver of any right
of termination that would otherwise arise as a result of the consummation
of the Merger under each of (a) the License Agreement, dated as of
June 27, 2000, between the Company and Rabobank Nederland, (b) the OEM
Licensing Agreement, dated as of May 7, 2000, between the Company and
Nokia Corporation and (c) the Software License and Maintenance Agreement,
dated as of June 30, 2000, between the Company and Credit Suisse
Aktiengesellschaft and (iii) a waiver or other agreement executed by
Compaq Computer Corporation to the effect that any modifications to the
terms of the Patent Cross-Licence Agreement, dated as of March 31, 1999,
between the Company and Compaq Computer Corporation (the "Compaq License
Agreement") that would otherwise be effected in accordance with the terms
of the Compaq License Agreement as a result of the consummation of the
Merger shall not be so effected and that the Compaq License Agreement
shall continue in full force and effect after consummation of the Merger
in accordance with the terms thereof in effect immediately prior to the
consummation of the Merger as if the Merger had not been consummated.
(i) TERMINATION OF CERTAIN AGREEMENTS. The Company shall take all actions
necessary to terminate or cause to be terminated, if such agreements do
not terminate by their respective terms contemporaneously with the
consummation of the Merger, each of (i) the Amended and Restated
Investors' Rights Agreement, dated as of June 1, 2000, by and among the
Company, certain holders of Company Preferred Stock and the Founders (as
defined therein), (ii) the Amended and Restated Right of First Refusal
and Co-Sale Agreement, dated as of June 1, 2000, by and among the
Company, certain holders of Company Common Stock and certain holders of
Company Preferred Stock, (iii) the Amended and Restated Put Right
Agreement, dated as of June 1, 2000, by and among the Company and certain
holders of Company Preferred Stock and (iv) the Amended and Restated
Voting Agreement, dated as of June 1, 2000, by and among the Company,
certain holders of Company Common Stock, certain holders of Company
Preferred Stock and Chase Capital Investments LLC (any such agreement
that does not by its terms terminate contemporaneously with the
consummation of the Merger being referred to as a "Company Investor
Agreement").
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(j) RECORDATION OF ASSIGNMENT OF PATENTS. The Company shall use its
reasonable best efforts to cause Compaq Computer Corporation ("Compaq")
to execute recordable assignments memorializing Compaq's transfer to the
Company of its entire right, title and interest in and to the Transferred
Patents (as such term is defined in the Asset Transfer Agreement)
pursuant to the Asset Transfer Agreement and the Company shall record all
such assignments in the United States Patent and Trademark Office and in
the appropriate foreign patent offices or administrative agencies in each
country in which any Transferred Patent is issued or pending.
(k) PREFERRED HOLDER LETTER AGREEMENT. The Company has entered into a
letter agreement dated as of November 27, 2000 with certain holders of
Company Preferred Stock who collectively hold more than 66 2/3% of all
outstanding shares of Company Preferred Stock (the "Preferred Holder
Letter Agreement"). The Company shall take all reasonable actions
necessary to enforce the provisions of the Preferred Holder Letter
Agreement against each holder of Company Preferred Stock that is a party
thereto.
(l) RESALE RESTRICTION AGREEMENTS. The Company shall use it best efforts to
cause each Stockholder and each holder of Stock Options or Warrants to
execute and deliver a Resale Restriction Agreement.
SECTION 5.02. COVENANTS OF PARENT.
(a) During the period from the date of this Agreement to the Effective Time,
Parent shall not take any action outside of the ordinary course of
business without consulting the chief executive officer of the Company a
reasonable amount of time prior to taking any such action, and, in
addition, except as consented to in writing by the Company or as
specifically contemplated by this Agreement, Parent shall not and shall
not permit any of its subsidiaries to:
(i) directly or indirectly acquire or agree to acquire, by merging,
amalgamating or consolidating with, or by purchasing all or a
substantial portion of the assets of, or by any other manner, any
assets constituting a business or any corporation, partnership,
joint venture or association or other entity or division thereof, or
any direct or indirect interest in any of the foregoing, in each
case that is material to Parent and its subsidiaries, taken as a
whole;
(ii) (A) directly or indirectly sell, lease, license, sell and
leaseback, mortgage or otherwise encumber or subject to any Lien or
otherwise dispose of any properties or assets or any interest
therein, in each case that is material to Parent and its
subsidiaries, taken as a whole or (B) agree to any issuance of
greater than 10% of the outstanding Parent Common Stock; or
(iii) authorize any of, or commit, resolve or agree to take any of, the
foregoing actions.
(b) During the period from the date of this Agreement to the Effective Time,
except as consented to in writing by the Company or as specifically
contemplated by this Agreement, Parent shall not:
(i) (x) declare, set aside or pay any dividends on, or make other
distributions (whether in cash, stock or property) in respect of,
any of its capital stock, (y) split, combine or reclassify any of
its capital stock or issue or authorize or propose the issuance of
any other securities in respect of, in lieu of or in substitution
for shares of its capital stock or any of its other securities or
(z) purchase, redeem or otherwise acquire any shares of capital
stock or any other securities of Parent, or any options, warrants,
calls or rights to
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acquire any such shares or other securities, except pursuant to
Parent's contractual rights in connection with its acquisition of
Ezlogin.com, Inc. and Spyonit.com, Inc.;
(ii) issue, deliver or sell, or authorize or propose the issuance,
delivery or sale of, any shares of its capital stock, or any other
equity or voting interests or any other securities of any class or
any securities convertible into, or exchangeable for, or any
options, warrants, calls or rights to acquire, any such shares,
equity or voting interests or other securities or any stock
appreciation rights or other rights that are linked to the value of
capital stock of Parent, other than (x) the granting of options to
purchase shares of Parent Common Stock pursuant to Parent's stock
incentive plans in effect as of the date of this Agreement and the
issuance of shares of Parent Common Stock upon the exercise of such
options or (y) the issuance to Yrless Internet Corporation of
shares of Parent Common Stock in satisfaction of Parent's deferred
share issuance obligations relating to its acquisition of Yrless
Internet Corporation;
(iii) amend or propose to amend its Articles of Amalgamation or by-laws;
or
(iv) authorize any of, or commit, resolve or agree to take any of, the
foregoing actions.
SECTION 5.03. OTHER ACTIONS.
(a) The Company shall not, nor shall it permit any of its subsidiaries to,
take any action that would, or that could reasonably be expected to,
result in (i) any of the representations and warranties of the Company
set forth in this Agreement that are qualified as to materiality or
material adverse effect becoming untrue, (ii) any of such representations
and warranties that are not so qualified becoming untrue in any material
respect or (iii) any of the conditions set forth in Article VII not being
satisfied.
(b) Parent shall not, nor shall it permit any of its subsidiaries to, take
any action that would, or that could reasonably be expected to, result in
(i) any of the representations and warranties of Parent set forth in this
Agreement that are qualified as to materiality or material adverse effect
becoming untrue, (ii) any of such representations and warranties that are
not so qualified becoming untrue in any material respect or (iii) any of
the conditions set forth in Article VII not being satisfied.
SECTION 5.04. ADVICE OF CHANGES; FILINGS. The Company, Parent and each of
their respective subsidiaries shall (i) confer on a regular and frequent basis
with each other to report on operational matters and other matters requested by
Parent or the Company and (ii) promptly advise the other orally and in writing
of any change or event that is reasonably likely to have a material adverse
effect on the Company or Parent, as the case may be. The Company and Parent
shall promptly provide the other copies of all filings made by such party with
any Governmental Entity in connection with this Agreement and the transactions
contemplated hereby, other than the portions of such filings that include
confidential information not directly related to the transactions contemplated
by this Agreement.
ARTICLE VI
ADDITIONAL AGREEMENTS
SECTION 6.01. PREPARATION OF THE FORM F-4; COMPANY SHAREHOLDERS' MEETING.
(a) As soon as practicable following the date of this Agreement, Parent and
the Company shall prepare and file with the SEC the Form F-4. Each of
Parent and the Company shall use its reasonable best efforts to have the
Form F-4 declared effective under the Securities Act as
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promptly as practicable after such filing. Company shall use its
reasonable best efforts to cause the Information Statement to be mailed
to the Stockholders as promptly as practicable after the Form F-4 is
declared effective under the Securities Act. Each party hereto shall also
take any action (other than qualifying to do business in any jurisdiction
in which such party is not already so qualified) required to be taken
under any applicable state or provincial securities laws in connection
with the issuance of Parent Common Stock in the Merger and each party
shall furnish all information concerning itself and its shareholders as
may be reasonably requested in connection with any such action. No filing
of, or amendment or supplement to, the Form F-4 or the Information
Statement will be made without the approval of Parent and the Company.
Parent shall advise the Company, promptly after it receives notice
thereof, of the time when the Form F-4 has become effective or any
supplement thereto or amendment thereof has been filed, the issuance of
any stop order, the suspension of the qualification of the Parent Common
Stock issuable in connection with the Merger for offering or sale in any
jurisdiction, or any request by the SEC for amendment of the Form F-4 or
comments thereon and responses thereto or requests by the SEC for
additional information. If at any time prior to the Effective Time any
information relating to Parent or the Company, or any of their respective
affiliates, directors or officers, is discovered that should be set forth
in an amendment or supplement to the Form F-4 or the Information
Statement, so that such documents would not include any misstatement of a
material fact or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading, the party that discovers such information shall
promptly notify the other parties hereto and an appropriate amendment or
supplement describing such information shall be promptly filed with the
SEC and, to the extent required by applicable law, disseminated to the
shareholders of Parent and the Company.
(b) The Company shall, as soon as practicable following the effectiveness of
the Form F-4, either solicit written consents from or duly call, give
notice of, convene and hold a meeting of, the Stockholders (the "Company
Stockholders' Meeting"), for the purpose of obtaining the Company
Stockholder Approval. The Board of Directors of the Company will
recommend that the Stockholders vote in favor of the adoption of this
Agreement and the other matters comprising the Company Stockholder
Approval at the Company Stockholders' Meeting. Without limiting the
generality of the foregoing, the Company agrees that its obligations
pursuant to this Section 6.01(b) shall not be affected by the
commencement, public proposal, public disclosure or communication to the
Company of any Takeover Proposal.
SECTION 6.02. ACCESS TO INFORMATION. Upon reasonable notice, the Company
shall, and shall cause each of its subsidiaries to, afford to the officers,
employees, accountants, counsel and other representatives of Parent, reasonable
access, during normal business hours during the period prior to the Effective
Time, to all its employees, properties, books, Contracts and records and, during
such period, the Company shall, and shall cause each of its subsidiaries,
accountants, counsel and other advisors to, furnish promptly to Parent all
information concerning its business, properties and personnel as Parent may
reasonably request. Parent will treat any such information that is nonpublic as
"Information" in accordance with the terms of the Confidentiality Agreement
dated as of August 7, 2000 (the "Confidentiality Agreement"), between Parent and
the Company and in the event of termination of this Agreement for any reason
Parent shall promptly upon request return or destroy all nonpublic documents
obtained from the Company, and any copies made of such documents, to the
Company. No investigation pursuant to this Section 6.02 or information provided
or received by any party hereto pursuant to this Agreement will affect any of
the representations or warranties of the parties hereto contained in this
Agreement or the conditions hereunder to the obligations of the parties hereto.
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SECTION 6.03. LEGAL CONDITIONS TO MERGER. Each of the Company, Parent and
Sub will use its reasonable best efforts to take, and will cause each of its
subsidiaries to use its reasonable best efforts to take, all actions and to do,
or cause to be done, all things necessary, proper and advisable under applicable
laws and regulations promptly to consummate and make effective the transactions
contemplated by this Agreement (including cooperating fully with the other
parties hereto and furnishing all information to each other in connection with
any requirements imposed upon any party in connection with the Merger). Each of
the Company, Parent and Sub will, and will cause each of its subsidiaries to,
take all reasonable actions necessary to obtain (and will cooperate with each
other in obtaining) any consent, authorization, order or approval of, or any
exemption by, any Governmental Entity or other public or private third party,
required to be obtained or made by Parent or the Company in connection with the
Merger or the taking of any action contemplated thereby or by this Agreement,
except that no party need waive any substantial rights or agree to any
substantial limitation on its operations or to dispose of, or enter into any
licensing or similar arrangement with respect to, any material assets.
SECTION 6.04. STOCK OPTIONS, WARRANTS AND RESTRICTED STOCK.
(a) As soon as practicable following the date of this Agreement, the Board
of Directors of the Company (or, if appropriate, any committee
administering the Company Stock Plan) shall adopt such resolutions or
take such other actions (if any) as may be required to effect the
following:
(i) adjust the terms of all outstanding Stock Options, whether vested or
unvested, as necessary to provide that, at the Effective Time, each
such Stock Option outstanding immediately prior to the Effective
Time shall be assumed by Parent and converted into an option to
acquire, on the same terms and conditions as were applicable under
such Stock Option, the number of shares of Parent Common Stock
(rounded down to the nearest whole share), determined by multiplying
the number of shares of Company Common Stock subject to such Stock
Option by the Common Exchange Ratio, at an exercise price per share
of Parent Common Stock equal to (1) the per share exercise price for
the shares of Company Common Stock otherwise purchasable pursuant to
such Stock Option divided by (2) the Common Exchange Ratio, PROVIDED
that such exercise price shall be rounded up to the nearest whole
cent (each, as so adjusted, an "Adjusted Stock Option");
(ii) adjust the terms of all outstanding Permitted Interim Period Stock
Options, whether vested or unvested, as necessary to provide that,
at the Effective Time, each such Permitted Interim Period Stock
Option outstanding immediately prior to the Effective Time shall be
assumed by Parent and converted into an option to acquire, on the
same terms and conditions as were applicable under such Permitted
Interim Period Stock Option, the number of shares of Parent Common
Stock (rounded down to the nearest whole share), determined by
multiplying the number of shares of Company Common Stock subject to
such Permitted Interim Period Stock Option by the Common Exchange
Ratio, at an exercise price per share of Parent Common Stock equal
to (1) the per share exercise price for the shares of Company
Common Stock otherwise purchasable pursuant to such Permitted
Interim Period Stock Option divided by (2) the Common Exchange
Ratio, PROVIDED that such exercise price shall be rounded up to the
nearest whole cent (each, as so adjusted, an "Assumed Permitted
Interim Period Stock Option" and, together with the Adjusted Stock
Options, the "Adjusted Options");
(iii) make such changes to the Adjusted Options as are required by the
rules of the TSE or applicable Canadian law; and
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(iv) make such other changes to the Company Stock Plans as Parent and
the Company may agree are appropriate to give effect to the Merger.
(b) The adjustments provided herein with respect to any Stock Options that
are "incentive stock options" as defined in Section 422 of the Code shall
be and are intended to be effected in a manner which is consistent with
Section 424(a) of the Code.
(c) At the Effective Time, by virtue of the Merger and without the need of
any further corporate action, Parent shall assume the Company Stock Plan,
with the result that all obligations of the Company under the Company
Stock Plan, including with respect to Stock Options and Permitted Interim
Period Stock Options outstanding at the Effective Time, shall be
obligations of Parent following the Effective Time.
(d) Within 30 days after the Closing Date, Parent shall prepare and file
with the SEC a registration statement on Form S-8 (or another appropriate
form) registering a number of shares of Parent Common Stock equal to the
number of shares subject to the Adjusted Options. Such registration
statement shall be kept effective (and the current status of the
prospectus or prospectuses required thereby shall be maintained) as long
as any Adjusted Options may remain outstanding.
(e) As soon as practicable and in any event within 30 days after the
Effective Time, Parent shall deliver to the holders of Stock Options and
Permitted Interim Period Stock Options appropriate notices setting forth
such holders' rights pursuant to the Company Stock Plan and the
agreements evidencing the grants of such Stock Options and Permitted
Interim Period Stock Options and that such Stock Options and Permitted
Interim Period Stock Options and agreements have been assumed by Parent
and shall continue in effect on the same terms and conditions (subject to
the adjustments required by this Section 6.04 after giving effect to the
Merger).
(f) A holder of an Adjusted Option may exercise such Adjusted Option in
whole or in part in accordance with its terms by delivering a properly
executed notice (in the form to be specified by Parent) of exercise to
Parent, together with the consideration therefor and the Federal
withholding tax information, if any, required in accordance with the
related Company Stock Plan.
(g) Except as otherwise contemplated by this Section 6.04 and except to the
extent required under the respective terms of the Stock Option, the
Permitted Interim Period Stock Options or Company Stock Plan, all
restrictions or limitations on transfer with respect to Stock Options and
Permitted Interim Period Stock Options awarded under the Company Stock
Plans or any other plan, program or arrangement of the Company, to the
extent that such restrictions or limitations have not already lapsed,
shall remain in full force and effect with respect to such Stock Options
and Permitted Interim Period Stock Options after giving effect to the
Merger and the assumption by Parent as set forth above.
(h) As soon as practicable following the date of this Agreement, the Company
shall use its best efforts to cause all the holders of Warrants to
exercise all outstanding Warrants into Company Capital Stock.
(i) If, notwithstanding the Company's compliance with Section 6.04(h), any
Warrants remain outstanding at the Effective Time, then, at the Effective
Time, by virtue of the Merger and without the need for any further
corporate action, each Warrant outstanding immediately prior to the
Effective Time shall be automatically converted into a warrant to
acquire, on the same terms and conditions as were applicable under such
Warrant, a number of shares of Parent Common Stock (rounded down to the
nearest whole share) equal to the number of shares of
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Parent Common Stock that the holder of such Warrant would have been
entitled to receive pursuant to Section 2.01(c) if such Warrant had been
exercised immediately prior to the Effective Time, at a price per share
of Parent Common Stock equal to (A) the per share exercise price for the
shares of Company Capital Stock otherwise purchasable pursuant to such
Warrant divided by (B) the Common Exchange Ratio; PROVIDED, HOWEVER, that
such exercise price shall be rounded up to the nearest whole cent; and
PROVIDED FURTHER, HOWEVER, that no Warrants to purchase shares of Company
Common Stock shall be assumed by Parent and so converted.
(j) All shares of Restricted Stock shall, after conversion into shares of
Parent Common Stock in accordance with Section 2.01(c), remain subject to
the same vesting requirements and transfer restrictions as were
applicable to such shares of Restricted Stock immediately prior to the
Effective Time, and Parent shall assume and become entitled to exercise,
at the Effective Time, the Company's right of repurchase with respect to
all shares of Restricted Stock on the same terms and conditions as were
applicable to such right of repurchase in favor of the Company
immediately prior to the Effective Time.
(k) This Section 6.04 shall survive the consummation of the Merger, is
intended to benefit the holders of the Stock Options and Warrants and
shall be enforceable by such persons.
SECTION 6.05. FEES AND EXPENSES. Except as provided in Section 5.01(b),
all fees and expenses incurred in connection with the Merger, this Agreement and
the transactions contemplated by this Agreement shall be paid by the party
incurring such fees or expenses, whether or not the Merger is consummated.
Notwithstanding the foregoing, the Company and Parent agree that they shall each
bear and pay one-half of (i) the expenses incurred by the parties hereto in
connection with the filing, printing and mailing of the Form F-4 and the
Information Statement contained therein and (ii) filing fees incurred by the
parties hereto in connection with the filing of a Notification and Report Form
pursuant to the HSR Act with respect to the transactions contemplated hereby.
SECTION 6.06. ADDITIONAL AGREEMENTS. In case at any time after the
Effective Time any further action is necessary or desirable to carry out the
purposes of this Agreement or to vest the Surviving Corporation with full title
to all properties, assets, rights, approvals, immunities and franchises of
either the Company or Sub, the proper officers and directors of each party to
this Agreement shall take all such necessary action.
SECTION 6.07. INDEMNIFICATION, EXCULPATION AND INSURANCE.
(a) Except as prohibited by applicable law, from and after the Effective
Time, Parent shall cause the Surviving Corporation to (and, in the event
of the liquidation, dissolution or winding up of the Surviving
Corporation, Parent shall) fulfill and honor in all respects any
indemnification obligations of the Company owed to each person who is or
was a director or officer of the Company at or prior to the Effective
Time (the "Indemnified Parties") under (a) the Company Certificate and
By-laws of the Company as in effect on the date hereof or (b) any
indemnification agreements between the Company and any Indemnified Party.
Except as prohibited by applicable law, the Certificate of Incorporation
and By-laws of the Surviving Corporation will at all times during a
period of not fewer than six years following the Effective Time, contain
provisions with respect to exculpation and indemnification that are at
least as favorable to the Indemnified Parties as those contained in the
Company Certificate and By-laws of the Company as in effect on the date
hereof. In addition, from and after the Effective Time, directors and
officers of the Company or any of its subsidiaries who become directors
or officers of Parent will be entitled to the indemnity rights and
protections afforded to directors and officers of Parent.
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(b) For six years after the Effective Time, Parent shall maintain in effect
the directors' and officers' liability insurance policies currently
maintained by the Company (to the extent such coverage may be obtained)
covering acts or omissions occurring prior to the Effective Time with
respect to those persons who are currently covered by the Company's
directors' and officers' liability insurance policies on terms with
respect to scope and amount of coverage no less favorable than those of
the relevant policy in effect on the date of this Agreement; PROVIDED,
HOWEVER, that Parent may substitute therefor policies of a reputable
insurance company the material terms of which, including coverage and
amount, are no less favorable in any material respect to such directors
and officers than the insurance coverage otherwise required under this
Section 6.07(b); PROVIDED FURTHER, HOWEVER, that in no event shall Parent
be required to pay aggregate premiums for insurance under this
Section 6.07(b) in excess of 150% of the amount of the aggregate premiums
paid by the Company for coverage in 1999 for such purpose (which 1999
premiums are hereby represented and warranted by the Company to be
$15,500), it being understood that if such coverage cannot be obtained
for such 150% amount or less, then Parent shall nevertheless be obligated
to provide such coverage in respect of such party hereto as may be
obtained for such 150% amount relating to such party hereto.
(c) This Section 6.07 shall survive the consummation of the Merger, is
intended to benefit each Indemnified Party, shall be binding upon the
successors and assigns of Parent and the Surviving Corporation, and shall
be enforceable by the Indemnified Parties.
SECTION 6.08. LITIGATION. The Company and Parent shall give each other
prompt notice of and the opportunity to participate in the defense of, any
Litigation against the Company or Parent and/or their respective directors
relating to the transactions contemplated by this Agreement. Neither party shall
settle or agree to settle any such litigation without the prior written consent
of the other party, not to be unreasonably withheld or delayed.
SECTION 6.09. TAX TREATMENT. Each of Parent, Sub and the Company shall use
its reasonable best efforts to cause the Merger to qualify as a reorganization
under the provisions of Section 368(a)(1)(B) of the Code and to qualify for an
exemption to gain recognition pursuant to Section 367(a) of the Code, and the
Company shall use its reasonable best efforts to obtain the opinion of counsel
referred to in Section 7.03(c), including the execution of the letters of
representation referred to therein.
SECTION 6.10. AFFILIATES. Prior to the Closing Date, the Company shall
deliver to Parent a letter identifying all persons who may be deemed, in the
Company's reasonable judgment, at the time this Agreement is submitted for
approval and adoption to the Stockholders, "affiliates" of the Company for
purposes of Rule 145 under the Securities Act. The Company shall use its
reasonable efforts to cause each such person to deliver to Parent as promptly as
practicable after the date of this Agreement a written agreement substantially
in the form attached as Exhibit C hereto.
SECTION 6.11. EMPLOYEE BENEFITS.
(a) During the six-month period following the Effective Time (the
"Transition Period"), Parent shall cause the Surviving Corporation to
either maintain the benefit programs provided by the Company and its
subsidiaries in effect immediately prior to the Effective Time or replace
all or any such programs with programs maintained for similarly situated
employees of Parent, PROVIDED that the aggregate level of benefits
provided during the Transition Period shall be substantially similar to
the aggregate level of benefits provided by the Company and its
subsidiaries before the Effective Time. To the extent that any plan of
Parent or any of its affiliates (a "Parent Plan") becomes applicable to
any employee or former employee of the Company or its subsidiaries,
Parent shall grant, or cause to be granted, to such employees or
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former employees credit for their service with the Company and its
subsidiaries for the purpose of determining eligibility to participate
and nonforfeitability of benefits under such Parent Plan and for purposes
of benefit accrual under vacation and severance pay plans (but only to
the extent such service was credited under similar plans of the Company
and its subsidiaries).
(b) With respect to any welfare benefit plan of Parent or its affiliates
made available to individuals who immediately prior to the Closing Date
were employees of the Company or any of its Subsidiaries, Parent shall,
or shall cause the Surviving Corporation to, waive any waiting periods,
pre-existing condition exclusions and actively-at-work requirements to
the extent such provisions were inapplicable under the Company Plans
immediately before such plan of Parent was made available and provide
that any expenses incurred on or before the date such plan was made
available by any such individual or such individual's covered dependents
shall be taken into account for purposes of satisfying applicable
deductible, coinsurance and maximum out-of-pocket provisions.
SECTION 6.12. PARENT BOARD OF DIRECTORS.
(a) The Board of Directors of Parent shall take such action as may be
necessary (including increasing the size of the Board of Directors of
Parent to thirteen directors) to appoint to the Board of Directors of
Parent as of the Effective Time four persons designated by the Board of
Directors of the Company (which designees shall include John Sims and at
least one resident of Canada (within the meaning of the OBCA)) and
reasonably acceptable to the Board of Directors of Parent, subject in
each case to obtaining the required consent of the TSE, which shall be
diligently pursued. The Board of Directors of the Company shall inform
the Board of Directors of the Parent of the names of such designees as
soon as practicable following the date of this Agreement, and a
designated sub-committee of the Board of Directors of Parent shall review
the qualifications of such designees (including through conducting
personal interviews). A reasonable time prior to the expected Effective
Time, the Board of Directors of Parent shall notify the Board of
Directors of the Company whether or not it has approved of such
designees, which approval shall not be unreasonably withheld. If the
Board of Directors of Parent notifies the Board of Directors of the
Company that it has not approved of a designee, the Board of Directors of
the Company shall supply the Board of Directors of Parent with the name
of an alternate designee as soon as practicable following receipt of such
notification.
(b) The Board of Directors of Parent shall take such action as may be
necessary to appoint one designee of the Company to the governance
committee of the Board of Directors of Parent effective at the first
meeting of the Board of Directors following the Effective Time.
(c) This Section 6.12 shall survive consummation of the Merger, is intended
to benefit each designee of the Company referred to in the first sentence
of Section 6.12(a), shall be binding upon the successors and assigns of
Parent, and shall be enforceable by each such designee.
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ARTICLE VII
CONDITIONS
SECTION 7.01. CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE
MERGER. The respective obligation of each party hereto to effect the Merger
shall be subject to the satisfaction or waiver by each of the Parties hereto on
or prior to the Closing Date of the following conditions:
(a) SHAREHOLDER APPROVAL. The Company Stockholder Approval shall have been
obtained.
(b) FORM F-4. The Form F-4 shall have become effective under the Securities
Act and shall not be the subject of any stop order or proceedings seeking
a stop order.
(c) EXCHANGE LISTING. The shares of Parent Common Stock to be issued in the
Merger and issuable in connection with the Adjusted Options and the
Warrants shall have been conditionally approved for listing on the TSE
(subject to the customary requirements of such exchange) and Nasdaq,
subject only to official notice of issuance.
(d) HSR ACT. The waiting period (and any extension thereof) applicable to
the Merger under the HSR Act shall have been terminated or expired.
(e) NO INJUNCTIONS OR RESTRAINTS. No temporary restraining order,
preliminary or permanent injunction or other order, writ, decree,
judgment or stipulation issued by any court of competent jurisdiction or
other legal restraint or prohibition (collectively, "Legal Restraints")
preventing the consummation of the Merger shall be in effect.
SECTION 7.02. CONDITIONS OF OBLIGATIONS OF PARENT AND SUB. The obligations
of Parent and Sub to effect the Merger shall be subject to the satisfaction or
waiver by Parent and Sub on or prior to the Closing Date of the following
conditions:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
the Company contained in this Agreement that are qualified as to
materiality or material adverse effect shall be true and correct, and the
representations and warranties of the Company contained in this Agreement
that are not so qualified shall be true and correct in all material
respects, in each case as of the date of this Agreement and as of the
Closing Date with the same effect as though made as of the Closing Date
(except that the accuracy of representations and warranties that by their
terms speak as of a specified date will be determined as of such date).
Parent shall have received a certificate signed on behalf of the Company
by the Chief Executive Officer of the Company to such effect.
(b) PERFORMANCE OF OBLIGATIONS. The Company shall have performed in all
material respects all obligations required to be performed by it under
this Agreement at or prior to the Closing Date. Parent shall have
received a certificate signed on behalf of the Company by the Chief
Executive Officer of the Company to such effect.
(c) NO LITIGATION. There shall not be pending or threatened any suit,
action or proceeding brought by any Governmental Entity, or any suit,
action or proceeding with a reasonable probability of success brought by
any other third party,
(i) seeking to restrain or prohibit the consummation of the Merger;
(ii) seeking to prohibit or limit in any material respect the ownership
or operation by the Company, Parent or any of their respective
affiliates of a material portion of the business or assets of the
Company and its subsidiaries, taken as a whole, or Parent and its
subsidiaries, taken as a whole, or to require any such person to
dispose of or hold separate any material portion of the business or
assets of the Company and its
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subsidiaries, taken as a whole, or Parent and its subsidiaries,
taken as a whole, as a result of the Merger; or
(iii) seeking to prohibit Parent or any of its affiliates from
effectively controlling in any material respect the business or
operations of the Company or its subsidiaries.
(d) LEGAL RESTRAINT. No Legal Restraint that could reasonably be expected
to result, directly or indirectly, in any of the effects referred to in
clauses (i) through (iii) of paragraph (c) of this Section 7.02 shall be
in effect.
(e) APPRAISAL SHARES. No more than 5% of the shares of Company Capital
Stock outstanding immediately prior to the Effective Time shall be
Appraisal Shares.
(f) EMPLOYMENT AGREEMENTS AND THE EMPLOYMENT TERMS LETTERS. Each of the
Employment Agreements and the Employment Terms Letters shall be in full
force and effect.
(g) INDEMNIFICATION AND ESCROW AGREEMENT. The Indemnification and Escrow
Agreement in the form attached hereto as Exhibit B shall have been
executed by the Company, the Escrow Agent and the Representative.
(h) RESALE RESTRICTION AGREEMENT. Each person (other than those persons
listed in Section 7.02(h) of the Company Disclosure Schedule) who holds
100,000 or more shares of Company Capital Stock (assuming for this
purpose the exercise of all Stock Options held by such person and the
exercise in full for cash of all Warrants held by such person) shall have
entered into a Resale Restriction Agreement and all the Resale
Restriction Agreements shall be in full force and effect.
(i) PERMITTED INTERIM PERIOD STOCK OPTIONS. Parent shall have received a
certificate signed on behalf of the Company by the Chief Executive
Officer of the Company to the effect that the options to acquire Company
Common Stock issued from the date of this Agreement until the Effective
Time that were intended to be Permitted Interim Period Stock Options
satisfied the criteria set forth in Section 5.01(a)(xii)(F) hereof.
(j) NO MATERIAL ADVERSE EFFECT. No material adverse effect on the Company
shall have occurred.
(k) CONVERSION OF COMPANY PREFERRED STOCK. All issued and outstanding
shares of Company Preferred Stock shall have been converted by the
holders thereof into shares of Company Common Stock in accordance with
the Company Certificate.
(l) TERMINATION OF COMPANY INVESTOR AGREEMENTS. All Company Investor
Agreements shall have been terminated.
SECTION 7.03. CONDITIONS OF OBLIGATIONS OF THE COMPANY. The obligation of
the Company to effect the Merger shall be subject to the satisfaction on or
prior to the Closing Date of the following conditions unless waived by the
Company:
(a) REPRESENTATIONS AND WARRANTIES. The representations and warranties of
Parent contained in this Agreement that are qualified as to materiality
or material adverse effect shall be true and correct, and the
representations and warranties of the Parent contained in this Agreement
that are not so qualified shall be true and correct in all material
respects, in each case as of the date of this Agreement and as of the
Closing Date with the same effect as though made as of the Closing Date
(except that the accuracy of representations and warranties that by their
terms speak as of a specified date will be determined as of such date).
The Company shall have received a certificate signed on behalf of Parent
by an authorized signatory of Parent to such effect.
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(b) PERFORMANCE OF OBLIGATIONS. Parent and Sub shall have performed in all
material respects all obligations required to be performed by them under
this Agreement at or prior the Closing Date. The Company shall have
received a certificate signed on behalf of Parent by an authorized
signatory of Parent to such effect.
(c) TAX OPINION. The Company shall have received from Brobeck, Phleger &
Harrison LLP, counsel to the Company, on the Closing Date, an opinion,
dated as of such date and stating that the Merger qualifies for Federal
income tax purposes as a "reorganization" within the meaning of
Section 368(a)(1)(B) of the Code, that Parent, Sub and the Company will
each be a party to that reorganization within the meaning of
Section 368(b) of the Code and no gain or loss will be recognized by the
stockholders of the Company who exchange Company Capital Stock solely for
Parent Common Stock pursuant to the Merger (except with respect to
(i) cash received in lieu of fractional shares or (ii) stockholders of
the Company who are not Eligible Company Shareholders). The issuance of
such opinion shall be conditioned upon the receipt by such counsel of
customary representation letters from each of the Company and Parent,
which shall be in a form reasonably acceptable to such counsel.
(d) REGISTRATION RIGHTS AGREEMENT. The Registration Rights Agreement
substantially in the form attached hereto as Exhibit D shall have been
executed and delivered by Parent.
(e) NO MATERIAL ADVERSE EFFECT. No material adverse effect on Parent shall
have occurred.
SECTION 7.04. FRUSTRATION OF CLOSING CONDITIONS. None of the Company,
Parent or Sub may rely on the failure of any condition set forth in
Section 7.01, 7.02 or 7.03, as the case may be, to be satisfied if such failure
was caused by such party's failure to use its reasonable best efforts to
consummate the Merger and the other transactions contemplated by this Agreement,
as required by and subject to Section 6.03.
ARTICLE VIII
TERMINATION AND AMENDMENT
SECTION 8.01. TERMINATION. This Agreement may be terminated at any time
prior to the Effective Time:
(i) by mutual consent of Parent and the Company;
(ii) by either Parent or the Company if the other party shall have breached
any of its representations, warranties, covenants or agreements set
forth in this Agreement, which breach (i) would give rise to the
failure of a condition to the obligation of such party set forth in
Article VII of this Agreement and (ii) has not been, or is incapable of
being, cured by such other party within 30 calendar days after such
other party receives written notice of such breach from Parent or the
Company, as the case may be;
(iii) by either Parent or the Company if any Legal Restraint preventing the
consummation of the Merger shall have become final and nonappealable;
(iv) by either Parent or the Company if the Company Stockholder Approval
shall not have been obtained at the Company Stockholders' Meeting or at
any adjournment or postponement thereof; or
(v) by either Parent or the Company if the Merger shall not have been
consummated on or before March 31, 2001; PROVIDED, HOWEVER, that the
right to terminate this Agreement pursuant to this clause (v) shall not
be available to any party whose failure to perform any of its
obligations under this Agreement results in the failure of the Merger to
be consummated by such time.
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SECTION 8.02. EFFECT OF TERMINATION. In the event of a termination of this
Agreement by either the Company or Parent as provided in Section 8.01, this
Agreement shall forthwith become void and there shall be no liability or
obligation on the part of Parent, Sub or the Company or their respective
officers or directors, except with respect to any willful breach of any
representation, warranty, covenant or agreement contained in this Agreement
prior to such termination; and except that Section 6.05, this Section 8.02,
Article IX and the penultimate sentence of Section 6.02 shall continue in
effect.
SECTION 8.03. AMENDMENT. This Agreement may be amended by the parties
hereto, by action taken or authorized by their respective Boards of Directors
prior to the Effective Time, but no amendment shall be made which by law
requires further approval by the stockholders of Parent or the Company without
such further approval. This Agreement may not be amended except by an instrument
in writing signed on behalf of each of the parties hereto.
SECTION 8.04. EXTENSION; WAIVER. At any time prior to the Effective Time,
each of the parties hereto, by action taken or authorized by their respective
Boards of Directors, may, to the extent legally allowed, (i) extend the time for
the performance of any of the obligations or other acts of the other parties
hereto, (ii) waive any inaccuracies in the representations and warranties of the
other party contained herein or in any document delivered pursuant hereto and
(iii) waive compliance of the other party with any of the agreements or
conditions to its obligations contained herein. Any agreement on the part of the
party hereto to any such extension or waiver shall be valid only if set forth in
a written instrument signed on behalf of such party.
ARTICLE IX
MISCELLANEOUS
SECTION 9.01. SURVIVAL OF REPRESENTATIONS, WARRANTIES AND COVENANTS. The
representations and warranties and covenants of the Company set forth in
Sections 3.03 and 5.01 shall not terminate. The other representations and
warranties and the covenants of the Company in this Agreement and in any
instrument delivered pursuant to this Agreement shall survive for a period of
fifteen months after the Effective Time for purposes of the Escrow Agreement. No
representations or warranties of Parent or Sub shall survive the Effective Time.
SECTION 9.02. NOTICES. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties to this Agreement at the following
addresses (or at such other address for a party as shall be specified by like
notice):
(a) if to Parent or Sub, to
724 Solutions Inc.
4101 Yonge Street
Toronto, Ontario
Canada, M2P 1N6
Attention: Mr. Christopher Erickson
President and General Counsel
Telecopy: (416) 228-2456
with a copy to:
Ogilvy Renault
77 King Street West
Suite 2100, P.O. Box 141
Royal Trust Tower
Toronto-Dominion Centre
Toronto, Ontario
M5K 1H1
Attention: Brian A. Ludmer, Esq.
Telecopy: (416) 216-3930
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with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019-7475
Attention: Scott A. Barshay, Esq.
Telecopy: (212) 474-3700
(b) if to the Company, to
Tantau Software, Inc.
108 Wild Basin Road
Austin, TX 78746
Attention: Mr. John Reece
Vice President and Chief
Financial Officer
Telecopy: (512) 329-0167
with a copy to:
Brobeck, Phleger & Harrison LLP
4801 Plaza On the Lake
Austin, TX 78746
Attention: S. Michael Dunn, P.C.
Telecopy: (512) 330-4001
SECTION 9.03. DEFINITIONS. For purposes of this Agreement:
(a) an "affiliate" of any person means another person that directly or
indirectly, through one or more intermediaries, controls, is controlled
by, or is under common control with, such first person and, for purposes
of Section 3.10(e) only, shall include (i) any director or officer of
such person and (ii) any person owning 5% or more of the voting
securities of such person;
(b) "knowledge" of any person that is not an individual means the knowledge
of such person's executive officers after reasonable inquiry and
investigation.
(c) "material adverse effect" means, when used in connection with the
Company or Parent, any state of facts, change, effect, condition,
development, event or occurrence that has been, is or is reasonably
likely to be, materially adverse to the business, assets, financial
condition or results of operations of such party and its subsidiaries,
taken as a whole, other than any state of facts, change, effect,
condition, development, event or occurrence (A) arising directly as a
result of material changes in (1) general economic or business conditions
in the e commerce and m commerce software and applications development
market or (2) economic conditions in the United States generally or
(B) resulting from the announcement of this Agreement or the effects of
the pendency of the transactions contemplated by this Agreement;
(d) "person" means an individual, corporation, company, limited liability
company, partnership, joint venture, association, trust, unincorporated
organization or other entity; and
(e) a "subsidiary" of any person means another person, an amount of the
voting securities or other voting ownership or voting partnership
interests of which is sufficient to elect at least a majority of its
Board of Directors or other governing body (or, if there are no such
voting interests, more than 50% of the equity interests of which) is
owned directly or indirectly by such first person.
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<PAGE>
SECTION 9.04. ENTIRE AGREEMENT; NO THIRD-PARTY BENEFICIARIES; RIGHTS OF
OWNERSHIP. This Agreement (including the documents and the instruments referred
to herein) and the Confidentiality Agreement (a) constitute the entire agreement
and supersede all prior agreements and understandings, both written and oral,
among the parties with respect to the subject matter hereof and (b) except as
expressly set forth in Sections 6.04, 6.08 and 6.13 of this Agreement, are not
intended to confer upon any person other than the parties hereto any rights or
remedies hereunder.
SECTION 9.05. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK, REGARDLESS OF
THE LAWS THAT MIGHT OTHERWISE GOVERN UNDER APPLICABLE PRINCIPLES OF CONFLICTS OF
LAWS THEREOF.
SECTION 9.06. PUBLICITY. Except as otherwise required by law or the rules
of the TSE or the National Association of Securities Dealers, Inc., for so long
as this Agreement is in effect, neither the Company nor Parent shall issue or
cause the publication of any press release or other public announcement with
respect to the transactions contemplated by this Agreement without the consent
of the other party, which consent shall not be unreasonably withheld. The
parties hereto have agreed upon the form of a joint press release announcing the
execution of this Agreement and the transactions contemplated hereby.
SECTION 9.07. ASSIGNMENT. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by operation of law
(including by merger, amalgamation or consolidation) or otherwise by any of the
parties hereto without the prior written consent of the other parties, except
that Sub may assign, in its sole discretion, any or all of its rights, interests
and obligations hereunder to Parent or to any direct or indirect wholly owned
subsidiary of Parent; PROVIDED, HOWEVER, that prior to any such assignment,
Parent shall deliver to the Company a written opinion from Cravath, Swaine &
Moore to the effect that such assignment will not affect the Tax treatment of
the Merger contemplated by this Agreement. Subject to the preceding sentence,
this Agreement will be binding upon, inure to the benefit of and be enforceable
by the parties and their respective successors and permitted assigns.
SECTION 9.08. COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original and all of
which together shall be deemed to be a single agreement.
SECTION 9.09. EXHIBITS AND SCHEDULES; INTERPRETATION. The headings
contained in this Agreement or in any Exhibit or Schedule hereto and in the
table of contents to this Agreement are for reference purposes only and shall
not affect in any way the meaning or interpretation of this Agreement. All
Exhibits and Schedules annexed to this Agreement or referred to herein are
hereby incorporated in and made a part of this Agreement as if set forth in full
herein. Any capitalized terms used in any Schedule or Exhibit to this Agreement
but not otherwise defined herein, shall have the meaning as defined in this
Agreement. When a reference is made in this Agreement to a Section, Article,
Exhibit or Schedule, such reference shall be to a Section or Article of, or an
Exhibit or Schedule to, this Agreement unless otherwise indicated. For all
purposes hereof, (a) the words "include", "includes" and "including" shall be
deemed followed by the words "without limitation", (b) the words "hereof",
"herein" and "hereunder" and words of similar import when used in this Agreement
shall refer to this Agreement as a whole and not to any particular provision of
this Agreement and (c) the word "extent" in the phrase "to the extent" shall
mean the degree to which a subject or other thing extends, and such phrase shall
not simply mean "if".
SECTION 9.10. CONSENT TO JURISDICTION. Each of the parties hereto
irrevocably and unconditionally submits to the exclusive jurisdiction of
(a) the New York State court sitting in New York, New York and (b) the United
States District Court for the Southern District of New York, for the purposes of
any suit, action or other proceeding arising out of this Agreement or any
transaction
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contemplated hereby (and each agrees that no such action, suit or proceeding
relating to this Agreement shall be brought by it or any of its affiliates
except in such courts). Each of the parties hereto further agrees that service
of any process, summons, notice or document by U.S. registered mail to such
person's respective address set forth above shall be effective service of
process for any action, suit or proceeding in New York with respect to any
matters to which it has submitted to jurisdiction as set forth above in the
immediately preceding sentence. Each of the parties hereto irrevocably and
unconditionally waives (and agrees not to plead or claim) any objection to the
laying of venue of any action, suit or proceeding arising out of this Agreement
or the transactions contemplated hereby in (a) any New York State court sitting
in New York, New York or (b) the United States District Court for the Southern
District of New York, or that any such action, suit or proceeding brought in any
such court has been brought in an inconvenient forum.
SECTION 9.11. WAIVER OF JURY TRIAL. Each party hereto hereby waives, to
the fullest extent permitted by applicable law, any right it may have to a trial
by jury in respect of any Litigation directly or indirectly arising out of,
under or in connection with this Agreement. Each party hereto (a) certifies that
no representative, agent or attorney of any other party has represented,
expressly or otherwise, that such party would not, in the event of any such
Litigation, seek to enforce the foregoing waiver and (b) acknowledges that it
and the other parties hereto have been induced to enter into this Agreement, by,
among other things, the mutual waiver and certifications in this Section 9.11.
SECTION 9.12. ENFORCEMENT. The parties hereto agree that irreparable
damage would occur in the event that any of the provisions of this Agreement
were not performed in accordance with their specific terms or were otherwise
breached. It is accordingly agreed that the parties hereto shall be entitled to
an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions of this Agreement in the United
States District Court for the Southern District of New York or in any New York
State court sitting in New York, New York, this being in addition to any other
remedy to which they are entitled at law or in equity.
IN WITNESS WHEREOF, Parent, Sub and the Company have caused this Agreement
to be signed by their respective officers thereunto duly authorized as of the
date first written above.
<TABLE>
<S> <C> <C>
724 SOLUTIONS INC.
By: /s/ CHRISTOPHER ERICKSON
-----------------------------------------
Name: Christopher Erickson
Title: President
SATURN MERGER SUB, INC.
By: /s/ CHRISTOPHER ERICKSON
-----------------------------------------
Name: Christopher Erickson
Title: President
TANTAU SOFTWARE, INC.
By: /s/ JOHN REECE
-----------------------------------------
Name: John Reece
Title: Vice President and
Chief Financial Officer
</TABLE>
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EXHIBIT A
FORM OF RESALE RESTRICTION AGREEMENT
[SET FORTH AS ANNEX C TO THE INFORMATION STATEMENT/PROSPECTUS]
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<PAGE>
EXHIBIT B
FORM OF INDEMNIFICATION AND ESCROW AGREEMENT
[SET FORTH AS ANNEX D TO THE INFORMATION STATEMENT/PROSPECTUS]
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EXHIBIT D
FORM OF REGISTRATION RIGHTS AGREEMENT
[FILED AS EXHIBIT 10.11 TO REGISTRATION STATEMENT
OF WHICH THIS INFORMATION STATEMENT/PROSPECTUS FORMS A PART]
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ANNEX B
FORM OF VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") is entered into as of - ,
2000 by and between 724 Solutions Inc., a corporation amalgamated under the laws
of Ontario ("Parent"), and the undersigned shareholder (the "Shareholder") of
Tantau Software, Inc., a Delaware Corporation (the "Company").
RECITALS
A. This Agreement is entered into in connection with the Agreement and Plan
of Merger, dated as of November 29, 2000, among Parent, the Company and Saturn
Merger Sub, Inc., a Delaware corporation and a wholly owned subsidiary of Parent
("Saturn Merger Sub"), as the same may be amended (the "Merger Agreement"),
pursuant to which Saturn Merger Sub will be merged with and into the Company.
Capitalized terms used in this Agreement and not otherwise defined herein shall
have the meanings ascribed to them in the Merger Agreement.
B. Shareholder is the registered and beneficial owner of such number of
shares of Company Capital Stock as is indicated on the signature page of this
Agreement under the heading "Total Number of Shares of Company Capital Stock
Owned on the Date Hereof" (such shares, together with any other shares of
Company Capital Stock acquired by the Shareholder after the date hereof and
during the term of this Agreement (including through the exercise of any stock
options, warrants or similar instruments) being collectively referred to as the
"Shares") and the Shareholder desires to make the Shares subject to the terms of
this Agreement.
C. Pursuant to the Merger Agreement, at the Effective Time, each
outstanding share of Company Capital Stock will, subject to
Section 2.01(c)(ii) of the Merger Agreement, be converted into the right to
receive a number of fully paid and nonassessable common shares, no par value, of
Parent (the "Parent Common Stock") equal to the Common Exchange Ratio, and cash
in lieu of any fractional shares thereof.
D. Shareholder is entering into this Agreement as a material inducement to,
and in consideration of, Parent's willingness to enter into the Merger
Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the promises and the mutual agreements,
provisions and covenants set forth in the Merger Agreement and in this
Agreement, it is hereby agreed as follows:
1. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDER. The Shareholder hereby
represents and warrants to Parent as of the date hereof in respect of himself,
herself or itself as follows:
(a) AUTHORITY; EXECUTION AND DELIVERY; ENFORCEABILITY. The Shareholder has
all requisite power and authority to execute this Agreement and to
consummate the transactions contemplated hereby. The Shareholder has duly
executed and delivered this Agreement, and this Agreement constitutes the
legal, valid and binding obligation of the Shareholder, enforceable
against the Shareholder in accordance with its terms. The execution and
delivery by the Shareholder of this Agreement do not, and the
consummation of the transactions contemplated hereby and compliance with
the terms hereof will not, result in any breach of or constitute a
default (or an event that with notice or lapse of time or both would
become a default) under, or give to others any right to terminate, amend,
accelerate or cancel any right or obligation under, or result in the
creation of any lien or encumbrance on any Shares pursuant to, any note,
bond,
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mortgage, indenture, contract, agreement, lease, license, permit,
franchise or other instrument or obligation to which such Shareholder is
a party or by which such Shareholder or the Shares are bound. If the
Shareholder is a natural person and is married and the Shares constitute
community property of the Shareholder or otherwise need spousal or other
approval for this Agreement to be legal, valid and binding, this
Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, the Shareholder's spouse,
enforceable against such spouse in accordance with its terms.
(b) THE SHARES. The Shareholder is the record holder of and beneficial
owner of, or is the trustee of a trust that is the record holder of, and
whose beneficiaries are the beneficial owners of, and has good and
marketable title to, the Shares, free and clear of any liens, claims,
options, charges or other encumbrances other than repurchase rights in
favor of the Company for unvested shares. The Shareholder does not own,
of record or beneficially, any outstanding shares of Company Capital
Stock other than the Shares. The Shareholder has the sole right to vote
the Shares, and except as contemplated by this Agreement, none of the
Shares is subject to any voting trust or other agreement, arrangement or
restriction with respect to the voting of such Shares.
2. AGREEMENT TO RETAIN SHARES. Shareholder agrees not to directly or
indirectly offer, sell, assign, transfer, encumber, pledge, contract to sell,
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or otherwise dispose
of (including by gift), any Shares or any securities convertible into or
exercisable or exchangeable for Shares or publicly disclose the intention to
make any such offer, sale, assignment, transfer, pledge, grant or disposal
("Transfer"), or deposit any Shares into a voting trust or grant a proxy or
enter into an agreement of any kind with respect to the voting of any Shares,
other than pursuant to the Proxy (as defined in Section 4) at any time prior to
the Expiration Date (as defined in the Proxy).
3. AGREEMENT TO VOTE SHARES. Prior to the earlier to occur of (i) the
Effective Time of the Merger, and (ii) termination of the Merger Agreement, at
every meeting of the shareholders of the Company called with respect to any of
the following, and at every adjournment thereof, and on every action or approval
by written resolution of the shareholders of the Company with respect to any of
the following, Shareholder shall vote all Shares in favor of approval and
adoption of the Merger Agreement and the Merger and any matter that could
reasonably be expected to facilitate the Merger.
4. IRREVOCABLE PROXY. Contemporaneously with the execution of this
Agreement, Shareholder is delivering to Parent a duly executed proxy in the form
attached hereto as EXHIBIT A (the "Proxy") with respect to each and every
meeting of the shareholders of the Company or action or approval by written
resolution of the shareholders of the Company prior to the Expiration Date
relating to the approval and adoption of the Merger Agreement and the Merger and
the other matters covered by this Agreement, such Proxy to cover all Shares in
respect of which Shareholder is entitled to vote at any such meeting or in
connection with any such written consent.
5. NO SOLICITATION. Until the Expiration Date, Shareholder will not (and
will use Shareholder's best efforts to cause the Company, its affiliates,
officers, directors and employees and any investment banker, attorney,
accountant or other agent retained by Shareholder or them, not to):
(i) initiate or solicit, directly or indirectly, any proposal, plan or offer to
acquire all or any substantial part of the business or properties or capital
stock of the Company, whether by merger, purchase of assets, tender offer or
otherwise, or to liquidate the Company or otherwise distribute to the
shareholders of the Company all or any substantial part of the business,
properties or capital stock of the Company (each, an "Acquisition Proposal");
(ii) initiate, directly or indirectly, any contact with any person in an effort
to or with a view towards soliciting any Acquisition Proposal; (iii) furnish
non-public information concerning the Company's business, properties or assets
to any corporation, partnership, person or other entity or group (other than
Parent, or any associate, agent or representative of Parent) under any
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circumstances that could reasonably be expected to result in an Acquisition
Proposal; or (iv) negotiate or enter into discussions or an agreement, directly
or indirectly, with any entity or group with respect of any potential
Acquisition Proposal. In the event Shareholder shall receive or become aware of
any Acquisition Proposal subsequent to the date hereof, Shareholder shall
promptly inform Parent as to any such matter and the details thereof.
6. AFFILIATE AGREEMENT. If, at the time the Merger Agreement is submitted
for adoption by the shareholders of the Company, the Shareholder is an
"affiliate" of Target for purposes of Rule 145 under the Securities Act, the
Shareholder shall deliver to Parent at or prior to the Closing a written
agreement substantially in the form attached as Exhibit C to the Merger
Agreement.
7. ADDITIONAL DOCUMENTS; PRIOR AGREEMENTS. Shareholder hereby covenants and
agrees to execute and deliver any additional documents necessary or desirable,
in the reasonable opinion of Parent, to carry out the purpose and intent of this
Agreement. Shareholder also agrees that all the shares of Parent Common Stock
issued in the Merger (including any cash paid in lieu of fractional shares)
shall be deemed to satisfy all rights pertaining to the Company Capital Stock
and any other rights or agreements relating thereto shall be of no further force
or effect, except as otherwise contemplated by the Merger Agreement.
8. CONFIDENTIALITY. Shareholder agrees (i) to hold any information
regarding this Agreement and the Merger in strict confidence, and (ii) not to
divulge any such information to any third person, until such time as the Merger
has been publicly disclosed by Parent or Shareholder is legally compelled to
disclose such information.
9. MISCELLANEOUS.
(a) AMENDMENT AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of
a written agreement executed by the parties hereto.
(b) ASSIGNMENT. This Agreement will be binding upon, and inure to the
benefit of, the persons or entities who are permitted, by the terms of
this Agreement, to be successors, assigns, transferees and personal
representatives of the respective parties hereto.
(c) COSTS OF ENFORCEMENT. If any party to this Agreement seeks to enforce
its rights under this Agreement by legal proceedings or otherwise, the
non-prevailing party will pay all costs and expenses incurred by the
prevailing party, including, without limitation, all reasonable
attorneys' and experts' fees.
(d) COUNTERPART EXECUTION; FACSIMILE DELIVERY. This Agreement may be
executed in several counterparts and delivered by facsimile, each of
which shall be an original, but all of which together shall constitute
one and the same agreement.
(e) EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this
Agreement.
(f) ENTIRE AGREEMENT. This Agreement and the exhibits hereto contains the
entire understanding of the parties in respect of the subject matter
hereof, and supersede all prior negotiations and understandings between
the parties with respect to such subject matter.
(g) GOVERNING LAW. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the laws of the State of New
York, without regard to conflict of laws. Each of the parties hereto
irrevocably consents to the jurisdiction of any court located within the
State of New York or the State of New York, in connection with any matter
based upon or arising out of this Agreement or the matters contemplated
herein, agrees that process may be served upon them in any manner
authorized by the laws of the State of New York for
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<PAGE>
such persons and waives and covenants not to assert or plead any
objection that they might otherwise have to such jurisdiction and such
process. EACH OF THE PARTIES IRREVOCABLY WAIVES THE RIGHT TO A JURY TRIAL
IN CONNECTION WITH ANY LEGAL PROCEEDING RELATING TO THIS AGREEMENT AND
THE OTHER TRANSACTION AGREEMENTS OR THE ENFORCEMENT OF ANY PROVISION OF
THIS AGREEMENT OR OTHER TRANSACTION AGREEMENTS.
(h) NOTICES. All notices, requests, demands or other communications that
are required or may be given pursuant to the terms of this Agreement
shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by registered or certified mail, postage
prepaid, as follows:
IF TO THE SHAREHOLDER, at the address set forth below the
Shareholder's signature at the end hereof.
with a copy to:
Brobeck, Phleger & Harrison LLP
4801 Plaza on the Lake
Austin, TX 78746
Attn: S. Michael Dunn, Esq.
Fax: (512) 330-4001
Phone: (512) 330-4030
IF TO PARENT:
724 Solutions Inc.
4101 Yonge Street, Suite 702
Toronto, Ontario M2P 1N6
Canada
Attn: Jay Howard, Legal Counsel
Fax: (416) 228-8199
Phone: (416) 226-2900
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019-7475
Attn: Scott A. Barshay, Esq.
Fax: (212) 474-3700
Phone: (212) 474-1000
and
Oglivy Renault
Suite 2100, P. O. Box 141
Royal Trust Tower, TD Centre
Toronto, Ontario M5K 1H1
Attn: Brian Ludmer
Fax: (416) 216-3930
Phone: (416) 216-4000
IF TO THE COMPANY:
Tantau Software, Inc.
108 Wild Basin Road, Suite 110
Austin, TX 78746
Attn: John Sims, CEO
Fax: (512) 329-0167
Phone: (512) 306-4201
B-4
<PAGE>
with a copy to:
Brobeck, Phleger & Harrison LLP
4801 Plaza on the Lake
Austin, TX 78746
Attn: S. Michael Dunn, Esq.
Fax: (512) 330-4001
Phone: (512) 330-4030
or to such other address as any party hereto may designate for itself by
notice given as herein provided.
(i) SEVERABILITY. If any provision of this Agreement is held to
be unenforceable for any reason, such provision and all other related
provisions shall be modified rather than voided, if possible, in order to
achieve the intent of the parties to this Agreement to the extent
possible. In any event, all other unrelated provisions of this Agreement
shall be deemed valid and enforceable to the full extent.
(j) SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto
acknowledge that Parent will be irreparably harmed and that there will be
no adequate remedy at law for a violation of any of the covenants or
agreements of Shareholder set forth herein. Therefore, it is agreed that,
in addition to any other remedies that may be available to Parent upon
any such violation, Parent shall have the right to enforce such covenants
and agreements by specific performance, injunctive relief or by any other
means available to Parent at law or in equity and the Shareholder hereby
waives any and all defenses which could exist in its favor in connection
with such enforcement and waives any requirement for the security or
posting of any bond in connection with such enforcement.
(k) TERMINATION. This Agreement shall terminate upon the
earlier to occur of (i) the Effective Time of the Merger and (ii) the
termination of the Merger Agreement in accordance with its terms.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
724 SOLUTIONS INC.
By: __________________________________
Its
SHAREHOLDER:
______________________________________
Name:
Address: _____________________________
________________________________
________________________________
Fax: _________________________________
SPOUSE OF SHAREHOLDER
(if an individual):
______________________________________
Name:
Address: _____________________________
________________________________
________________________________
Fax: _________________________________
Total Number of Shares of Company Capital Stock Owned on the Date Hereof:
<TABLE>
<CAPTION>
<S> <C>
Company Common Stock:
--------------------------------------------------------
Series A Preferred Stock:
--------------------------------------------------------
Series B Preferred Stock:
--------------------------------------------------------
State or Country of Residence:
--------------------------------------------------------
</TABLE>
[SIGNATURE PAGE TO VOTING AGREEMENT]
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<PAGE>
EXHIBIT A
IRREVOCABLE PROXY TO VOTE STOCK OF TANTAU SOFTWARE, INC.
The undersigned shareholder of Tantau Software, Inc., a Delaware corporation
(the "Company"), hereby irrevocably (to the fullest extent permitted by Delaware
General Corporation Law) appoints the members of the Board of Directors of
724 Solutions Inc., a corporation amalgamated under the laws of Ontario
("Parent"), and each of them, or any other designee of Parent, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the fullest extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Company that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of the Company issued or issuable in respect thereof on or
after the date hereof (collectively, the "Shares") in accordance with the terms
of this Irrevocable Proxy until the Expiration Date (as defined below). The
Shares beneficially owned by the undersigned shareholder of the Company as of
the date of this Irrevocable Proxy are listed on the final page of this
Irrevocable Proxy. Upon the undersigned's execution of this Irrevocable Proxy,
any and all prior proxies given by the undersigned with respect to any Shares
are hereby revoked and the undersigned agrees not to grant any subsequent
proxies with respect to the Shares until after the Expiration Date.
This Irrevocable Proxy is irrevocable (to the fullest extent provided in the
Delaware General Corporation Law), is coupled with an interest, including, but
not limited to, that certain Voting Agreement dated as of even date herewith by
and among Parent and the undersigned, and is granted in consideration of Parent
entering into that certain Agreement and Plan of Merger, among Parent, the
Company and Saturn Merger Sub, Inc., a Delaware corporation and wholly owned
subsidiary of Parent ("Merger Sub"), as may be amended (the "Merger Agreement"),
which agreement provides for the merger of Merger Sub with and into the Company
(the "Merger"). As used herein, the term "Expiration Date" shall mean the
earlier to occur of (i) such date and time as the Merger shall become effective
in accordance with the terms and provisions of the Merger Agreement, and
(ii) the date of termination of the Merger Agreement.
The attorneys and proxies named above, and each of them are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date, to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting and other rights of the undersigned with respect to the
Shares (including, without limitation, the power to execute and deliver written
consents pursuant to the Delaware General Corporation Law), at every annual,
special or adjourned meeting of the stockholders of the Company and in every
written consent in lieu of such meeting as follows: (a) in favor of approval of
the Merger and the Merger Agreement and the transactions contemplated thereby
and (b) in favor of any matter that could reasonably be expected to facilitate
the Merger.
The attorneys and proxies named above may not exercise this Irrevocable
Proxy on any other matter except as provided above. The undersigned stockholder
may vote the Shares on all other matters.
All authority herein conferred shall survive the death or incapacity of the
undersigned and any obligation of the undersigned hereunder shall be binding
upon the heirs, personal representatives, successors and assigns of the
undersigned.
[SIGNATURE PAGE FOLLOWS]
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<PAGE>
This Irrevocable Proxy is coupled with an interest as aforesaid and is
irrevocable.
Dated: December - , 2000
SHAREHOLDER:
________________________________________
Name:
Address: _______________________________
_________________________________
_________________________________
Fax: ________________________________
Total Number of Shares of Company Capital Stock beneficially owned on the date
hereof:
<TABLE>
<S> <C>
Company Common Stock:
------------------------------------------------------------
Series A Preferred Stock:
------------------------------------------------------------
Series B Preferred Stock:
------------------------------------------------------------
State or Country of Residence:
------------------------------------------------------------
</TABLE>
[SIGNATURE PAGE TO IRREVOCABLE PROXY]
B-8
<PAGE>
ANNEX C
FORM OF RESALE RESTRICTION AGREEMENT
THIS RESALE RESTRICTION AGREEMENT (this "Agreement") is entered into as of
- , 2000 by and between 724 Solutions Inc., a corporation amalgamated
under the laws of Ontario ("Parent"), and the undersigned ("Holder").
RECITALS
A. This Agreement is entered into in connection with the Agreement and Plan
of Merger, dated as of November 29, 2000, among Parent, Tantau Software, Inc., a
Delaware corporation (the "Company"), and Saturn Merger Sub, Inc., a Delaware
corporation and a wholly owned subsidiary of Parent ("Merger Sub") (as the same
may be amended, the "Merger Agreement"), pursuant to which Merger Sub will be
merged with and into the Company. Capitalized terms used in this Agreement and
not otherwise defined herein shall have the meanings ascribed to them in the
Merger Agreement.
B. Holder holds, and/or has options to acquire, shares of Company Capital
Stock or other securities or contractual rights representing the right to
acquire or subscribe for or which are exercisable for or convertible into or
exchangeable for shares of Company Capital Stock (collectively, "Company
Securities").
C. Pursuant to the Merger Agreement, at the Effective Time, each
outstanding share of Company Capital Stock will, subject to
Section 2.01(c)(ii) of the Merger Agreement, be converted into the right to
receive a number of fully paid and non-assessable shares of Parent Common Stock,
equal to the Common Exchange Ratio (the shares of Parent Common Stock issued to
Holder in connection with the Merger being referred to herein as the "Merger
Shares") and cash in lieu of any fractional shares thereof. All options to
purchase shares of Company Common Stock then outstanding under the Company Stock
Plan or granted outside the Company Stock Plan (the "Stock Options") will be
assumed by Parent (as such, the "Assumed Options").
D. The Merger Shares and the shares of Parent Company Stock issued upon the
exercise of Assumed Options will be subject to contractual transfer
restrictions, including a lock-up. Additionally, certain of such Merger Shares
and certain of the Assumed Options and certain of the shares of Parent Common
Stock issued upon exercise thereof will be subject to an escrow or cancellation,
as applicable, as security for Holder's indemnity obligations under an
Indemnification and Escrow Agreement to be entered by Parent, the Company, an
escrow agent to be named therein and the Representative (as defined therein),
which agreement will be in the form attached as Exhibit B to the Merger
Agreement (the "Escrow Agreement").
E. Holder is entering into this Agreement as a material inducement to, and
in consideration of, Parent's willingness to consummate the transactions
contemplated by the Merger Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the mutual promises, representations,
warranties, covenants and conditions set forth in this Agreement, the parties
mutually agree as follows:
1. REPRESENTATIONS, WARRANTIES AND COVENANTS. Holder hereby represents,
warrants and covenants to Parent as follows:
(a) OWNERSHIP OF TITAN SECURITIES. Holder now owns and will own immediately
prior to the Effective Time (including shares held both beneficially and
of record and shares held either beneficially or of record) such number
of shares of Company Capital Stock and/or such
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<PAGE>
number of Stock Options or other Company Securities as is set forth on
SCHEDULE 1. Holder does not directly or indirectly own, either
beneficially or of record, any shares of Company Capital Stock or rights
to purchase or acquire or otherwise receive any shares of Company Capital
Stock or Stock Options or other Company Securities, whether vested,
unvested or subject to any other contingency, other than the shares of
Company Capital Stock and/or Stock Options and/or other Company
Securities listed on SCHEDULE 1.
(b) ABSENCE OF LIENS AND ENCUMBRANCES. Except as provided on SCHEDULE 1
attached hereto, the shares of Company Capital Stock and/or the Stock
Options and/or other Company Securities owned or held by Holder
(including securities held both beneficially and of record and securities
held either beneficially or of record) are now and at the Effective Time
will be free and clear of all liens and encumbrances or third party
rights of any kind, other than repurchase rights in favor of the Company
with respect to unvested shares. None of the liens or encumbrances or
other rights listed on SCHEDULE 1 will prevent, delay, alter or otherwise
interfere with the transactions contemplated by the Merger Agreement or
this Agreement or result in any cost (other than pursuant to the exercise
of any repurchase right) to the Company, Parent, Merger Sub or the
Surviving Corporation (collectively, an "Impeding Right"). Prior to
Closing, Holder shall obtain any such lien or other right-holder's (other
than the Company, Parent or Merger Sub) agreement in writing (in form and
content satisfactory to Parent, in its discretion but acting reasonably
and in good faith) to be bound by the terms of this Agreement and the
Merger Agreement and Escrow Agreement, or in the absence of such written
agreement, Holder shall discharge the liens and third party rights prior
to Closing.
(c) AUTHORITY, ENFORCEABILITY.
(i) Holder has the authority, legal capacity and financial capability to
enter into, execute, deliver and perform Holder's obligations under
this Agreement (including, without limitation, the waiver and/or
discharge of the third party liens or other rights required above).
This Agreement constitutes a valid and binding obligation of Holder
enforceable against Holder in accordance with its terms, subject to
laws of general application relating to bankruptcy, insolvency,
reorganization, moratorium, and other similar laws and equitable
principles relating to or limiting creditors' rights generally and
general equity principles.
(ii) Holder (if not an individual) has, prior to the execution of this
Agreement, delivered to Parent a Certificate of Trust, if Holder is
a trust, or an Incumbency and Corporate Authority Certificate if
Holder is a corporate entity or partnership (in the forms attached
as Exhibits 1 and 2 hereto, respectively), certifying that Holder
has the authority and power to execute this Agreement and the
individual executing this Agreement has the authority to do so on
Holder's behalf; provided that notwithstanding the above, in the
event Parent has a reasonable belief that such certificate is
materially untrue or contains a material misstatement of fact,
Parent may demand additional reasonable evidence from such Holder
as to such authority.
(iii) The execution, delivery, and performance of this Agreement by
Holder will not violate any other agreement to which Holder is a
party, other than any violation that would not result in an
Impeding Right. No consent, approval, authorization, order,
registration or qualification of or by any person is required in
connection with the execution, delivery and performance of this
Agreement by Holder or the consummation of the transactions
contemplated hereby, other than any consent, approval,
authorization, order, registration or qualification that would not
result in an Impeding Right.
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<PAGE>
(iv) If Holder is a natural person and is married, and the Merger Shares
or Assumed Options or the shares of Parent Common Stock issued upon
the exercise thereof do or will constitute community property, this
Agreement has been duly authorized, executed and delivered by, and
constitutes a valid and binding agreement of, Holder's spouse,
enforceable against such person in accordance with its terms,
subject to laws of general application relating to bankruptcy,
insolvency, reorganization, moratorium, and other similar laws and
equitable principles relating to or limiting creditors' rights
generally and general equity principles.
(v) Holder has not, at any time, taken or been the subject of any action
that may have an adverse effect on Holder's ability to comply with
or perform Holder's covenants or obligations under this Agreement.
(vi) There is no private or governmental action, suit, proceeding,
claim, arbitration or investigation (collectively, a "Proceeding")
pending, and no person has threatened to commence any Proceeding,
that may have an adverse effect on the ability of Holder to either
comply with or perform his covenants or obligations under this
Agreement. To the knowledge of Holder, no event has occurred, and
no claim, dispute or other condition or circumstance exists, that
might reasonably be expected to directly or indirectly give rise
to, or serve as a basis for, the commencement of any such
Proceeding.
(d) MERGER AGREEMENT; DISCLOSURE DOCUMENTS. Holder has received and
carefully reviewed copies of the Merger Agreement, together with all
exhibits and schedules thereto (including the Escrow Agreement), and has
had the opportunity to discuss such Agreement and exhibits and schedules
with counsel and other advisors.
(e) ABSENCE OF CERTAIN CLAIMS. Holder hereby represents and warrants that
holder does not currently have and represents, warrants, covenants and
agrees that, effective at the Effective Time of the Merger, Holder will
not have (with the exception of Holder's right of appraisal under
applicable corporate law) any claims, demands, damages, actions, causes
of action, suits or proceedings, fixed or contingent, matured or
unmatured, of whatever nature, character, type or description that have
been or in the future might be asserted by Holder (or by any other person
as successor to Holder) against the Company, or any of its predecessors,
successors or assigns, any past or present, direct or indirect, partner,
subsidiary, or affiliated entity or corporation, or any past or present
employee, agent, representative, attorney, officer, director or
stockholder of the Company acting in its capacity as such an employee,
agent, representative, attorney, officer, director or stockholder.
2. TRANSFER RESTRICTIONS.
(a) Holder may not, directly or indirectly:
(i) sell, assign, transfer, encumber, pledge, contract to sell, sell any
option or contract to purchase, purchase any option or contract to
sell, grant any option, right or warrant to purchase, lend, or
otherwise dispose of;
(ii) offer or publicly disclose the intention to make any such offer,
sale, assignment, transfer, pledge, grant or disposal of;
(including, in the case of investment funds, the distribution of
assets of the fund to its members, participants, managers, owners
or other stakeholders):
(iii) exercise any or all rights to request or demand registration
pursuant to the Securities Act of 1933, as amended, except to the
extent expressly permitted under the Registration Rights Agreement
to be entered into between Parent and certain of its stockholders
in connection with the transactions contemplated by the Merger
Agreement, which
C-3
<PAGE>
agreement will be substantially in the form of Exhibit G to the
Merger Agreement (the "Registration Rights Agreement"), of;
(iv) sell under a prospectus, registration statement or similar offering
document, except to the extent expressly permitted under the
Registration Rights Agreement, any of; or
(v) enter into any swap, hedge, loan, securitization or other
arrangement (collectively, a "Hedge") that transfers to another, in
whole or in part, any of the economic consequences of ownership of,
(collectively, "Transfer") any Company Securities or the Merger Shares or
any shares of Parent Common Stock issued or issuable upon the exercise of
Assumed Options, or Hedge the Holder's interest in any shares of Parent
Common Stock underlying options to purchase shares of Parent Common Stock
which may be granted to Holder, unless the resale restrictions under this
SECTION 2 have been released or complied with, whether any such Transfer
is to be settled by delivery of Company Securities, shares of Parent
Common Stock, such other securities, in cash or otherwise.
Notwithstanding the foregoing, Holder may Transfer such Merger Shares or
shares of Parent Common Stock issued upon the exercise of Assumed
Options: (i) if required by court order or by operation of law or in
connection with the settlement of Holder's estate; (ii) to an immediate
family member; (iii) to a trust solely controlled by and solely for the
benefit of Holder and/or members of Holder's immediate family solely for
tax or estate planning purposes (a "Qualifying Trust"), so long as such
trust remains a Qualifying Trust; or (iv) to any corporation,
partnership, limited liability company or other entity that, directly or
indirectly, is wholly-owned by Holder together with members of Holder's
immediate family and is wholly-controlled by Holder (a "Qualifying
Entity"), so long as such entity remains a Qualifying Entity; provided
that each transferee in respect of items (i), (ii), (iii) and
(iv) agrees in writing to assume all the obligations of Holder under this
Agreement, the Merger Agreement and the Escrow Agreement (for greater
certainty, without releasing or reducing in any way the Holder's
obligation to ensure compliance with this Agreement, the Merger Agreement
and the Escrow Agreement). In addition, Holder may Transfer up to
one-half of the Merger Shares received by Holder and up to one-half of
all shares of Parent Common Stock issued pursuant to the Assumed Options
held by Holder to his or her ex-spouse (or, if such Holder is a trust, to
the ex-spouse of an affiliate of such Holder) pursuant to a valid,
court-approved divorce decree or in connection with a valid and
enforceable divorce settlement (provided, that for purposes of this
Agreement a divorce settlement shall be deemed to be valid and
enforceable upon filing with the applicable court), provided that such
transferee agrees in writing to assume all obligations of Holder under
this Agreement, the Merger Agreement and the Escrow Agreement with
respect to all Merger Shares and other shares of Parent Common Stock so
Transferred. None of the above provisions shall be deemed to prohibit
Holder from exercising an option or a warrant to purchase shares of
Parent Common Stock.
(b) RESALE RESTRICTIONS. Holder shall not Transfer any Merger Shares or any
shares of Parent Common Stock issued upon the exercise of Assumed Options
or Hedge the Holder's interest in any shares of Parent Common Stock
underlying options to purchase shares of Parent Common Stock which may be
granted to Holder until after the 18 Month Reference Date (as defined
below) ("Resale Restriction"), provided that portions of Holder's Share
Consideration (as defined herein) shall be released from this Resale
Restriction over time as provided in this section 2(b) (subject to
earlier release in accordance with section 2(d)) and Holder shall be
entitled to Transfer a maximum of:
(i) 15% of the sum of (x) the number of Merger Shares issued to Holder
at the Effective Time (which number includes the portion of Holder's
Merger Shares that are held in
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<PAGE>
escrow as security for Holder's indemnity obligations under the
Escrow Agreement), (y) if applicable, the number of shares of Parent
Common Stock issued to Holder upon the exercise of Assumed Options,
and (z) if applicable, the number of shares of Parent Common Stock
that may be issued to Holder upon the exercise of then vested but
unexercised Assumed Options (the sum of these items being referred
to herein as "Share Consideration") after the day which is three
months from the Effective Time (the "Three Month Reference Date");
(ii) (subject to adjustment in accordance with section 2(d)) an
additional 15% of Holder's Share Consideration after the day which
is six months from the Effective Time (the "Six Month Reference
Date");
(iii) (subject to adjustment in accordance with section 2(d)) an
additional 15% of Holder's Share Consideration after the day which
is nine months from the Effective Time (the "Nine Month Reference
Date");
(iv) (subject to adjustment in accordance with section 2(d)) an
additional 15% of Holder's Share Consideration after the day which
is 12 months from the Effective Time (the "12 Month Reference
Date");
(v) (subject to adjustment in accordance with section 2(d)) an
additional 20% of Holder's Share Consideration after the day which
is 15 months from the Effective Time (the "15 Month Reference
Date"); and
(vi) (subject to adjustment in accordance with section 2(d)) the final
20% of Holder's Share Consideration after the day which is
18 months from the Effective Time (the "18 Month Reference Date").
The number of Merger Shares and the number of shares of Parent Common
Stock issued upon the exercise of Assumed Options that Holder may
Transfer at any time in accordance with this section 2(b) shall include
all Merger Shares and shares of Parent Common Stock issued or issuable
upon the exercise of vested Assumed Options previously made available for
Transfer by this section 2(b) and not yet Transferred by Holder.
(c) MAJOR STOCKHOLDERS SCHEDULE. At the Effective Time, Parent shall be
required to deliver to the Shareholders' Agent (as defined below) a
schedule certified by Parent's Chief Financial Officer (a "Schedule")
setting forth, as at the date of the Schedule, with respect to Blue Sky
Capital Corporation, Bank of Montreal, Bank of America Corporation,
Citigroup Inc. and Sonera Corporation (and in each case, their respective
subsidiaries other than broker-dealer, investment or securities dealer
and similar entities) (collectively, the "Major Stockholders"),
individually and in the aggregate: (I) the number of shares of Parent
Common Stock beneficially owned by such Major Shareholders; (II) whether
any such shares of Parent Common Stock have been Hedged; and
(III) whether any such holding has been offset wholly or partially by the
purchase of any option or contract to sell or the grant of any option,
right or warrant to purchase, and, if so, the extent of such offset. For
the avoidance of doubt, the number of Parent Shares beneficially owned by
any of the Major Stockholders shall not include any Parent Shares held by
such Majority Stockholder or any subsidiary thereof, including without
limitation, any such subsidiary which is a broker-dealer, investment or
securities dealer or similar entity, in respect of which such Major
Stockholder or subsidiary (i) is noted as the holder of record of such
Parent Shares and does not have any beneficial ownership interest
therein, or (ii) is holding such Parent Shares as collateral security for
the payment, performance or discharge of any debt, liability or
obligation (direct or indirect, contingent or otherwise) made in good
faith. The aggregate amount by which the collective ownership of the
Major Stockholders as at the Effective Time (item (I) above) exceeds the
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<PAGE>
aggregate number of shares indicated with respect to items (II) and
(III) above on the Schedule delivered at the Effective Time is
hereinafter referred to as the "Baseline Major Stockholder Position" and
such net result with respect to any other Schedule is hereinafter
referred to as the "Net Position of the Major Stockholders" as at the
current date of the particular Schedule in question. Parent shall also be
required to deliver to the Shareholders' Agent an updated Schedule in
respect of the Major Stockholders' holdings of shares of Parent Common
Stock within five business days after the Three Month Reference Date
(with information current to the Three Month Reference Date), and monthly
(within five business days of the date to which the Schedule is made up)
thereafter until the 18 Month Reference Date. For purposes of assembly of
the information to be disclosed on a Schedule, Parent shall use its
reasonable best efforts to obtain such information from responsible
officials of the Major Stockholders, but shall not be liable in any way
for any inaccuracy in any Schedule (unless caused by the willful
misconduct or bad faith of Parent). All such Schedules shall be
accompanied by a statement by Parent of the applicability of
section 2(d), if any, to the Schedule then being delivered, together with
details (if applicable) of the effect of such application. In addition,
Parent shall deliver a Schedule, for informational purposes only (for
greater certainty without application to Section 2(d)) within five
business days of the end of the first and second monthly periods after
the Effective Time. For avoidance of doubt, the Baseline Major
Stockholder Position will not, but any Schedule subsequently delivered
will, include shares of Parent Common Stock acquired, directly or
indirectly, by any of the Major Shareholders after the Effective Time.
(d) ACCELERATED RELEASE FROM RESALE RESTRICTION AS A RESULT OF CERTAIN
SALES, HEDGING OR OTHER DISPOSITIONS OF SHARES OF PARENT COMMON STOCK BY
THE MAJOR STOCKHOLDERS. Notwithstanding the provisions of section 2(b)
hereof, if the Net Position of the Major Stockholders (adjusted for any
intervening splits, consolidations, capital reorganizations or other such
events pertaining to shares of Parent Common Stock) disclosed on a
Schedule delivered to the Shareholders' Agent in accordance with this
Agreement at any time after the Three Month Reference Date has declined
from the Baseline Major Stockholder Position at a rate that is greater
than the aggregate percentage of Holder's Share Consideration in respect
of which the Resale Restriction shall have been released at the end of
the immediately preceding post-Closing quarter (as adjusted for all
previous applications of this section 2(d), if any), then Holder shall be
entitled to Transfer, during the then current quarterly period,
additional portions of Holder's Share Consideration in such quantum as
would result in the cumulative release from the Holder's Resale
Restriction (through the operation of section 2(b) and the current and
all previous applications of this section 2(d)) of a percentage of
Holder's Share Consideration that is equal to the cumulative percentage
reduction in the Baseline Major Stockholder Position indicated by the
Schedule in question. In such event, the next pending release from the
Resale Restriction (and, if applicable additional scheduled releases in
order of maturity) shall be correspondingly reduced and section 2(b)
shall be deemed to be so amended to reflect the acceleration (and related
reduction(s)) of the relevant portion of the remaining scheduled
releases. Examples of the application of this section 2(d) are set out on
Schedule 2 attached hereto. If the Shareholders' Agent determines that
this section 2(d) applies to a particular Schedule delivered by Parent in
a manner different than that indicated by Parent in the statement
accompanying the Schedule, the matter shall be resolved by arbitration in
accordance with the Commercial Arbitration Rules then in effect of the
American Arbitration Association.
(e) COMPLIANCE WITH LAWS. Holder will observe and comply with the
Securities Act and the General Rules and Regulations thereunder, as well
as the applicable securities laws, regulations and rules of each of the
Provinces of Canada (and the related Rules, Policies and other
pronouncements of the Canadian Securities Administrators) as now in
effect and as
C-6
<PAGE>
from time to time amended and including those hereafter enacted or
promulgated, in connection with any Transfer of the Merger Shares, the
shares of Parent Common Stock issued upon the exercise of Assumed Options
or any part thereof.
(f) OTHER TRANSFER RESTRICTIONS. In the event that Parent elects to conduct
an underwritten follow-on public offering of shares of Parent Common
Stock (whether a primary, secondary or combined primary and secondary
offering) at any time during the four year period commencing at Closing,
Holder shall enter into any lock-up agreements requested by the
underwriters at the same time, on the same terms and to the same extent
as requested by the underwriters from the Major Stockholders (or, if
applicable, from any future shareholder of Parent which holds more shares
of Parent Common Stock than any one of the Major Stockholders) and agreed
to by the majority of such significant shareholders. For greater
certainty, the time periods contemplated by section 2(b) shall continue
to run during the term of any such lock-up agreement, and additional
shares of Parent Common Stock may, during such term, become eligible for
resale after the expiry of the lock-up agreement, though the Transfer may
be prohibited during the term of the particular lock-up agreement.
(g) AUTHORIZATION. To the extent consistent with this Agreement, Holder
authorizes Parent to cause Parent's transfer agent to decline to Transfer
and/or to note stop-transfer restrictions on the transfer books and
records of Parent with respect to any Merger Shares and any shares of
Parent Common Stock issued upon the exercise of Assumed Options, and, in
the case of any such shares for which Holder is the beneficial owner but
not the record holder, agrees to cause the record holder to authorize
Parent to cause the transfer agent to decline to Transfer and/or to note
stop-transfer restrictions on such books and records with respect to such
shares.
(h) EXERCISE OF ASSUMED OPTIONS. Holder hereby acknowledges and agrees that
any shares of Parent Common Stock issued to Holder upon the exercise of
any Assumed Option shall be subject to this Agreement and the Escrow
Agreement and shall be treated as Parent Merger Shares in all respects
hereunder.
3. ADDITIONAL COVENANTS.
(a) DELIVERY OF INDEMNIFICATION AND ESCROW AGREEMENT. Holder hereby
covenants and agrees to execute and deliver at the Effective Time (as
part of and conditional upon the completion of the transaction
contemplated by the Merger Agreement) the Escrow Agreement in the form
appended to the Merger Agreement subject to such non-material and
non-adverse changes as may be reasonably requested by Parent.
(b) RIGHTS OF FIRST REFUSAL, ETC. Holder hereby waives any rights Holder
may have of first refusal, rights of co-sale, registration rights,
information rights, preemptive rights, rights of redemption, retraction
or repurchase, board observer rights and similar rights of Holder under
any agreement, arrangement or understanding applicable to the shares of
Company Capital Stock and the Assumed Options or other Company Securities
as the same may apply to the execution and delivery of the Merger
Agreement and the consummation of the Merger and the other transactions
contemplated by the Merger Agreement or otherwise with application
generally before or after the consummation of the Merger (including
without limitation, if applicable, pursuant to that certain Amended and
Restated Investors' Rights Agreement that certain Amended and Restated
Right of First Refusal and Co-Sale Agreement, that certain Amended and
Restated Put Right Agreement and that certain Amended and Restated Voting
Agreement among certain of the stockholders of the Company each made as
of June 1, 2000), except for any such rights granted pursuant to the
Merger Agreement or the Registration Rights Agreement.
C-7
<PAGE>
(c) LEGEND. All certificates representing the Merger Shares and the shares
of Parent Common Stock issued upon the exercise of Assumed Options and
any certificates subsequently issued with respect thereto or in
substitution therefor, shall bear a legend substantially as set forth
below:
"THE COMMON SHARES, NO PAR VALUE, OF 724 SOLUTIONS INC. REPRESENTED BY
THIS CERTIFICATE ARE SUBJECT TO A RESALE RESTRICTION AGREEMENT DATED AS
OF - , 2000, AND THE TRANSFER THEREOF ARE SUBJECT TO THE TERMS OF
SUCH AGREEMENT. COPIES OF SUCH AGREEMENT MAY BE OBTAINED AT THE PRINCIPAL
EXECUTIVE OFFICES OF 724 SOLUTIONS INC. FROM THE CORPORATE SECRETARY."
4. SHAREHOLDERS' AGENT.
(a) Holder irrevocably authorizes, directs and appoints that certain person
referred to as the "Representative" in the Escrow Agreement (the
"Shareholders' Agent") to act as the sole and exclusive agent,
attorney-in-fact and representative of Holder and Holder's heirs,
representatives and successors in connection with this Agreement.
(b) Without limiting the generality of the foregoing, with respect to the
matters covered by or related to this Agreement:
(i) Holder irrevocably relinquishes his or her right to act
independently and other than through the Shareholders' Agent with
respect to the subject matter of this Agreement (except with respect
to appointment of a successor Shareholders' Agent);
(ii) Holder shall not have any right to institute any suit, action or
proceeding against the Company, Parent, Merger Sub or the Surviving
Corporation with respect to the subject matter of this Agreement,
any such right being irrevocably and exclusively delegated to the
Shareholders' Agent; and
(iii) Holder agrees that any notice delivered to the Company, Parent,
Merger Sub or the Surviving Corporation (or any person entitled to
indemnification under the Merger Agreement) by Holder, other than
through the Shareholders' Agent, shall be of no effect, and each
notice delivered by Parent or any such other person to the
Shareholders' Agent shall be effective as against Holder; provided
that Parent and such other person may elect at their sole
discretion to give effect to any notice delivered by Holder.
(c) In the event of the death, physical or mental incapacity or resignation
of the Shareholders' Agent, Holder shall, in conjunction with the other
Holders, promptly (and in any event within thirty (30) days of notice of
such event) appoint a successor Shareholders' Agent.
5. MISCELLANEOUS.
(a) AMENDMENT AND MODIFICATION. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of
a written agreement executed by the parties hereto.
(b) ASSIGNMENT. This Agreement will be binding upon, and inure to the
benefit of, the persons or entities who are permitted, by the terms of
this Agreement, to be successors, assigns, transferees (except as
otherwise provided herein) and personal representatives of the respective
parties hereto. If any transferee of any Holder shall acquire Merger
Shares or shares of Parent Common Stock issued upon the exercise of
Assumed Options (or any interest in the Assumed Options, which are
generally non-transferable), in any manner, whether by operation of law
or otherwise, such shares shall be held subject to all of the terms of
this Agreement (and the related Merger Agreement and Escrow Agreement),
and by taking and
C-8
<PAGE>
holding such shares such person shall be conclusively deemed to have
agreed to be bound by and to perform all of the terms and provisions of
this Agreement and such person shall be entitled to receive the benefits
hereof (for greater certainty, except to the extent provided herein,
without releasing or reducing in any way the Holder's obligation to
ensure compliance with this Agreement (and the related Merger Agreement
and Escrow Agreement)). This Agreement shall be transferable by Parent in
conjunction with an assignment of its rights under the Merger Agreement.
(c) COSTS OF ENFORCEMENT. If any party to this Agreement seeks to enforce
its rights under this Agreement by legal proceedings or otherwise, the
non-prevailing party will pay all costs and expenses incurred by the
prevailing party, including, without limitation, all reasonable
attorneys' and experts' fees (on a solicitor and its own client basis).
(d) COUNTERPART EXECUTION; FACSIMILE DELIVERY. This Agreement may be
executed in several counterparts and delivered by facsimile, each of
which shall be an original, but all of which together shall constitute
one and the same agreement.
(e) EFFECT OF HEADINGS. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this
Agreement.
(f) ENTIRE AGREEMENT. This Agreement and the exhibits hereto contains the
entire understanding of the parties in respect of the subject matter
hereof, and supersedes all prior negotiations and understandings between
the parties with respect to such subject matter.
(g) FURTHER ASSURANCES. Holder agrees to execute and deliver, before or
after the Effective Time, any additional documents reasonably necessary
or desirable to carry out the purposes and intent of this Agreement.
(h) GOVERNING LAW. This Agreement shall be governed by and construed,
interpreted and enforced in accordance with the laws of the State of New
York, without regard to conflict of laws. Each of the parties hereto
irrevocably consents to the jurisdiction of any court located within the
State of New York, in connection with any matter based upon or arising
out of this Agreement or the matters contemplated herein, agrees that
process may be served upon them in any manner authorized by the laws of
the State of New York for such persons and waives and covenants not to
assert or plead any objection that they might otherwise have to such
jurisdiction and such process. EACH OF THE PARTIES IRREVOCABLY WAIVES THE
RIGHT TO A JURY TRIAL IN CONNECTION WITH ANY LEGAL PROCEEDING RELATING TO
THIS AGREEMENT, THE MERGER AGREEMENT AND THE ESCROW AGREEMENT OR THE
ENFORCEMENT OF ANY PROVISION OF THIS AGREEMENT, THE MERGER AGREEMENT AND
THE ESCROW AGREEMENT.
(i) NOTICES. All notices, requests, demands or other communications that
are required or may be given pursuant to the terms of this Agreement
shall be in writing and shall be deemed to have been duly given if
delivered by hand or mailed by registered or certified mail, postage
prepaid, as follows:
If to Holder, at the address set forth below Holder's signature at the end
hereof.
with a copy to:
Brobeck, Phleger & Harrison LLP
4801 Plaza on the Lake
Austin, Texas 78746
Attn: Michael Dunn
Fax: (512) 330-4001
Phone: (512) 330-4030
C-9
<PAGE>
If to Parent:
724 Solutions Inc.
4101 Yonge Street
Suite 702
Toronto, Ontario
M2P 1N6
Attn: Gregory Wolfond
Fax: (416) 228-8199
Phone: (416) 226-0271
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York
Attn: Scott A. Barshay
Fax: (212) 474-3700
Phone: (212) 474-1009
and
Ogilvy Renault
Suite 2100, P. O. Box 141
Royal Trust Tower, TD Centre
Toronto, Ontario M5K 1H1
Attn: Brian Ludmer
Fax: (416) 216-3930
Phone: (416) 216-4000
or to such other address as any party hereto may designate for itself by
notice given as herein provided.
(j) SEVERABILITY. If any provision of this Agreement is held to be
unenforceable for any reason, such provision and all other related
provisions shall be modified rather than voided, if possible, in order to
achieve the intent of the parties to this Agreement to the extent
possible. In any event, all other unrelated provisions of this Agreement
shall be deemed valid and enforceable to the full extent.
(k) SPECIFIC PERFORMANCE; INJUNCTIVE RELIEF. The parties hereto acknowledge
that Parent will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of
Holder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to Parent upon any such violation,
Parent shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available
to Parent at law or in equity and Holder hereby waives any and all
defenses which could exist in its favor in connection with such
enforcement and waives any requirement for the security or posting of any
bond in connection with such enforcement.
(l) TERMINATION. This Agreement shall terminate upon the earlier to occur
of (i) the Effective Time of the Merger and (ii) the termination of the
Merger Agreement in accordance with its terms.
C-10
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first above written.
724 SOLUTIONS INC.
By: ____________________________________
Name:
Title:
HOLDER:
________________________________________
<TABLE>
<CAPTION>
<S> <C>
Name:
Address:
Fax:
SPOUSE OF HOLDER (if applicable):
Name:
Address:
Fax:
</TABLE>
C-11
<PAGE>
SCHEDULE 1
OWNERSHIP OF COMPANY CAPITAL STOCK
<TABLE>
<S> <C>
Common Stock:
------------------------------------------------------------
Series A Preferred Stock:
------------------------------------------------------------
Series B Preferred Stock:
------------------------------------------------------------
Stock Options
------------------------------------------------------------
Convertible Debt
------------------------------------------------------------
Warrants
------------------------------------------------------------
State or Country of Residence:
------------------------------------------------------------
Other Beneficial Owners:
------------------------------------------------------------
Other Rights Holders:
------------------------------------------------------------
Liens and Encumbrances:
------------------------------------------------------------
</TABLE>
C-12
<PAGE>
SCHEDULE 2
EXAMPLES OF THE EFFECT OF TRANSFERS OF MAJOR STOCKHOLDER SHARES ON RESALE
RESTRICTIONS
FOR PURPOSES OF THIS SCHEDULE, "1Q" MEANS THE FIRST THREE MONTH PERIOD AFTER
THE EFFECTIVE DATE, "2Q" MEANS THE SECOND THREE-MONTH PERIOD AFTER THE EFFECTIVE
DATE, AND SO ON.
- Example #1: If the Major Stockholders sell, in aggregate, 10% of their
shares in 1Q, 12% in 2Q and 11% in 3Q, the Holder will be allowed to sell
up to 15% of Holder's Consideration at the end of 1Q, up to 15% at the end
of 2Q, and up to 15% at the end of 3Q.
- Example #2: If the Major Stockholders sell 20% of their aggregate holdings
in 1Q and 5% in 2Q, then Holder will be allowed to sell up to 20% of
Holder's Consideration at the end of 1Q and up to 10% at the end of 2Q.
- Example #3: If the Major Stockholders sell 10% of their shares in 1Q and
5% in 2Q, the Major Stockholders will have the ability to sell up to 30%
of their shares in 3Q (5% remaining from 1Q, 10% remaining from 2Q, and
15% in 3Q) without triggering the acceleration of sales by Holder, while
Holder will have the ability to sell 15% of Holder's Consideration at the
end of 1Q, 15% at the end of 2Q, and 15% at the end of 3Q.
- Example #4: If the Major Stockholders sell 15% of their shares in 1Q and
report selling an additional 5% at the end of the 4th month, then Holder
will be allowed to sell up to 15% after 1Q, up to 5% at the end of month 4
and up to 10% at the end of 2Q.
C-13
<PAGE>
EXHIBIT 1
CERTIFICATE OF TRUST
OF
------------------------
(HOLDER)
TO: 724 Solutions Inc.
RE: That certain Resale Restriction Agreement dated as of - , 2000 (the
"AGREEMENT") between 724 Solutions Inc. and
--------------------------.
(Holder)
--------------------------------------------------------------------------------
I,
--------------------------, the duly appointed trustee of
--------------------------
(name) (Holder)
(the "TRUST"), in that capacity and not personally, hereby certify as follows:
1. The capitalized terms used but not defined in this certificate shall have
the meanings specified in the Agreement.
2. I have read and am familiar with the Agreement to which the Trust is a
party. This certificate is being delivered pursuant to clause 1(c)(ii) of
the Agreement.
3. I have made or caused to be made such examinations or investigations as are,
in my opinion, necessary to make these statements, and I have furnished this
certificate with the intent that it may be relied upon by 724 Solutions Inc.
without further enquiry.
5. The entry into of the Agreement is within the powers of the Trustees. The
Trustees are in no way whatsoever limited or restricted, in whole or in
part, by the Declaration of Trust or agreements they have entered into with
third parties, from entering into the Agreement and performing their
obligations thereunder. Pursuant to the provisions of the Trust, the
Agreement may be executed and delivered on the authority of any one Trustee.
The Agreement binds the assets of the Trust and its Trustees, including, in
particular the securities it holds in 724 Solutions Inc.
C-14
<PAGE>
6. The following persons are duly appointed trustees of the Trust, who are
authorized to sign documents on behalf of the Trust. Each signature that
appears opposite the name of such trustee is a true and correct specimen of
the signature of that person:
<TABLE>
<CAPTION>
NAME SIGNATURE
---- ---------
<S> <C>
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
------------------------------------ ------------------------------------
</TABLE>
DATED the
------------ day of
------------, 2000.
--------------------------------------
Name:
Title:
I,
--------------------------, the duly appointed trustee of
--------------------------
(name) (Holder)
(the "Trust"), in that capacity and not personally, hereby certify that
-------------------------- is on
(name)
the date hereof the duly appointed trustee of
-------------------------- and the signature set forth
(Holder)
above is the genuine signature of such person.
--------------------------------------
Name:
Title:
C-15
<PAGE>
EXHIBIT 2
CERTIFICATE OF INCUMBENCY
AND CORPORATE AUTHORITY
OF
------------------------
(HOLDER)
TO: 724 Solutions Inc.
RE: That certain Resale Restriction Agreement dated as of - , 2000 (the
"AGREEMENT") between 724 Solutions Inc. and
--------------------------.
(Holder)
--------------------------------------------------------------------------------
I,
-------------------, the duly appointed
------------------- of
-------------------
(name) (position) (Holder)
(the "CORPORATION"), in that capacity and not personally, hereby certify as
follows:
1. The capitalized terms used but not defined in this certificate shall have
the meanings specified in the Agreement.
2. I have read and am familiar with the Agreement to which the Corporation is a
party. This certificate is being delivered pursuant to clause 1(c)(ii) of
the Agreement.
3. I have made or caused to be made such examinations or investigations as are,
in my opinion, necessary to make these statements, and I have furnished this
certificate with the intent that it may be relied upon by 724 Solutions Inc.
without further enquiry.
4. The Corporation has the power and authority to enter into the Agreement and
perform all of its obligations pursuant thereto. The Corporation is in no
way whatsoever limited or restricted, in whole or in part, by its
certificate of incorporation, its by-laws or agreements it has entered into
with third parties, from entering into the Agreement and performing its
obligations thereunder.
5. The following persons are duly elected or appointed officers or directors of
the Corporation who hold the respective positions in the Corporation set out
opposite their respective names, and who are authorized to sign documents on
behalf of the Corporation. Each signature that appears opposite the name of
such officer or director is a true and correct specimen of the signature of
that person:
<TABLE>
<CAPTION>
NAME POSITION SIGNATURE
---- -------- ---------
<S> <C> <C>
-------------------------- -------------------------- --------------------------
-------------------------- -------------------------- --------------------------
-------------------------- -------------------------- --------------------------
</TABLE>
C-16
<PAGE>
6. The certificate of incorporation and by-laws of the Corporation authorize
the execution and delivery of the Agreement by any one officer or director
on behalf of the Corporation. The Agreement has been duly authorized,
executed and delivered by the Corporation and constitutes a binding
obligation of the Corporation in accordance with its terms.
DATED the
------------ day of
------------, 2000.
--------------------------------------
Name:
Title:
I,
-------------------, the duly appointed
------------------- of
-------------------
(name) (position) (Holder)
(the "CORPORATION"), in that capacity and not personally, hereby certify that
------------------- is on
(name)
the date hereof the duly appointed
---------------- of
---------------- and the signature set forth
(position) (Holder)
above is the genuine signature of such person.
--------------------------------------
Name:
Title:
C-17
<PAGE>
EXHIBIT 3
CERTIFICATE OF GENERAL PARTNER
OF
------------------------
(HOLDER)
TO: 724 Solutions Inc.
RE: That certain Resale Restriction Agreement dated as of - , 2000 (the
"AGREEMENT") between 724 Solutions Inc. and
--------------------------.
(Holder)
--------------------------------------------------------------------------------
I,
------------------------, the
------------------------ of
------------------------,
(name) (position) (General Partner)
a - Corporation and the general partner (the "GENERAL PARTNER") of
---------------------
(Holder)
(the "LIMITED PARTNERSHIP"), in that capacity and not personally, hereby certify
as follows:
1. The capitalized terms used but not defined in this certificate shall have
the meanings specified in the Agreement.
2. I have read and am familiar with the Agreement to which the Limited
Partnership is a party. This certificate is being delivered pursuant to
clause 1(c)(ii) of the Agreement.
3. I have made or caused to be made such examinations or investigations as are,
in my opinion, necessary to make these statements, and I have furnished this
certificate with the intent that it may be relied upon by 724
Solutions Inc. without further enquiry.
4. The entry into of the Agreement is within the powers of the General Partner
of the Limited Partnership. The General Partner is in no way whatsoever
limited or restricted, in whole or in part, by the Limited Partnership's
certificate of limited partnership and limited partnership agreement, or
agreements the Limited Partnership has entered into with third parties, from
entering into the Agreement and performing its obligations thereunder.
Pursuant to the provisions of the limited partnership agreement, the
Agreement may be executed and delivered on the authority of the General
Partner.
5. The following persons are duly executed or appointed directors and/or
officers of the General Partner, who hold the respective positions in the
General Partner set out opposite their respective names, and who are
authorized to sign documents on behalf of such General Partner and the
Limited Partnership. Each signature that appears opposite the name of such
director and/or officer of such General Partner is a true and correct
specimen of the signature of that person:
<TABLE>
<CAPTION>
NAME POSITION SIGNATURE
---- -------- ---------
<S> <C> <C>
-------------------------- -------------------------- --------------------------
-------------------------- -------------------------- --------------------------
-------------------------- -------------------------- --------------------------
</TABLE>
C-18
<PAGE>
6. The Agreement has been duly authorized, executed and delivered by the
Limited Partnership and constitutes a binding obligation of the Limited
Partnership in accordance with its terms.
DATED the
------------ day of
------------, 2000.
--------------------------------------
Name:
Title:
I,
----------------------------, the
---------------------------- of the General Partner
(name) (position)
of the Limited Partnership, in that capacity and not personally, hereby certify
that
------------------------ is on the date hereof the
------------------------ of the General Partner
(name) (position)
of the Limited Partnership and the signature set forth above is the genuine
signature of such person.
--------------------------------------
Name:
Title:
C-19
<PAGE>
ANNEX D
FORM OF INDEMNIFICATION AND ESCROW AGREEMENT
INDEMNIFICATION AND ESCROW AGREEMENT dated as of - , 2000
(this "Agreement"), among 724 Solutions Inc., a corporation
amalgamated under the Business Corporations Act of the Province
of Ontario ("Parent"), Tantau Software, Inc., a Delaware
corporation (the "Company"), [ ], as Escrow Agent
(the "Escrow Agent"), the stockholders of the Company who are
deemed parties to this Agreement in accordance with
Section 8.10 (the "Stockholders"), the holders of options to
purchase shares of common stock, par value $0.001 per share, of
the Company ("Company Common Stock") who are deemed parties to
this Agreement in accordance with Section 8.10 (the
"Optionholders") and Joseph Aragona, as representative of the
Stockholders, the other stockholders of the Company and the
Optionholders.
WHEREAS Parent, Saturn Merger Sub, Inc., a Delaware corporation and a wholly
owned subsidiary of Parent ("Sub"), and the Company have entered into an
Agreement and Plan of Merger dated as of November 29, 2000 (as the same may be
amended or supplemented, the "Merger Agreement") providing for the merger of Sub
with and into the Company (the "Merger") upon the terms and subject to the
conditions set forth in the Merger Agreement;
WHEREAS, each Stockholder is the record and beneficial owner of the number
of shares of Company Common Stock, Company Series A Preferred Stock (such term
and each other term used but not defined herein shall have the meaning assigned
to it in the Merger Agreement) and Company Series B Preferred Stock set forth
opposite such Stockholder's name on Schedule 7.01(b) hereto;
WHEREAS, each Optionholder holds the number of Stock Options set forth
opposite such Optionholder's name on Schedule 7.02(b) hereto;
WHEREAS, share certificates representing (i) a number of shares
(the "Escrow Shares" or the "Escrow Fund") of Parent Common Stock to be issued
in the Merger in accordance with the terms of the Merger Agreement equal to
1,900,000 LESS the number of shares of Parent Common Stock underlying the
Subject Options (as defined below) and (ii) any Subject Shares (as defined in
Section 2.07), shall, in each case, be deposited in escrow, to be held and
disposed of by the Escrow Agent in accordance with the terms of this Agreement;
WHEREAS, 10% of the Adjusted Options (other than Permitted Interim Period
Stock Options) held by Optionholders as of the Effective Time (the "Subject
Options") shall be subject to cancellation by Parent in accordance with the
terms of this Agreement;
WHEREAS, it is a condition to Parent's and Sub's obligations to consummate
the transactions contemplated by the Merger Agreement that the parties hereto
execute and deliver this Agreement.
NOW, THEREFORE, to induce Parent and Sub to consummate, and in consideration
of their consummating the transactions contemplated by the Merger Agreement, and
in consideration of the
D-1
<PAGE>
premises and the representations, warranties and agreements contained herein,
the parties agree as follows:
ARTICLE I
INDEMNIFICATION AND COMPENSATION
SECTION 1.01. SURVIVAL OF COVENANTS, AGREEMENTS, REPRESENTATIONS AND
WARRANTIES. For purposes of this Agreement (and notwithstanding anything to the
contrary provided under applicable law or in the Merger Agreement), the
representations, warranties, covenants and agreements of the Company contained
in the Merger Agreement or in any certificate or other document delivered
pursuant thereto or in connection therewith shall be deemed to survive the
Closing and to remain in full force and effect for the period set forth in
Section 1.04, regardless of any investigation made by or on behalf of any party
hereto; PROVIDED, HOWEVER, that any and all rights of indemnification and any
and all rights of Parent, any Affiliate (as defined in Section 1.02) of Parent,
the Company and any subsidiary of the Company, and their respective successors
and assigns (collectively, the "Indemnitees") to receive compensation, in each
case as provided herein and any and all other remedies relating thereto shall be
subject to Section 1.04 and all other limitations contained in this Agreement.
SECTION 1.02. INDEMNIFICATION BY THE STOCKHOLDERS AND OPTIONHOLDERS AND
COMPENSATION OF PARENT AND OTHER INDEMNITEES.
(a) "Losses" of any person shall mean any and all losses, costs, damages,
liabilities and expenses arising from demands, claims, suits, actions,
causes of action, proceedings and assessments incurred by such person,
including interest, penalties, attorneys' fees, fines, judgments, awards
and financial responsibility for investigation and cleanup costs;
PROVIDED, HOWEVER, that in no event shall Losses (i) be based on any
multiple or (ii) include any incidental, lost profits, consequential,
indirect, punitive or exemplary damages. As used in this Article I, an
"Affiliate" of Parent shall include any direct or indirect subsidiary of
Parent and any officer, director or employee of Parent or any such
subsidiary. As used in this Article I, an "Indemnifying Party" shall
mean, with respect to any Loss, the person or persons that have agreed to
indemnify and hold harmless the Indemnitees with respect to such Loss
pursuant to Section 1.02(b) and 1.02(e), as provided below.
(b) Each Stockholder and Optionholder agrees, severally and not jointly, to
indemnify and hold harmless each Indemnitee from and against any and all
Losses imposed upon or incurred by such Indemnitee which arise out of or
in connection with:
(i) any inaccuracy in, or any breach of, any representation or warranty
of such Stockholder or Optionholder contained in Article VII of this
Agreement, or in any certificate, instrument or document delivered
by such Stockholder or Optionholder relating to such Stockholder's
or Optionholder's rights, obligations, personal capacity and other
matters directly bearing upon such Stockholder or Optionholder
pursuant to this Agreement;
(ii) the failure by such Stockholder or Optionholder to perform any
covenant, agreement, obligation or undertaking in this Agreement or
in any certificate, instrument, document or agreement delivered by
such Stockholder or Optionholder pursuant to or in connection with
this Agreement; and
(iii) any and all such actions, suits, proceedings, demands, assessments,
judgments, damages, awards, costs and expenses (including
attorneys' fees) incident to any of the foregoing or incurred in
connection with the enforcement of the rights of any Indemnitee
with respect to the foregoing.
(c) The Escrow Fund and the Subject Options shall be available to compensate
each Indemnitee, and each Indemnitee shall be entitled to receive
compensation, for any and all Losses asserted
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against, imposed upon, or incurred by such Indemnitee which arise out of
or in connection with:
(i) any inaccuracy in, or any breach of, any representation or warranty
of the Company contained in the Merger Agreement, or in any
certificate, instrument, document or agreement delivered by the
Company pursuant to or in connection with the Merger Agreement or
the transactions contemplated thereby (it being agreed that for
purposes of determining the existence of any such inaccuracy or
breach, all such representations and warranties of the Company that
are directly or indirectly qualified as to materiality shall be
deemed to be not so qualified);
(ii) the failure by the Company to perform any covenant, agreement,
obligation or undertaking in the Merger Agreement, or in any
certificate, instrument, document or agreement delivered by the
Company pursuant to or in connection with the Merger Agreement or
the transactions contemplated thereby, in each of the above cases
which was or is required to be performed at or prior to the
Effective Time; and
(iii) any and all actions, suits, proceedings, demands, assessments,
judgments, damages, awards, costs and expenses (including
attorneys' fees) incident to any of the foregoing or incurred in
connection with the enforcement of the rights of any Indemnitee
with respect to the foregoing.
(d) The Escrow Fund and the Subject Options shall be available to compensate
each Indemnitee, and each Indemnitee shall be entitled to receive
compensation, for (i) all legal, accounting and other advisory fees and
expenses incurred by the Company or any of its subsidiaries directly on
behalf of any Stockholder or Optionholder or in direct relation to such
Stockholder's or Optionholder's interests and concerns in its capacity as
such in connection with the Merger (it being understood that any such
fees and expenses attributable to any such Stockholder shall be recovered
through disbursement to Parent from such Stockholder's percentage
interest in the Escrow Fund and any such fees and expenses attributable
to any Optionholder shall be recovered through the cancellation of such
Optionholder's Subject Options), (ii) all amounts paid by Parent pursuant
to Section 6.01(c) (except for amounts payable that are directly
attributable to any failure or delay by Parent with respect to performing
its obligations under Section 6.01(c) and (iii) the difference, if
positive, between the amount paid by the Company or the Surviving
Corporation in respect of each Appraisal Share and the product of
(A) the number of shares of Parent Common Stock into which such Appraisal
Share would have been converted had it not been an Appraisal Share and
(B) the last quoted sale price for a share of Parent Common Stock on
Nasdaq on the Closing Date.
(e) Subject to the limitations set forth in Sections 1.04, 1.05 and 1.06,
each Stockholder and Optionholder agrees, severally and not jointly, to
indemnify and hold harmless each Indemnitee from and against any and all
Losses described in Section 1.02(c) or 1.02(d) for which it is entitled
to receive compensation under the terms of this Agreement.
(f) For the purposes of the indemnity and compensation provided for in this
Section 1.02, any Losses hereunder shall be determined on the basis of
the net effect after giving effect to any actual cash payments, setoffs
or recoupment or any payments in each case actually received, realized or
retained by the Indemnitee as a result of any event giving rise to a
claim for such indemnification or compensation. The amount of any Losses
for which indemnification or compensation is provided hereunder shall be
net of any amount actually recovered by the Indemnitee under insurance
policies with respect to such Losses. To the extent that an Indemnitee
(or its Affiliate) has rights under insurance policies or similar rights
in respect of any Loss it shall use its reasonable efforts to exercise
such rights.
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(g) All Losses (including Losses relating to Taxes) under this Article I
shall be calculated in a manner such that the net after-Tax effect of the
indemnification and compensation payment received by an Indemnitee equals
the net after-Tax Loss (including any Loss relating to Taxes) suffered or
payable by such Indemnitee for which such indemnification payment is
being made. Without limiting the generality of the foregoing, for the
purposes of the indemnity and compensation provided for in this
Section 1.02, all Losses (including Losses relating to Taxes) hereunder
shall be increased to take into account any net Tax cost incurred by the
Indemnitee as a result of the receipt or accrual of such indemnification
or compensation payment. Any indemnification or compensation payment
hereunder shall initially be made without regard to this paragraph and
shall later be adjusted to reflect any net Tax cost or net Tax benefit
only after the Indemnitee has actually realized such cost or benefit. For
purposes of this agreement, the Indemnitee shall be deemed to have
"actually realized" a net Tax cost or a net Tax benefit to the extent
that, and at such times as, the amount of Taxes payable by such
Indemnitee is increased above or reduced below, as the case may be, the
amount of Taxes that such Indemnitee would be required to pay but for the
receipt or accrual of the indemnification or compensation payment or the
payment or incurrence of such Loss. Any indemnification or compensation
payment under this Agreement shall be treated as an adjustment to
purchase price.
(h) The parties hereto agree that Parent's knowledge of a breach of the
Merger Agreement or the waiver by Parent of a condition to the Closing
shall not affect the indemnification obligations of the Stockholders or
the Optionholders or any Indemnitee's right to compensation hereunder.
SECTION 1.03. THIRD-PARTY CLAIMS.
(a) If a claim by a third party (a "Third Party Claim") is made against
Parent or any of its affiliates arising out of a matter for which Parent
or such affiliate is entitled to be indemnified or compensated pursuant
to Section 1.02, Parent shall promptly notify the Representative in
writing of such claim. The failure to notify promptly the Representative
hereunder shall not relieve the Stockholders or the Optionholders of
their obligations hereunder or deprive any Indemnitee of its right to
compensation hereunder, in each case except to the extent (and only to
the extent) that the Stockholders or the Optionholders, as applicable,
are actually and materially prejudiced by such failure. Subject to
Section 1.05 and 1.06, the Stockholders or the Optionholders shall be
responsible, and the Escrow Fund and Subject Options shall be available
to compensate each Indemnitee, for the fees and expenses of the counsel
employed by it; PROVIDED, HOWEVER, that in no event shall the
Stockholders and Optionholders be liable, or the Indemnitees be entitled
to indemnification or compensation, for the fees and expenses of more
than one counsel (in addition to any local counsel) for all Indemnitees
in connection with any one action or separate but similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances.
(b) The Stockholders and Optionholders shall be entitled to participate in
the defense of a Third Party Claim, individually or jointly, through
their counsel, at their own expense.
(c) So long as the Stockholders or Optionholders are participating in the
defense of a Third Party Claim in good faith, Parent shall reasonably
cooperate with such Stockholders or Optionholders, as applicable, by
providing records and information that are reasonably relevant to such
Third Party Claim. Parent shall not settle, compromise, admit to
liability or confess to judgment with respect to any Third Party Claim
without the written consent of the Representative, which consent will not
be unreasonably withheld or delayed. No such consent will be required if
Parent, on behalf of all Indemnitees, agrees in writing to forego all
claims for indemnification from the Stockholders and Optionholders and
for compensation hereunder
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with respect to such Third Party Claim, or Parent reasonably believes any
Indemnitee to be potentially or actually exposed to (i) Losses in excess
of amounts reasonably expected to be received from the Stockholders and
Optionholders or as a result of compensation hereunder or
(ii) non-monetary remedies; PROVIDED, HOWEVER, that Parent obtains in
such settlement a release of the Stockholders and Optionholders and the
Company with respect to all such Third Party Claims.
SECTION 1.04. TERMINATION OF INDEMNIFICATION. The Escrow Fund shall be
held by the Escrow Agent, and the Subject Options shall be subject to
cancellation by Parent, in each case on the terms and subject to the conditions
set forth herein until, and the obligations of the Stockholders and
Optionholders to indemnify any Indemnitee pursuant to Section 1.02(b) or 1.02(e)
(except in respect of breaches of Sections 7.01(b) and 7.02(b)) and the rights
of the Indemnitees to receive compensation pursuant to Section 1.02(c) (except
in respect of breaches of Section 3.03 or Section 5.01 of the Merger Agreement)
shall terminate at, the close of business on the date that is fifteen months
after the Effective Time (the "Expiration Date"), as certified to the Escrow
Agent in writing by Parent, and thereafter, with respect to such amount, if any,
as provided in Section 3.07, to be retained to satisfy any Claims (as defined in
Section 3.01) with respect to matters not absolute as to liability or not
liquidated as to amount at such date but with respect to which Parent shall have
given the notice described in Section 3.01, until such time as such liability is
determined pursuant to the provisions hereof.
SECTION 1.05. SOLE AND EXCLUSIVE REMEDY AGAINST THE STOCKHOLDERS AND
OPTIONHOLDERS. Except with respect to fraud, fraudulent misrepresentation,
willful misconduct or willful concealment by or on behalf of the Company or any
Stockholder or Optionholder, an Indemnitee's right to indemnification and
compensation under this Article I through the disbursement of Escrow Shares and
cancellation of Subject Options in accordance with this Agreement constitutes
such Indemnitee's sole and exclusive remedy for damages and monetary relief
against such Stockholder and Optionholder pursuant to Sections 1.02(b), 1.02(c)
or 1.02(e) with respect to any inaccuracy in, or any breach of, any
representation, warranty, covenant or agreement of the Company in the Merger
Agreement or of any Stockholder or Optionholder in this Agreement (other than
breaches of Section 3.03 and Section 5.01 of the Merger Agreement and
Sections 7.01(b) and 7.02(b) of this Agreement, which together with fraud,
fraudulent misrepresentation, willful misconduct or willful concealment and
obligations to the Indemnitees under Section 1.02(d) of this Agreement, are
referred to herein as "Specified Matters").
SECTION 1.06. THRESHOLD AMOUNT; MAXIMUM AMOUNT.
(a) The Indemnitees shall not be entitled to indemnification or compensation
for Losses covered under Section 1.02(b), 1.02(c) or 1.02(e) until the
aggregate of all such Losses for which the Indemnitees are entitled to
indemnification or compensation are in excess of $1,000,000, in which
case the Indemnitees shall be entitled to indemnification and
compensation in respect of the aggregate amount of such Losses in excess
of $1,000,000; PROVIDED, HOWEVER, that the limitations on indemnification
and compensation set forth in this sentence shall not apply to Losses in
connection with a Specified Matter.
(b) No stockholder's aggregate liability in respect of Specified Matters
shall exceed 70% of such Stockholder's Realized Value (as defined below)
on any date of determination, and no Optionholder's aggregate liability
in respect of Specified Matters shall exceed 70% of such Optionholder's
Realized Value on any date of determination. For purposes of this
Section 1.06(b), the Realized Value of any Stockholder shall, as of any
date of determination, be equal to (i) the sum of (A) the aggregate
proceeds received by such Stockholder through such date from sales or
other dispositions to unaffiliated third parties of any shares of Parent
Common Stock into which such Stockholder's Company Capital Stock was
converted pursuant to the merger (PROVIDED, HOWEVER, that in no event
shall the aggregate proceeds received from any such sale or other
disposition for purposes of this clause (i) (A) be less than the product
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of (x) the lowest quoted sale price for a share of Parent Common Stock on
Nasdaq on the date of such sale or other disposition and (y) the number
of shares of Parent Common Stock sold or otherwise disposed of as part of
such sale or other disposition) and (B) the aggregate value as of such
date of all shares of Parent Common Stock into which such Stockholder's
Company Capital Stock was converted pursuant to the Merger that have not
been previously sold or otherwise disposed of, LESS (ii) the aggregate
value as of such date of all shares of Parent Common Stock previously
distributed to Parent from such Stockholder's percentage interest in the
Escrow Fund to indemnify or compensate the Indemnitees for Losses. For
purposes of this Section 1.06(b), the Realized Value of any Optionholder
shall, as of any date of determination, be equal to (i) the sum of
(A) the aggregate proceeds received by such Optionholder through such
date from sales or other dispositions to unaffiliated third parties of
any shares of Parent Common Stock received upon the exercise of Adjusted
Stock Options (PROVIDED, HOWEVER, that in no event shall the aggregate
proceeds received from any such sale for purposes of this clause (i)
(A) be less than the product of (x) the lowest quoted sale price for a
share of Parent Common Stock on Nasdaq on the date of such sale or other
disposition and (y) the number of shares of Parent Common Stock sold or
otherwise disposed of as part of such sale or other disposition) LESS the
aggregate exercise price paid by such Optionholder in respect of the
exercise of such Adjusted Stock Options, (B) the aggregate value as of
such date of all shares of Parent Common Stock received upon exercise of
Adjusted Stock Options through such date that have not been previously
sold or otherwise disposed of LESS the aggregate exercise price paid by
such Optionholder in respect of the exercise of such Adjusted Stock
Options, and (C) the aggregate value as of such date of all shares of
Parent Common Stock underlying Adjusted Stock Options then held by such
Optionholder LESS the aggregate exercise price of all such Adjusted Stock
Options, LESS (ii) the sum of (A) the aggregate value as of such date of
all Subject Shares previously distributed to Parent from such
Optionholder's percentage interest in the Escrow Fund and (B) the
aggregate value as of such date of all Subject Options of such
Optionholder previously cancelled, in each case to indemnify or
compensate the Indemnitees for Losses.
For purposes of this Section 1.06, as of any date of determination (i) the
value of a share of Parent Common Stock (including a Subject Share) shall be
equal to the last quoted sale price for a share of Parent Common Stock on Nasdaq
on such date and (ii) the value of an Adjusted Stock Option (including a Subject
Option) shall be equal to the last quoted sale price for a share of Parent
Common Stock on Nasdaq on such date LESS the per share exercise price.
ARTICLE II
APPOINTMENT OF ESCROW AGENT;
CREATION OF ESCROW; PRO RATA TREATMENT; SUBJECT SHARES AND CANCELLATION OF
SUBJECT OPTIONS
SECTION 2.01. APPOINTMENT OF ESCROW AGENT. Parent and the Representative
hereby appoint the Escrow Agent, and the Escrow Agent hereby agrees to act, as
depository and administrator of the Escrow Fund, upon the terms and conditions
set forth below.
SECTION 2.02. CREATION OF ESCROW FUND; DEPOSIT OF ESCROW SHARES.
(a) Pursuant to the Merger Agreement, at the Effective Time Parent shall
deposit in escrow with the Escrow Agent, as escrow agent, a stock
certificate or certificates representing the Escrow Shares which shall be
registered in the name of the Escrow Agent, as escrow agent hereunder, or
in the Escrow Agent's discretion, in the name of its nominee. The Escrow
Agent shall have no responsibility for the genuineness, validity, market
value, title or sufficiency for any intended purpose of the Escrow Fund.
The Escrow Fund shall be held and distributed by the Escrow Agent in
accordance with the terms and conditions of this Agreement. The number of
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Escrow Shares beneficially owned by each person who was a holder of
Company Capital Stock (other than Appraisal Shares) immediately prior to
the Effective Time (the "Holders") is set forth in Schedule 2.04 attached
hereto. The Holders hereby authorize Parent to deliver directly to the
Escrow Agent all dividends and other distributions paid in Parent Common
Stock made in respect of any Escrow Shares held in the Escrow Fund, all
of which dividends and distributions shall be added to and become part of
the Escrow Fund held for the respective Holders on account of whose
shares such dividends or distributions were paid. Any cash dividends or
distributions of property (other than securities) received by the Escrow
Agent in respect of the Escrow Fund shall be paid by the Escrow Agent to
the Holders according to the Escrow Shares held by it for each Holder.
Parent, upon depositing Escrow Shares (and upon depositing any dividends
and other distributions made in respect of Escrow Shares which are paid
in securities) with the Escrow Agent in the Escrow Fund, as hereinabove
provided, shall deliver to the Escrow Agent three copies of a schedule,
signed by an officer of Parent, identifying the securities being
deposited by Parent in the Escrow Fund, two copies of which schedule
shall be countersigned by an appropriate officer of the Escrow Agent,
acknowledging the deposit of such securities in the Escrow Fund, and
returned by the Escrow Agent to Parent and the Representative. The Escrow
Agent shall hold the Escrow Fund in a separate account and shall invest
such account (to the extent of any cash held therein) and disburse such
account as hereinafter provided. The Escrow Fund, less any amounts
therefrom disbursed to Parent, shall be disbursed by the Escrow Agent to
the Holders on or after the Expiration Date in accordance with the
provisions of this Agreement.
(b) If any dividends or distributions made on or in respect of Escrow Shares
that are required to be distributed to the Escrow Agent as provided
pursuant to clause (a) above are received by any Holder prior to the
release of any such Escrow Shares to such Holder in accordance with the
provisions of this Agreement, such dividends or distributions shall not
be commingled by such Holder with any of its other funds or property but
shall be held separate and apart therefrom, shall be held in trust for
the benefit of the Escrow Agent and shall be forthwith delivered to the
Escrow Agent in the same form as so received (with any necessary
endorsement).
(c) To the extent and so long as any of the Escrow Shares are held by the
Escrow Agent hereunder, Parent shall have, as of and from the date such
Escrow Shares are received by the Escrow Agent, a perfected first
priority security interest in such Escrow Shares to secure the payment of
the amount, if any, payable to an Indemnitee for the account of a Holder
pursuant to Article I of this Agreement. In connection therewith, the
Representative expressly agrees on behalf of the Holders (i) that the
Escrow Agent shall perfect Parent's first priority security interest in
the Escrow Shares, (ii) to execute and deliver such instruments as Parent
may from time to time reasonably request for the purpose of evidencing
and perfecting such security interest and (iii) to execute and deliver
such instruments as Parent and the Representative may from time to time
reasonably request for the purpose of evidencing the release of such
security interest with respect to any Escrow Shares distributed to the
Holders in accordance with the provisions of this Agreement. In the event
that any cash portion of the Escrow Shares is invested pursuant to
Section 4.01, the Escrow Agent shall take all actions necessary,
including, but not limited to, appropriate identification on the Escrow
Agent's books and records, to ensure that all such investments are deemed
held by the Escrow Agent as Parent's agent for the purpose of perfecting
Parent's first-priority security interest therein.
SECTION 2.03. STOCKHOLDER RIGHTS. While any Escrow Shares are held in
escrow in the Escrow Fund, and pending the disbursement thereof to Parent or the
Holders, as the case may be, in connection with any disbursement of property
from the Escrow Fund in accordance with Article III hereof, the Holders will
have all rights with respect thereto (including, without limitation, the right
to
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vote such shares), except (i) the right of possession thereof, (ii) the right to
sell, assign, pledge, hypothecate or otherwise dispose of such Escrow Shares or
any interest therein and (iii) the right to receive any dividends or other
distributions in respect thereof paid in securities. The Escrow Agent grants a
proxy to the Holders to the extent necessary for them to vote their Escrow
Shares. Parent shall deliver any stockholder communications directly to the
Holders, and the Escrow Agent shall not be responsible for voting with regard to
the Escrow Shares. The Escrow Agent shall be under no obligation to exercise
rights in the Escrow Shares, and shall be responsible for only reasonable
measures to maintain the physical safekeeping thereof, and otherwise to perform
and observe such duties on its part as are expressly set forth in this
Agreement.
SECTION 2.04. STOCKHOLDER PERCENTAGE INTEREST IN ESCROW FUND. Attached
hereto as Schedule 2.04 is a schedule listing each Holder, such Holder's address
and Social Security or other tax identification number, the number of Escrow
Shares delivered to the Escrow Agent at the Effective Time on behalf of such
Holder and each Holder's percentage interest in the Escrow Fund, and such
Schedule shall be updated by Parent from time to time upon the deposit into the
Escrow Fund of any Subject Shares. At the time of delivery to the Escrow Agent
of any shares of Parent Common Stock, Parent shall notify the Escrow Agent of
the Holder's account for which such shares are delivered.
SECTION 2.05. OPTIONHOLDERS PERCENTAGE INTEREST IN SUBJECT
OPTIONS. Attached hereto As Schedule 2.05 is a schedule listing each
Optionholder, such Optionholder's address and Social Security or other tax
identification number, the number of Subject Options held by such Optionholder
and each Optionholders percentage interest in the value of the total number of
Subject Options (determined in accordance with Section 3.02), and such Schedule
shall be updated by Parent from time to time upon the cancellation of any
Subject Options.
SECTION 2.06. PRO RATA TREATMENT. The Shares of Parent Common Stock to be
issued in the Merger in accordance with the terms of the Merger Agreement that
will be Escrow Shares will be determined on a PRO RATA basis among all Holders,
and the Adjusted Stock Options that will be Subject Options will be determined
on a PRO RATA basis among all Optionholders.
SECTION 2.07. SUBJECT SHARES. If any Subject Option is exercised prior to
the Expiration Date (or, subject to Section 3.06 and Section 3.07, after the
Expiration Date), Parent shall deposit in escrow with the Escrow Agent, as
escrow agent, a stock certificate or certificates representing the shares of
Parent Common Stock issuable as a result of such exercise (the "Subject
Shares"), which shall be registered in the name of the Escrow Agent, as escrow
agent hereunder, or in the Escrow Agent's discretion, in the name of its
nominee. All such Subject Shares shall be treated for all purposes as Escrow
Shares hereunder and shall be deemed to constitute part of the Escrow Fund, and
the Optionholder who exercised such Subject Option (whether or not a Stockholder
or a Holder prior to such exercise) shall, upon such exercise, be a Stockholder
and a Holder for all purposes hereunder.
ARTICLE III
DISTRIBUTIONS FROM ESCROW AND
CANCELLATION OF SUBJECT OPTIONS
SECTION 3.01. CLAIMS BY PARENT. In the event of the occurrence of an event
that Parent asserts (on or prior to the Expiration Date) constitutes a Loss
against which an Indemnitee is entitled to indemnification or compensation
pursuant to Article I of this Agreement (each a "Claim"), Parent shall notify
the Representative and the Escrow Agent promptly (and in any event on or prior
to the Expiration Date) of such event, and shall deliver for receipt by the
Escrow Agent a certificate signed by an officer of Parent: (1) stating the
aggregate amount of such Indemnitee's Losses or an estimate thereof and
(2) specifying in reasonable detail the individual items of Losses included in
the amount so stated, the date each such item was paid or properly accrued or
arose, or the basis for such anticipated
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liability, and the nature of the misrepresentation, breach of warranty or
covenant or other matter to which such item is related.
SECTION 3.02. CLAIMS NOT DISPUTED BY REPRESENTATIVE. If, within 20 days
after receipt of the notice described in Section 3.01, the Representative does
not give the notice provided for in Section 3.03 hereof, Parent shall be
entitled to (i) make demand upon the Escrow Agent that it retain for future
return to Parent as and when the amount of the Loss is determined pursuant to
the provisions hereof, if it is not then determined, or that it then disburse to
Parent, if the amount of the Loss has then been determined, a number of Escrow
Shares having a value equal to the product of (x) such Loss and (y) the Holder
Attributable Portion (as defined below) and (ii) cancel Subject Options having a
value equal to the product of (x) such Loss and (y) the Optionholder
Attributable Portion (as defined below). For purposes of this Agreement,
(i) the value of each Escrow Share returned to Parent in satisfaction of Claims
shall be equal to the last quoted sale price for a share of Parent Common Stock
on Nasdaq on the trading day immediately preceding such return to Parent,
(ii) the value of Subject Options cancelled in satisfaction of Claims shall be
equal to the product of (x) the number of shares of Parent Common Stock
underlying such Subject Options and (y) the last quoted sale price for a share
of Parent Common Stock on Nasdaq on the trading day immediately preceding such
cancellation LESS the per share exercise price, (iii) the term "Holder
Attributable Portion" shall mean a fraction, the numerator of which is the total
value of the Escrow Fund and the denominator of which is the sum of (x) the
total value of the Escrow Fund and (y) the total value of all Subject Options
and (iv) the term "Optionholder Attributable Portion" shall mean a fraction, the
numerator of which is the total value of all Subject Options and the denominator
of which is the sum of (x) the total value of the Escrow Fund and (y) the total
value of all Subject Options.
SECTION 3.03. CLAIMS DISPUTED BY THE REPRESENTATIVE. If the Representative
disputes a Claim described in a notice from Parent given pursuant to
Section 3.01, or the amount that Parent is claiming on account of such Claim,
the Representative shall, within 20 days after his receipt of such notice given
by Parent, notify the Escrow Agent and Parent of such dispute in writing,
setting forth the basis therefor in reasonable detail, based on his then good
faith belief (the "Dispute Notice"). In the event the Representative disputes
the entire Claim, (i) the Escrow Agent shall not distribute any amount with
respect thereto until the Escrow Agent receives a written agreement signed by
the Representative and Parent stating the amount to which Parent is entitled in
connection with such Claim and (ii) Parent shall not cancel any Subject Options
until Parent receives a written agreement signed by the Representative stating
the amount to which Parent is entitled in connection with such Claim.
Notwithstanding the foregoing, upon receipt by the Escrow Agent and Parent of a
copy of the final decision of the majority of the arbitrators made in accordance
with Section 3.05 and setting forth a determination as to the amount to which
Parent is entitled in connection with such disputed claim and instructions to
the Escrow Agent as to the distribution of Escrow Shares and instructions to
Parent as to the cancellation of Subject Options, if any, that shall be made
with respect to such disputed claim (the "Arbitration Award"), (i) the Escrow
Agent shall disburse to Parent a number of Escrow Shares having a value
(determined in accordance with the final sentence of Section 3.02) equal to the
product of (x) the amount set forth in such agreement or Arbitration Award and
(y) the Holder Attributable Portion, and (ii) Parent shall be entitled to cancel
Subject Options having a value (determined in accordance with the final sentence
of Section 3.02) equal to the product of (x) the amount set forth in such
agreement or Arbitration Award and (y) the Optionholder Attributable Portion.
SECTION 3.04. CLAIMS DISPUTED BY REPRESENTATIVE IN PART. In the event the
Representative notifies the Escrow Agent that it disputes part of, but not all
of, a Claim, (i) the Escrow Agent shall, if the amount is undetermined, retain,
or, if the amount is determined, distribute to Parent, a number of Escrow Shares
having a value (determined in accordance with the final sentence of
Section 3.02) equal to the product of (x) that portion of the Claim which is not
disputed by the Representative and (y) the Holder Attributable Portion, and
(ii) Parent shall be entitled to cancel Subject Options having a value
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(determined in accordance with the final sentence of Section 3.02) equal to the
product of (x) that portion of the Claim which is not disputed by the
Representative and (y) the Optionholder Attributable Portion. The Escrow Agent
shall not distribute any amount, and Parent shall not cancel any Subject
Options, in each cash with respect to the balance of the Claim, except in
accordance with the procedures set forth in Section 3.03.
SECTION 3.05. ARBITRATION. If the Representative disputes a Claim
described in a notice from Parent given pursuant to Section 3.01, or the amount
that Parent is claiming on account of such Claim (the "Contested Amount"), the
matter shall be settled by binding arbitration in New York, New York. All claims
shall be settled by three arbitrators in accordance with the Commercial
Arbitration Rules then in effect of the American Arbitration Association (the
"AAA Rules"). If the Representative and Parent are unable to resolve any such
dispute within 45 days after delivery of the Dispute Notice, the Representative
and Parent shall each designate one arbitrator within 15 days after the
termination of such 45-day period. The Representative and Parent shall cause
such designated arbitrators mutually to agree upon and designate a third
arbitrator; PROVIDED, HOWEVER, that (i) failing such agreement within 70 days of
delivery of the Dispute Notice, the third arbitrator shall be appointed in
accordance with the AAA Rules and (ii) if either the Representative or Parent
fails to timely designate an arbitrator, the dispute shall be resolved by the
one arbitrator timely designated. Parent shall notify the Escrow Agent of the
selection of arbitrators pursuant to this Section 3.05 within three business
days after the appointment of the last of such arbitrators, and a summary of the
dispute being submitted to such arbitrators. The fees and expenses of the three
arbitrators shall be allocated between Parent, on the one hand, and the Holders
and the Optionholders, on the other hand, as shall be determined by the
arbitrators. The Representative and Parent shall use their reasonable best
efforts to cause the arbitrators to decide the matter to be arbitrated pursuant
hereto within 30 days after the appointment of the last arbitrator. The
arbitrators' decision shall relate solely to whether Parent is entitled to
receive the Contested Amount (or a portion thereof) pursuant to the applicable
terms of this Agreement. The final decision of the majority of the arbitrators
shall be furnished to the Representative, Parent and the Escrow Agent in writing
and shall constitute the conclusive determination of the issue in question
binding upon the Representative, the Holders and Optionholders and Parent, and
shall not be contested by any of them. Such decision may be used in a court of
law only for the purpose of seeking enforcement of the arbitrators' decision.
SECTION 3.06. NOTICE TO WITHHOLD ON EXPIRATION DATE; DISTRIBUTION FOLLOWING
EXPIRATION DATE.
(a) On or prior to the Expiration Date, Parent shall notify (i) the Escrow
Agent and the Representative of the amount of Escrow Shares, if any, to
be retained after the Expiration Date and (ii) the Representative of the
amount of Subject Options to remain subject to cancellation in accordance
with the provisions hereof (such amounts to be determined based on the
Holder Attributable Portion and the Optionholder Attributable Portion),
in each case on account of Claims with respect to which Parent has given
the notice specified in Section 3.01 which are not, at such time,
absolute as to liability or liquidated as to amount, such notice to
contain the information specified in Section 3.01 to the extent it
requires supplementation or change based on Parent's then knowledge,
whereupon (i) the Escrow Agent shall retain Escrow Shares having a value
(determined in accordance with the final sentence of Section 3.02) equal
to the product of (x) the amount set forth in the notice given by Parent
pursuant to this Section 3.06(a) and (y) the Holder Attributable Portion
and (ii) Parent shall remain entitled to cancel Subject Options having a
value (determined in accordance with the final sentence of Section 3.02)
equal to the product of (x) the amount set forth in the notice given by
Parent pursuant to this Section 3.06(a) and (y) the Optionholder
Attributable Portion. In the event Parent does not timely provide the
notice required by this Section 3.06(a), (i) all remaining property held
in the Escrow Fund shall be distributed by the
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Escrow Agent to the Holders promptly after the Expiration Date and
(ii) no Subject Options shall thereafter be subject to cancellation.
(b) As soon as practicable following the Expiration Date, such number of
Escrow Shares (including any fractional shares) and such other property
as shall remain in the Escrow Fund, less all Escrow Shares required by
Parent to be retained in the Escrow Fund pursuant to notice given under
clause (a) of this Section 3.06, shall be released from the provisions of
this Agreement, submitted by the Escrow Agent to Parent's transfer agent
for transfer, and, upon return, distributed promptly by the Escrow Agent
to the Holders, in the proportions indicated on Schedule 2.04, by first
class mail or expedited courier service to each Holder at the address
indicated on such Schedule, or such other address as shall have been
specified in a written notice to the Escrow Agent from the relevant
Holder or the Representative, with any cash amounts paid in the form of a
check issued by and drawn on the Escrow Agent.
SECTION 3.07. RETENTION OF ESCROW FUND AFTER EXPIRATION DATE. Upon receipt
of a notice pursuant to Section 3.06(a), the Escrow Agent shall continue to hold
after the Expiration Date, with respect to each Claim included in such notice,
the amount of Escrow Shares specified by such notice in respect of such Claim
and the Subject Shares delivered by Parent to the Escrow Agent upon the exercise
of Subject Options after the date of such notice, until such time as the Escrow
Agent receives a written agreement signed by the Representative and Parent
stating the amount, if any, which Parent is entitled to receive from the Escrow
Fund in connection with such Claim, or a copy of an Arbitration Award with
respect to such Claim, at which time the Escrow Agent shall return to Parent's
transfer agent, with respect to such Claim, Escrow Shares having a value
(determined in accordance with the final sentence of Section 3.02) equal to the
product of (x) the amount specified in such agreement or Arbitration Award and
(y) the Holder Attributable Portion, and shall distribute to the Holders, in the
proportions indicated on Schedule 2.04, such property, if any, which the Escrow
Agent was holding after the Expiration Date pursuant to Section 3.06(a) by
reason of such Claim and which is in excess of the amount so distributed to
Parent with respect thereto; PROVIDED, HOWEVER, that, to the extent the
distribution of such property from the Escrow Fund to the Holders would cause
the value of the property remaining in the Escrow Fund after such distribution
to fall below the product of (x) the amount (as stipulated in Parent's
Section 3.06(a) notice) of all still unresolved Claims identified in the
Section 3.06(a) notice and (y) the Holder Attributable Portion, such property
shall be retained by the Escrow Agent in the Escrow Fund and shall be available
for distribution to Parent upon the resolution of any unresolved Claims, and
such property shall not be distributed to the Holders until such time, if any,
as such distribution can be made without causing the value of all property
remaining in the Escrow Fund to fall below the product of (x) the amount of all
remaining unresolved Claims identified in the Section 3.06(a) notice and
(y) the Holder Attributable Portion.
SECTION 3.08. ALLOCATION OF SHARES DISTRIBUTED TO PARENT. In the event
Escrow Shares are retained by the Escrow Agent or distributed to Parent pursuant
to any provisions of this Article III, such Escrow Shares shall be taken from
the Escrow Shares deposited on behalf of each Holder in proportion to such
Holder's percentage interest in the Escrow Fund as set forth on Schedule 2.04.
In the event the Escrow Shares of any Holder include unvested shares, the number
of Escrow Shares to be distributed from such Holder's percentage interest in the
Escrow Fund shall be allocated, on a PRO RATA basis, among the number of such
Holder's vested shares and the number of such Holder's unvested shares that will
vest on each subsequent vesting date. Schedule 2.04 sets forth for each Holder,
the number of Escrow Shares that are vested and the number of and vesting
schedule for any Escrow Shares that are unvested.
SECTION 3.09. ALLOCATION OF CANCELLATION OF SUBJECT OPTIONS. In the event
Subject Options are cancelled by Parent pursuant to any provisions of this
Article III, such cancellation shall be allocated among each Optionholder's
Subject Options in proportion to each Optionholder's percentage interest in the
Subject Options as set forth in Schedule 2.05. In the event the Subject Options
of any
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Optionholder include unvested options, the Subject Options to be cancelled with
respect to any Optionholder shall be allocated, on a PRO RATA basis, among the
number of such Optionholder's vested options and the number of such
Optionholder's unvested options that will vest on each subsequent vesting date.
Schedule 2.05 sets forth for each Optionholder, the number of Subject Options
which are vested and the vesting schedule for any Subject Options that are
unvested.
SECTION 3.10. REINSTATEMENT OF CLAIMS. If (i) Escrow Shares are
distributed to Parent or Subject Options are cancelled by Parent, in each case
pursuant to this Article III in respect of one or more Claims for Losses in
connection with any Specified Matter (a "Specified Claim") and (ii) any
Indemnitee makes a Claim for a Loss in connection with a matter other than a
Specified Matter and the amount to which such Indemnitee is entitled is
determined in accordance with this Article III subsequent to any distribution or
cancellation referred to in clause (i) of this sentence (a "Subsequently
Determined Non-Specified Claim"), then upon notice from Parent to the Escrow
Agent and the Representative:
(A) a portion of such Escrow Shares distributed to Parent and a portion of
such Subject Options cancelled by Parent (on a PRO RATA basis in
accordance with the respective values of such Escrow Shares and such
Subject Options (determined as set forth below) with an aggregate value
(determined as set forth below) as of the date on which the amount to
which such Indemnitee is entitled is determined in accordance with this
Article III equal to the lesser of the amount of such Subsequently
Determined Non-Specified Claim and the aggregate value (determined as set
forth below) of such distributed Escrow Shares and cancelled Subject
Options as of such date (such lesser amount being referred to as the
"Deemed Amount") shall be deemed to have been distributed or cancelled,
as applicable, in respect of such Subsequently Determined Non-Specified
Claim and shall be deemed not to have been distributed or cancelled in
connection with such Specified Claim, and
(B) the applicable Indemnitee shall thereupon be entitled to exercise its
remedies hereunder in respect of Losses in connection with such Specified
Claim in an amount equal to the Deemed Amount.
For purposes of this Section 3.10, as of any date (i) the value of each
Escrow Share distributed to Parent in connection with a Specified Claim shall be
equal to the last quoted sale price for a share of Parent Common Stock on Nasdaq
on such date and (ii) the value of each Subject Option cancelled by Parent in
connection with a Specified Claim shall be equal to the last quoted sale price
for a share of Parent Common Stock on Nasdaq on such date LESS the per share
exercise price.
ARTICLE IV
INVESTMENT OF ESCROW DEPOSIT AND ACCOUNTING
SECTION 4.01. INVESTMENT OF ESCROW FUND. All cash held in the Escrow Fund
shall be invested by the Escrow Agent in an insured, interest-bearing money
market account, or in such other investments as Parent and the Representative
may agree in a writing delivered to the Escrow Agent. All interest and other
income earned on the Escrow Fund shall be added to and become part of the Escrow
Fund, and the distribution thereof shall be subject to the terms of this
Agreement. Any losses on investments will be debited to the Escrow Fund, and the
Escrow Agent shall have no liability for investment losses, including losses on
investments required to be liquidated before maturity in order to make a
required distribution from the Escrow Fund.
SECTION 4.02. ACCOUNTING. In the event cash is held in the Escrow Fund,
the Escrow Agent shall supply a written account to Parent and the Representative
at the end of each month prior to the Expiration Date in which there is cash in
the Escrow Fund (and thereafter to the extent any amounts
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remain in the escrow pursuant to Section 3.07) listing all transactions with
respect to the Escrow Fund during the immediately preceding month.
SECTION 4.03. TAX REPORTING. The parties hereto agree that, for Tax
reporting purposes, all interest or other income earned from the investment of
the Escrow Fund shall be allocable to the Holders in the proportions set forth
at Schedule 2.04 as such proportions may be modified due to the receipt by the
Escrow Agent of any additional shares of Parent Common Stock.
SECTION 4.04. CERTIFICATION OF TAX IDENTIFICATION NUMBER. The
Representative agrees to provide the Escrow Agent with each Holder's certified
Tax identification number on a completed and executed Form W-9 (or Form W-8, in
the case of non-U.S. persons), to deliver such Form W-9s (or Form W-8s, in the
case of non-U.S. persons) to the Escrow Agent within 30 days from the date
hereof. The Representative has advised the Holders that, in the event their Tax
identification numbers are not certified to the Escrow Agent, the Code may
require withholding of a portion of any interest or other income earned on the
investment of the Escrow Fund in accordance with the Code.
ARTICLE V
REPRESENTATIVE; SUCCESSOR REPRESENTATIVE
SECTION 5.01. APPOINTMENT OF REPRESENTATIVE.
(a) The Company hereby irrevocably constitutes and appoints, on behalf of
the Holders and Optionholders, Joseph Aragona as the Holders' and
Optionholders' true and lawful agent and attorney-in-fact to act on the
Holders' and Optionholders' behalf with respect to any and all Claims. In
such representative capacity, Joseph Aragona, or any person who shall
succeed in such representative capacity pursuant to the terms of this
Agreement, is referred to in this Agreement as the "Representative". The
Representative shall take any and all actions which he believes are
necessary or appropriate under this Agreement for and on behalf of the
Holders and Optionholders, as fully as if the Holders and Optionholders
were acting on their own behalf, including, without limitation, defending
all Claims, consenting to, compromising or settling all claims,
conducting negotiations with Parent and its representatives regarding
such Claims, dealing with Parent and the Escrow Agent under this
Agreement with respect to all matters arising under this Agreement,
taking any and all other actions specified in or contemplated by this
Agreement and engaging counsel, accountants or other representatives in
connection with the foregoing matters. Parent and the Escrow Agent shall
have the right to rely upon all actions taken or omitted to be taken by
the Representative pursuant to this Agreement, all of which actions or
omissions shall be legally binding upon each of the Holders and
Optionholders. The Representative shall have reasonable access to
information of and concerning any Claim and which is in the possession,
custody or control of the Company or Parent and the reasonable assistance
of the Company's officers and employees for purposes of performing the
Representative's duties under this Agreement and exercising its rights
under this Agreement, including for the purpose of evaluating any Claim
against the Escrow Fund by Parent; PROVIDED, HOWEVER, that the
Representative shall treat confidentially and not disclose any nonpublic
information from or concerning any Claim to anyone (except to the
Representative's attorneys, accountants and other advisors, to the
Holders, to the Optionholders, to the arbitrators appointed to resolve
disputes pursuant to this Agreement, and on a need-to-know basis to other
individuals who agree to keep such information confidential).
(b) The Company hereby ratifies and confirms, on behalf of the Holders and
the Optionholders, any action taken by the Representative in the exercise
of the agency and power of attorney granted to the Representative
pursuant to this Section 5.01, which agency and power of attorney, being
coupled with an interest, is irrevocable and a durable agency and power
of
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attorney and shall survive the death, incapacity or incompetence of such
Holder or Optionholder.
(c) The Company hereby agrees and acknowledges, on behalf of the Holders and
Optionholders, that the Representative shall represent and bind all the
Holders and Optionholders and that Parent and the Escrow Agent shall be
entitled to rely exclusively on the Representative for all purposes
specified herein, and that no suit, action, proceeding or claim may be
brought against Parent, the Escrow Agent or any of their respective
affiliates by any Holder or Optionholder with respect to any matter
herein that is to be effected by the Representative.
(d) Until notified in writing by the Representative that he has resigned or
by a majority in interest of the Holders and Optionholders that he has
been removed, the Escrow Agent may act upon the directions, instructions
and notices of the Representative who is an original party to this
Agreement, and thereafter, upon the directions, instructions and notices
of any successor named in a writing executed by a majority-in-interest of
the Holders and the Optionholders filed with the Escrow Agent.
SECTION 5.02. RELIANCE. In the performance of his duties hereunder, the
Representative shall be entitled to rely upon any document or instrument
reasonably believed by him to be genuine, accurate as to content and signed by
any Holder, any Optionholder or Parent. The Representative may assume that any
person purporting to give any notice in accordance with the provisions hereof
has been duly authorized to do so.
SECTION 5.03. LIABILITY.
(a) If the Representative is required by the terms hereof to determine the
occurrence of any event or contingency, the Representative shall, in
making such determination, be liable to the Holders or the Optionholders
only for his proven bad faith or willful misconduct, as determined in
light of all the circumstances, including the time and facilities
available to him in the ordinary conduct of business. In determining the
occurrence of any such event or contingency, the Representative may
request from any of the Holders or the Optionholders or any other person
such reasonable additional evidence as the Representative in his sole
discretion may deem necessary to determine any fact relating to the
occurrence of such event or contingency, and may at any time inquire of
and consult with others, including any of the Holders or the
Optionholders, and the Representative shall not be liable to any Holder
or Optionholder for any damages resulting from his delay in acting
hereunder pending his receipt and examination of additional evidence
requested by him.
(b) The Representative is authorized, in his sole discretion, to comply with
final, nonappealable orders issued or process entered by any court of
competent jurisdiction with respect to the Escrow Fund. If any portion of
the Escrow Fund is disbursed to the Representative and is at any time
attached, garnished or levied upon under any court order, or in case the
payment, assignment, transfer, conveyance or delivery of any such
property shall be stayed or enjoined by any court order, or in case any
order, judgment or decree shall be made or entered by any court affecting
such property or any part thereof, then and in any such event, the
Representative is authorized, in his sole discretion, but in good faith,
to rely upon and comply with any such order, writ, judgment or decree
which he is advised by legal counsel selected by him is binding upon him
without the need for appeal or other action; and if the Representative
complies with any such order, writ, judgment or decree, he shall not be
liable to any Holder or Optionholder or to any other Person by reason of
such compliance even though such order, writ, judgment or decree may be
subsequently reversed, modified, annulled, set aside or vacated.
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(c) In no event shall the Representative be liable to any Holder or
Optionholder for incidental, lost profits, consequential, indirect,
punitive or exemplary damages.
(d) Each Holder and each Optionholder shall be liable for its proportionate
percentage of the expenses (including reasonable attorneys' fees) paid or
incurred by the Representative. The Representative shall be entitled, but
not limited to, reimbursement of any such expenses from the Escrow Fund
prior to any distribution thereof to the Holders.
SECTION 5.04. SUCCESSOR REPRESENTATIVE. If Joseph Aragona resigns (by
giving at least 60 days' written notice of such resignation to Parent and the
Escrow Agent) or dies or becomes incapable of continuing to act as the
Representative for any reason, a successor Representative shall be appointed by
a writing signed by Holders and Optionholders holding in the aggregate a
majority of the sum of the value (determined in accordance with Section 3.02) of
the Holders' interest in the Escrow Fund and the value of the Subject Options,
such appointment to become effective upon the delivery of executed counterparts
of such writing to parent and the Escrow Agent, together with an acknowledgment
signed by the successor Representative named in such writing that he or she
accepts the responsibility of successor Representative and agrees to perform and
be bound by all provisions of this Agreement applicable to the Representative.
Pending the election of a successor Representative, the Stockholder holding the
largest number of outstanding shares of Company Capital Stock as of the
Effective Time (excluding the former Representative) shall act as the interim
Representative. Failing such appointment, Parent, the Escrow Agent or any
Stockholder or Optionholder may apply to a court of competent jurisdiction for
the appointment of a successor Representative.
SECTION 5.05. REMOVAL OF REPRESENTATIVE. Holders and Optionholders who in
the aggregate hold at least a majority of the sum of the value (determined in
accordance with Section 3.02) of the Holders' interest in the Escrow Fund and
the value of the Subject Options shall have the right at any time during the
term of this Agreement to remove the then-acting Representative and to appoint a
successor Representative; PROVIDED, HOWEVER, that neither such removal of the
then acting Representative nor such appointment of a successor Representative
shall be effective until the delivery to Parent and the Escrow Agent of executed
counterparts of a writing signed by each such Holder and Optionholder with
respect to such removal and appointment, together with an acknowledgment signed
by the successor Representative appointed in such writing that he or she accepts
the responsibility of successor Representative and agrees to perform and be
bound by all of the provisions of this Agreement applicable to the
Representative.
SECTION 5.06. AUTHORITY OF SUCCESSOR REPRESENTATIVE. Each interim and
successor Representative shall have all of the power, authority, rights and
privileges conferred by this Agreement upon the original Representative, and the
term "Representative" as used herein shall be deemed to include any interim or
successor Representative.
SECTION 5.07. NOTICES. Any notices given by Parent or the Escrow Agent
while there is no Representative shall be sufficiently given if given to the
other, with a copy provided directly to the Stockholder holding the largest
number of Escrow Shares pursuant to Schedule 2.04. A copy of all such notices
shall be delivered to the successor Representative upon his or her appointment
and he or she shall have 30 days thereafter to take such actions as may be
required under the terms of this Agreement in connection with any such notice.
ARTICLE VI
ESCROW AGENT
SECTION 6.01. ESCROW AGENT DUTIES, PROTECTIONS, INDEMNIFICATION, ETC.
(a) The other parties hereto acknowledge and agree that the Escrow Agent
(i) shall not be responsible for any of the agreements referred to herein
but shall be obligated only for the
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performance of such duties as are specifically set forth in this
Agreement; (ii) shall not be obligated to take any legal or other action
hereunder which might in its judgment involve expense or liability unless
it shall have been furnished with indemnity acceptable to it; (iii) may
rely on and shall be protected in acting or refraining from acting upon
any written notice, instruction (including, without limitation, wire
transfer instructions, whether incorporated herein or provided in a
separate written instruction), instrument, statement, request or document
furnished to it hereunder and believed by it to be genuine and to have
been signed or presented by the proper person, and shall have no
responsibility for making any investigation into the facts or matters set
forth therein or otherwise determining the accuracy or rightfulness
thereof; and (iv) may consult counsel, satisfactory to it, including in-
house counsel, and the written advice or opinion of such counsel shall be
full and complete authorization and protection in respect of any action
taken, suffered or omitted by it hereunder in good faith and in
accordance with the written advice or opinion of such counsel.
(b) Neither the Escrow Agent nor any of its directors, officers or employers
shall be liable to anyone for any action taken or omitted to be taken by
it or any of its directors, officers or employees hereunder except in the
case of gross negligence, bad faith or willful misconduct. Parent, on the
one hand, and the Stockholders as a group, in proportion to their
respective percentage interests in the Escrow Fund, on the other hand,
jointly and severally, covenant and agree to indemnify the Escrow Agent
and hold it harmless without limitation from and against any loss,
liability or expense of any nature incurred by the Escrow Agent arising
out of or in connection with this Agreement or with the administration of
its duties hereunder, including, but not limited to, legal fees and
expenses and other costs and expenses of defending or preparing to defend
against any claim of liability in the premises, unless such loss,
liability or expense shall be caused by the Escrow Agent's gross
negligence, bad faith or willful misconduct. In no event shall the Escrow
Agent be liable for incidental, lost profits, consequential, indirect,
punitive or exemplary damages.
(c) Parent agrees to assume any and all obligations imposed now or hereafter
by any applicable Tax law with respect to the payment of Escrow Funds
under this Agreement, and to indemnify and hold the Escrow Agent harmless
from and against any additions for late payment, interest, penalties and
other expenses, that may be assessed against the Escrow Agent on any such
payment or other activities under this Agreement. Parent undertakes to
instruct the Escrow Agent in writing with respect to the Escrow Agent's
responsibility for withholding and other Taxes, assessments or other
governmental charges, certifications and governmental reporting in
connection with its acting as Escrow Agent under this Agreement. Parent
agrees to indemnify and hold the Escrow Agent harmless from any liability
on account of Taxes, assessments or other governmental charges, including
without limitation Taxes withheld or deducted or penalties imposed for
failure to withhold or deduct Taxes, and any liability for failure to
obtain proper certifications or to properly report to governmental
authorities, to which the Escrow Agent may be or become subject in
connection with or which arises out of this Agreement, including costs
and expenses (including reasonable fees and expenses), interest and
penalties.
(d) Parent agrees to pay or reimburse the Escrow Agent for any legal fees
and expenses incurred in connection with the preparation of this
Agreement and to pay the Escrow Agent's reasonable compensation for its
normal services hereunder in accordance with the fee schedule attached as
Schedule 6.01(d) hereto, which may be subject to change on an annual
basis. The Escrow Agent shall be entitled to reimbursement on demand for
all expenses incurred in connection with the administration of the escrow
created hereby which are in excess of its compensation for normal
services hereunder, including without limitation
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payment of any legal fees and expenses incurred by the Escrow Agent in
connection with the resolution of any claim by any party hereunder.
(e) The provisions of paragraphs (b), (c) and (d) of this Section 6.01 shall
survive the resignation or removal of the Escrow Agent or the termination
of this Agreement.
SECTION 6.02. DISPUTES. In the event that the Escrow Agent shall be
uncertain as to its duties or rights hereunder, or shall receive instructions
from any party hereto with respect to the Escrow Fund which, in its opinion, are
in conflict with any of the provisions of this Agreement, it shall be entitled
to refrain from taking any action at its sole discretion and election until such
time as there has been a final determination of the rights of Parent and the
Representative with respect to the Escrow Fund (or relevant portion thereof).
For purposes of this Section 6.02, there shall be deemed to have been a final
determination of the rights of Parent and the Representative with respect to the
Escrow Fund (or relevant portion thereof) at such time as the Escrow Agent shall
receive (i) an executed counterpart of an agreement between the Representative
and Parent or (ii) a copy of an Arbitration Award, which provides for the
disposition of the Escrow Fund (or relevant portion thereof).
SECTION 6.03. RESIGNATION. The Escrow Agent may at any time resign and be
discharged of the duties imposed hereunder (but without prejudice for any
liability for bad faith, gross negligence or willful misconduct hereunder) by
giving notice to the Representative and Parent at least 60 business days prior
to the date specified for such resignation to take effect, in which case, upon
the effective date of such resignation:
(a) all property then held by the Escrow Agent hereunder shall be delivered
by it to such person as may be designated in writing by Parent and the
Representative, whereupon the Escrow Agent's obligations hereunder shall
cease and terminate;
(b) if no such person has been designated by such date, all obligations of
the Escrow Agent hereunder shall, nevertheless, cease and terminate,
subject to clause (c) below; and
(c) the Escrow Agent's sole responsibility thereafter shall be to (i) keep
all property then held by it (and to make the investments as hereinbefore
provided) and to account for and deliver the same to the successor escrow
agent designated in writing by Parent and the Representative or, if no
such successor escrow agent shall have been so designated, in accordance
with the directions of an Arbitration Award, and the provisions of
Section 6.01(d) and Section 6.01(e) shall remain in effect, or
(ii) deposit the Escrow Fund with a court of competent jurisdiction,
whereupon its duties hereunder shall terminate.
SECTION 6.04. REMOVAL OF ESCROW AGENT. Parent and the Representative may,
upon at least 30 business days prior written notice to the Escrow Agent executed
by each of them, dismiss the Escrow Agent hereunder and appoint a successor. In
such event, the Escrow Agent shall promptly account for and deliver to the
successor escrow agent named in such notice the then balance of the Escrow Fund,
including all investments thereof and accrued income thereon. Upon acceptance
thereof and of such accounting by such successor escrow agent, and upon
reimbursement to the Escrow Agent of all expenses and other amounts due to it
hereunder through the date of such accounting and delivery, the Escrow Agent
shall be released and discharged from all of its duties and obligations
hereunder, but without prejudice to any liability of the Escrow Agent for its
bad faith, gross negligence or willful misconduct hereunder.
ARTICLE VII
REPRESENTATIONS AND WARRANTIES
SECTION 7.01. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS. Each
Stockholder hereby, severally and not jointly, represents and warrants to Parent
as follows:
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(a) AUTHORITY. Such Stockholder has all requisite power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary action of such Stockholder.
This Agreement has been duly executed and delivered by such Stockholder
and, assuming this Agreement constitutes a valid and binding obligation
of Parent, constitutes a valid and binding obligation of such Stockholder
enforceable against such Stockholder in accordance with its terms.
Neither the execution, delivery or performance of this Agreement by such
Stockholder nor the consummation by such Stockholder of the transactions
contemplated hereby will (i) require any filing with, or permit,
authorization, consent or approval of, any Governmental Entity,
(ii) result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default under, or give rise to any
right of termination, amendment, cancellation or acceleration under, or
result in the creation of any Lien upon any of the properties or assets
of such Stockholder under, any of the terms, conditions or provisions of
any Contract to which such Stockholder is a party or by which such
Stockholder or any such Stockholder's properties or assets, including
such Stockholder's shares of Company Capital Stock, may be bound or
(iii) violate any order, writ, injunction, decree, judgment or
stipulation (each, an "Order") or any statute, law, ordinance, rule or
regulation (each, a "Law") applicable to such Stockholder or any of such
Stockholder's properties or assets, including such Stockholder's shares
of Company Capital Stock.
(b) THE SHARES. Such Stockholder's shares of Company Capital Stock are set
forth opposite such Stockholder's name on Schedule 7.01(b) attached
hereto (the "Shares") and the certificates representing such Shares are
as of the date of this Agreement held by such Stockholder, or by a
nominee or custodian for the benefit of such Stockholder, and such
Stockholder has good and marketable title to such Shares, free and clear
of any Liens, other than repurchase rights for unvested shares. Such
Stockholder owns of record or beneficially no shares of Company Common
Stock, Company Series A Preferred Stock or Company Series B Preferred
Stock other than such Stockholder's Shares and shares of Company Common
Stock issuable upon the exercise of Stock Options.
(c) BROKERS. No broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on
behalf of such Stockholder.
(d) MERGER AGREEMENT. Such Stockholder understands and acknowledges that
Parent is consummating, and causing Sub to consummate, the transactions
contemplated by the Merger Agreement in reliance upon such Stockholder's
execution and delivery of this Agreement.
SECTION 7.02. REPRESENTATIONS AND WARRANTIES OF THE OPTIONHOLDERS. Each
Optionholder hereby, severally and not jointly, represents and warrants to
Parent as follows:
(a) AUTHORITY. Such Optionholder has all requisite power and authority to
execute and deliver this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby
have been duly authorized by all necessary action of such Optionholder.
This Agreement has been duly executed and delivered by such Optionholder
and, assuming this Agreement constitutes a valid and binding obligation
of Parent, constitutes a valid and binding obligation of such
Optionholder enforceable against such Optionholder in accordance with its
terms. Neither the execution, delivery or performance of this Agreement
by such Optionholder nor the consummation by such Optionholder of the
transactions contemplated hereby will (i) require any filing with, or
permit, authorization, consent or approval of, any
D-18
<PAGE>
Governmental Entity, (ii) result in a violation or breach of, or
constitute (with or without due notice or lapse of time or both) a
default under, or give rise to any right of termination, amendment,
cancellation or acceleration under, or result in the creation of any Lien
upon any of the properties or assets of such Optionholder under, any of
the terms, conditions or provisions of any Contract to which such
Optionholder is a party or by which such Optionholder or any of such
Optionholder's properties or assets, including such Optionholder's Stock
Options, may be bound or (iii) violate any Order or any Law applicable to
such Optionholder or any of such Optionholder's properties or assets,
including such Optionholder's Stock Options.
(b) STOCK OPTIONS. Such Optionholder's Stock Options (other than Permitted
Interim Period Stock Options) are set forth opposite such Stockholder's
name on Schedule 7.02(b) attached hereto (the "Options") and such
Optionholder has good title to such Options, free and clear of any Liens.
Such Optionholder owns no Stock Options other than such Options and other
than Permitted Interim Period Stock Options.
(c) BROKERS. No broker, investment banker, financial advisor or other
person is entitled to any broker's, finder's, financial advisor's or
other similar fee or commission in connection with the transactions
contemplated by this Agreement based upon arrangements made by or on
behalf of such Optionholder.
(d) MERGER AGREEMENT. Such Optionholder understands and acknowledges that
Parent is consummating, and causing Sub to consummate, the transactions
contemplated by the Merger Agreement in reliance upon such Optionholder's
execution and delivery of this Agreement.
SECTION 7.03. REPRESENTATION AND WARRANTY OF PARENT. Parent hereby
represents and warrants to the Stockholders and Optionholders as follows:
(a) AUTHORITY. Parent has all requisite corporate power and authority to
enter into this Agreement and to consummate the transactions contemplated
hereby. The execution, delivery and performance of this Agreement and the
consummation by Parent of the transactions contemplated hereby have been
duly authorized by all necessary corporate action on the part of Parent
and no other corporate proceedings on the part of Parent are necessary to
authorize this Agreement or to consummate the transactions contemplated
hereby. This Agreement has been duly executed and delivered by Parent
and, when executed and delivered by the Stockholders and Optionholders,
constitutes a legal, valid and binding obligation of Parent, enforceable
against Parent in accordance with its terms. Neither the execution and
delivery of this Agreement by Parent nor the consummation by Parent of
the transactions contemplated hereby will (i) require any filing with, or
permit, authorization, consent or approval of, any Governmental Entity,
(ii) result in a violation or breach of, or constitute (with or without
due notice or lapse of time or both) a default under, or give rise to any
right of termination, amendment, cancellation or acceleration under, or
result in the creation of any Lien upon any of the properties or assets
of Parent under, any of the terms, conditions or provisions of any
Contract to which Parent is a party or by which Parent or any of Parent's
properties or assets may be bound or (iii) violate any Law applicable to
Parent or any of Parent's properties or assets.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.01. TERM. This Agreement shall continue in force until the final
distribution of all amounts held by the Escrow Agent hereunder.
D-19
<PAGE>
SECTION 8.02. NOTICES.
(a) All notices, instructions and other communications given hereunder or in
connection herewith shall be in writing. Any such notice, instruction or
communication shall be sent either (i) by registered or certified mail,
return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set
forth below. Any such notice, instruction or communication shall be
deemed to have been delivered and received three business days after it
is sent prepaid, or one business day after it is sent via a reputable
nationwide overnight courier service.
If to Parent:
724 Solutions Inc.
Attention:
Tel:
Fax:
with a copy to:
Ogilvy Renault
77 King Street West
Suite 2100, P.O. Box 141
Royal Trust Tower
TorontoDominion Centre
Toronto, Ontario
M5K 1H1
Attention: Brian A. Ludmer, Esq.
Telecopy: 416-216-3930
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, NY 10019
Attention: Scott A. Barshay, Esq.
Tel: (212) 474-1000
Fax: (212) 474-3700
D-20
<PAGE>
If to the Holders, the Optionholders or the Representative, to the
Representative, at:
Attention:
Tel:
Fax:
with a copy to:
Brobeck, Phleger & Harrison LP
4801 Plaza on the Lake
Austin, TX 78746
Attention: S. Michael Dunn, P.C.
Tel: (512) 330-4000
Fax: (512) 330-4001
If to the Escrow Agent:
BY OVERNIGHT COURIER:
BY MAIL:
Attention:
Fax:
or, in each case, to such other address as may be specified in writing to
the other parties.
Any party may give any notice, instruction or communication in connection
with this Agreement, using any other means (including personal delivery,
telecopy or ordinary mail), but no such notice, instruction or communication
shall be deemed to have been delivered unless and until it is actually received
by the party to whom it was sent. Any party may change the address to which
notices, instructions or communications are to be delivered by giving the other
parties to this Agreement notice thereof in the manner set forth in this
Section 8.02.
(b) WIRING INSTRUCTIONS. Any funds to be paid to the Escrow Agent hereunder
shall be sent by wire transfer pursuant to the following instructions (or
by such method of payment and pursuant to such instruction as may have
been given in advance and in writing by the Escrow Agent, in accordance
with Section 7.02(a)).
If to the Escrow Agent:
Bank:
ABA #:
A/C #:
Attn:
Ref:
D-21
<PAGE>
SECTION 8.03. ASSIGNMENT. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective representatives,
successors and assigns. Neither this Agreement nor any rights, duties
obligations hereunder shall be assigned by any party hereto by operation of law
(including by merger, amalgamation or consolidation) or otherwise without the
prior written consent of the parties hereto (except as contemplated by
Article V and Article VI hereof with respect to the successor Representative or
any successor escrow agent).
SECTION 8.04. GOVERNING LAW. The parties hereto agree that this Agreement,
and the respective rights, duties and obligations of the parties hereunder,
shall be governed by and continued in accordance with the laws of the State of
New York, without giving effect to principles of conflicts of law thereunder.
Each of the parties hereby (i) irrevocably consents and agrees that any legal or
equitable action or proceeding arising under or in connection with this
Agreement shall be brought exclusively in any New York State court sitting in
New York, New York or in any United States District Court for the Southern
District of New York and any court to which an appeal may be taken in any such
litigation, and (ii) by execution and delivery of this Agreement, irrevocably
submits to and accepts, with respect to any such action or proceeding, for
itself and in respect of its properties and assets, generally and
unconditionally, the jurisdiction of the aforesaid courts, and irrevocably
waives any and all rights such party may now or hereafter have to object to such
jurisdiction.
SECTION 8.05. COUNTERPARTS. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original.
SECTION 8.06. HEADINGS. The Article and Section headings in this Agreement
are for convenience only and do not constitute part of this Agreement.
SECTION 8.07. AMENDMENT. This Agreement supersedes any prior agreements
among the parties relating to the subject matter hereof (except for the Merger
Agreement and the documents executed and delivered in connection therewith) and
can be amended only by a writing signed by Parent, the Escrow Agent and the
Representative or their respective successors in interest.
SECTION 8.08. FORCE MAJEURE. Neither Parent nor Representative nor Escrow
Agent shall be responsible for delays or failures in performance resulting from
acts beyond its control. Such acts shall include but not be limited to acts of
God, strikes, lockouts, riots, acts of war, epidemics, governmental regulations
superimposed after the fact, fire, communication line failures, computer
viruses, power failures, earthquakes or other disasters.
SECTION 8.09. REPRODUCTION OF DOCUMENTS. This Agreement and all documents
relating thereto, including, without limitation, (a) consents, waivers and
modifications which may hereafter be executed and (b) certificates and other
information previously or hereafter furnished, may be reproduced by any
photographic, photostatic, microfilm, optical disk, micro-card, miniature
photographic or other similar process. The parties agree that any such
reproduction shall be admissible in evidence as the original itself in any
judicial or administrative proceeding, whether or not the original is in
existence and whether or not such reproduction was made by a party in the
regular course of business, and that any enlargement, facsimile or further
reproduction of such reproduction shall likewise be admissible in evidence.
SECTION 8.10. STOCKHOLDERS AND OPTIONHOLDERS. Each holder of Company
Capital Stock and each holder of Stock Options, in each case that is a party to
the Resale Restrictions Agreement and each person who has been furnished the
final form of this Agreement and has executed and delivered an instrument in
writing in which such person agrees to be bound by the applicable terms hereof
shall be deemed to be a party hereto.
D-22
<PAGE>
IN WITNESS WHEREOF, the parties to this Agreement have caused this Agreement
to be duly executed as of the date first written above.
<TABLE>
<CAPTION>
<S> <C>
724 SOLUTIONS INC.
by
Name:
Title:
TANTAU SOFTWARE, INC.
by
Name:
Title:
[ ], as Escrow Agent,
by
Name:
Title:
JOSEPH ARAGONA, as Representative,
by
</TABLE>
D-23
<PAGE>
ANNEX E
APPRAISAL AND DISSENTERS' RIGHTS
TITLE 8 OF THE DELAWARE CODE
Section 262. Appraisal rights
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to Section 228
of this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to Section 251 (other than a merger effected pursuant to
Section 251(g) of this title), Section 252, Section 254, Section 257, Section
258, Section 263 or Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of Section 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to
SectionSection 251, 252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or resulting from such
merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts in
respect thereof, which shares of stock (or depository receipts in respect
thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a. and b. of this paragraph; or
E-1
<PAGE>
d. Any combination of the shares of stock, depository receipts and cash
in lieu of fractional shares or fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under Section 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights
are provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsection (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to Section
228 or Section 253 of this title, each constituent corporation, either before
the effective date of the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of stock of such
constituent corporation who are entitled to appraisal rights of the approval of
the merger or consolidation and that appraisal rights are available for any or
all shares of such class or series of stock of such constituent corporation, and
shall include in such notice a copy of this section; provided that, if the
notice is given on or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting corporation to all such
holders of any class or series of stock of a constituent corporation that are
entitled to appraisal rights. Such notice may, and, if given on or after the
effective date of the merger or consolidation, shall, also notify such
stockholders of the effective date of the merger or consolidation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of such notice, demand in writing from the surviving or resulting
corporation the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand the appraisal of
such holder's shares. If such notice did not notify stockholders of the
effective date of the merger or consolidation, either (i) each such constituent
corporation shall send a second notice before the effective date of the merger
or consolidation notifying each of the holders of any class or series of stock
of such constituent corporation that are entitled to appraisal rights of the
effective date of the merger or consolidation or (ii) the surviving or resulting
corporation shall send such a second notice to all such holders on or
E-2
<PAGE>
within 10 days after such effective date; provided, however, that if such second
notice is sent more than 20 days following the sending of the first notice, such
second notice need only be sent to each stockholder who is entitled to appraisal
rights and who has demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant secretary or of the
transfer agent of the corporation that is required to give either notice that
such notice has been given shall, in the absence of fraud, be prima facie
evidence of the facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each constituent corporation may
fix, in advance, a record date that shall be not more than 10 days prior to the
date the notice is given, provided, that if the notice is given on or after the
effective date of the merger or consolidation, the record date shall be such
effective date. If no record date is fixed and the notice is given prior to the
effective date, the record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within
10 days after such stockholder's written request for such a statement is
received by the surviving or resulting corporation or within 10 days after
expiration of the period for delivery of demands for appraisal under
subsection (d) hereof, whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the
Court shall appraise the shares, determining their fair value exclusive of any
element of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid
E-3
<PAGE>
upon the amount determined to be the fair value. In determining such fair value,
the Court shall take into account all relevant factors. In determining the fair
rate of interest, the Court may consider all relevant factors, including the
rate of interest which the surviving or resulting corporation would have had to
pay to borrow money during the pendency of the proceeding. Upon application by
the surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its discretion,
permit discovery or other pretrial proceedings and may proceed to trial upon the
appraisal prior to the final determination of the stockholder entitled to an
appraisal. Any stockholder whose name appears on the list filed by the surviving
or resulting corporation pursuant to subsection (f) of this section and who has
submitted such stockholder's certificates of stock to the Register in Chancery,
if such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal rights
under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
E-4
<PAGE>
PART II.
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under the Business Corporations Act (Ontario), we are permitted to indemnify
our directors and officers and former directors and officers against costs and
expenses, including amounts paid to settle an action or satisfy a judgment in a
civil, criminal or administrative action or proceeding to which they are made
parties because of their position as directors or officers, including an action
against us. In order to be entitled to indemnification under this Act, the
director or officer must act honestly and in good faith with a view to our best
interests, and in the case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, the director or officer must have
reasonable grounds for believing that his or her conduct was lawful.
Under our by-laws, we are permitted to indemnify our directly held
subsidiaries' current and former directors and our, and our directly held
subsidiaries', current and former officers, employees and agents. Our by-laws
also provide that, to the fullest extent permitted by the Act, we are authorized
to purchase and maintain insurance on behalf of our and our subsidiaries'
current and past directors, officers, employees and agents against any liability
incurred by them in their duties. We believe that the provisions of our by-laws
and the shareholders' agreement are necessary to attract and retain qualified
persons as directors and officers.
Currently, there is no pending litigation or proceeding where a current or
past director, officer or employee is seeking indemnification, nor are we aware
of any threatened litigation that may result in claims for indemnification. We
have purchased a liability insurance policy covering our directors and officers
and the directors and officers of our subsidiaries.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS
The exhibit list required to be filed as part of this registration statement
on Form F-4 is incorporated herein by reference.
(b) FINANCIAL STATEMENT SCHEDULES
None.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes: (i) to respond to requests
for information that is incorporated by reference into the prospectus
pursuant to Item 4, 10(b), 11, or 13 of this form, if any, within one
business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means; and (ii) to
arrange or provide for a facility in the U.S. for the purpose of
responding to such requests. The undertaking in subparagraph (i) above
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of
responding to the request.
(b) The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
registrant has duly caused this amendment to the registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the city
of Toronto, Ontario on January , 2001.
724 SOLUTIONS INC.
Per: /s/ Christopher Erickson
-----------------------------------
Christopher Erickson
President and General Counsel
Pursuant to the requirements of the Securities Act of 1933, as amended, this
amendment to the registration statement has been signed by the following persons
in the capacities on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- --------------------------- -----------------
<C> <S> <C>
Chairman and Chief
* Executive Officer
------------------------------------------- (principal executive January , 2001
Gregory Wolfond officer)
* Chief Financial Officer
------------------------------------------- (principal financial and January , 2001
Karen Basian accounting officer)
*
------------------------------------------- Director January , 2001
Lloyd F. Darlington
*
------------------------------------------- Director January , 2001
Martin A. Stein
*
------------------------------------------- Director January , 2001
James D. Dixon
*
------------------------------------------- Director January , 2001
Harri Vatanen
*
------------------------------------------- Director January , 2001
Alan Young
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- --------------------------- -----------------
<C> <S> <C>
*
------------------------------------------- Director January , 2001
Heather Reisman
*
------------------------------------------- Director January , 2001
Barry J. Reiter
*
------------------------------------------- Director January , 2001
Holger Kluge
*
------------------------------------------- Director January , 2001
J. Robert S. Prichard
</TABLE>
<TABLE>
<S> <C> <C> <C>
*By: /s/ Christopher Erickson
--------------------------------------
Christopher Erickson
AS ATTORNEY-IN-FACT
</TABLE>
AUTHORIZED REPRESENTATIVE
Pursuant to the requirements of Section 6(a) of the Securities Act of 1933,
as amended, the undersigned has signed this amendment to the registration
statement solely in the capacity of the duly authorized representative of 724
Solutions Inc. in the U.S., on January , 2001.
724 SOLUTIONS CORP.
Per: /s/ Karen Basian
-----------------------------------
Karen Basian
Treasurer
II-3
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INDEX TO EXHIBITS
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<CAPTION>
EXHIBIT
NUMBER NAME OF DOCUMENT
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<S> <C>
2.1 Agreement and Plan of Merger, dated as of November 29, 2000,
by and among the Registrant, Saturn Merger Sub, Inc. and
Tantau Software, Inc. (set forth as Annex A to the
information statement/prospectus)
2.2 Form of Stockholder Voting Agreement (set forth as Annex B
to the information statement/prospectus).
2.3 Form of Resale Restriction Agreement (set forth as Annex C
to the information statement/prospectus).
2.4 Form of Indemnification and Escrow Agreement (set forth as
Annex D to the information statement/prospectus).
3.1(1) Articles of the Registrant.
3.2(1) By-laws of Registrant.
5.1 Opinion of Ogilvy Renault, Toronto, with respect to the
validity of the shares.
8.1 Opinion of Brobeck, Phleger & Harrison LLP with respect to
certain U.S. federal tax matters.
10.1(1) Subscription Agreement between Bank of Montreal, the
Registrant and Blue Sky Capital Corporation, dated
April 30, 1998.
10.2(1) Agreement and Plan of Merger and Reorganization, among the
Registrant, Serpent Merger Sub, Inc., Spyonit.com, Inc. and
the Stockholders of Spyonit.com, Inc. party thereto.
10.3(2)(3) Technology License Agreement, dated as of April 30, 1998,
between the Registrant and Bank of Montreal.
10.4(1) Mutual Indemnity Agreement, dated April 30, 1998, between
the Registrant and Bank of Montreal.
10.5(1) Letter Agreement, dated November 27, 1998, between Bank of
Montreal and the Registrant.
10.6(1) Letter Agreement, dated November 27, 1998, between Bank of
Montreal and the Registrant.
10.7(1) Letter Agreement, dated July 26, 1999, between Bank of
Montreal and the Registrant.
10.8(2)(3) Technology License Agreement, dated June 1, 1999, between
the Registrant and Bank of America, N.A. (as successor to
Bank of America National Trust & Savings Association).
10.9(2)(3) Software Maintenance and Support Agreement, dated June 1,
1999, between the Registrant and Bank of America, N.A. (as
successor to Bank of America National Trust & Savings
Association).
10.10(2)(3) Service Agreement between the Registrant and Bank of
America.
10.11* Form of Registration Rights Agreement
10.12(1)(2) Master Technology License Agreement, dated December 29,
1999, between Citicorp Strategic Technology Corporation and
the Registrant.
10.13(1) Support Agreement, dated December 29, 1999, among Citicorp
Strategic Technology Corporation, 724 Solutions
International SRL and the Registrant.
10.14(2)(3) Licensed Affiliate Agreement between the Registrant and
Citibank, N.A.
10.15(1) Agreement between the Registrant and Sonoma Mountain
Ventures.
10.16(3) First Amended and Restated Agreement and Plan of Merger and
Reorganization among the Registrant, Sapphire Merger
Sub, Inc., ezlogin.com. and Alexandre Balkanski, as
Shareholders' Agent, dated as of May 9, 2000.
10.17(3) Amendment to First Amended and Restated Agreement and Plan
of Merger and Reorganization, among the Registrant, Sapphire
Merger Sub, Inc., ezlogin.com, Inc. and Alexandre Balkanski,
as Shareholders' Agent, dated as of June 9, 2000.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER NAME OF DOCUMENT
----------- ----------------
<S> <C>
10.18* Agreement and Plan of Merger and Reorganization among
724 Solutions Inc., the Registrant, Serpent Merger Sub,
Inc., Spyonit.com, Inc. and certain stockholders of
Spyonit.com, Inc., dated as of September 12, 2000.
11.1* List of Subsidiaries.
23.1 Consent of KPMG LLP, Toronto, Ontario.
23.2 Consent of KPMG LLP, Austin, Texas.
23.3 Consent of Ogilvy & Renault (contained in Exhibit 5.1).
23.4 Consent of Brobeck, Phleger & Harrison LLP (contained in
Exhibit 8.1).
24.1* Powers of Attorney.
27.1* Financial Data Schedule.
99.1 Form of Written Consent to be executed by Tantau
stockholders.
</TABLE>
------------
(1) Incorporated by reference to the Registrant's Registration Statement on
Form F-1, File No. 333-90143.
(2) Confidential treatment has been received with respect to certain portions of
the Exhibit pursuant to Rule 406 under the Securities Act of 1933, as
amended. Omitted portions have been filed separately with the Securities and
Exchange Commission.
(3) Incorporated by reference to the Registrant's Annual Report on Form 20-F,
Filed on June 29, 2000.
* Previously filed.
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