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E Xact Transactions Ltd – ‘10KSB40’ for 12/31/01

On:  Friday, 4/5/02   ·   For:  12/31/01   ·   Accession #:  950134-2-3330   ·   File #:  333-89561

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  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 4/05/02  E Xact Transactions Ltd           10KSB40    12/31/01    2:126K                                   RR Donnelley

Annual Report — Small Business — [x] Reg. S-B Item 405   —   Form 10-KSB
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10KSB40     Form 10Ksb for Fiscal Year End December 31, 2001      51    239K 
 2: EX-23.1     Consent of Deloitte & Touche LLP                       1      6K 


10KSB40   —   Form 10Ksb for Fiscal Year End December 31, 2001
Document Table of Contents

Page (sequential) | (alphabetic) Top
 
11st Page   -   Filing Submission
3Item 1. Description of Business
8E-commerce
12Item 2. Description of Property
"Item 3. Legal Proceedings
"Item 4. Submission of Matters to a Vote of Security Holders
"Item 5. Market for Common Equity and Related Stockholder Matters
14Item 6. Management's Discussion and Analysis of Financial Condition and Results of Operation
19Item 7. Financial Statements
40Item 9. Directors and Executive Officers; Compliance with Section 16(a) of the Exchange Act
43Item 10. Executive Compensation
45Item 11. Security Ownership of Certain Beneficial Owners and Management
47Item 12. Certain Relationships and Related Transactions
48Consulting Agreement
49Item 13. Exhibits and Reports on Form 8-K
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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB [X] Annual report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended December 31, 2001 Or [ ] Transition report pursuant to section 13 or 15 (d) of the Securities Exchange Act of 1934 Commission file number: 333-89561 E-xact Transactions Ltd. ------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 98-0212722 -------------------------------- ---------------------------- (State or other jurisdiction of I.R.S. Employer I. D. Number incorporation or organization) 2410-555 West Hastings Street, Vancouver, B.C., Canada V6B 4N6 ------------------------------------------------------ --------- (Address of principal executive offices) (zip code) Registrant's telephone number, including area code: (604) 691-1670 -------------- Securities registered pursuant to Section 12(b) of the Act: None. Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.001 Par Value Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be included herein, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of the Form 10-KSB or any amendment to this Form 10-KSB: [X]. State issuer's revenues for its most recent fiscal year: $392,519 -------- Shares of common stock, $.001 par value, outstanding as of March 20, 2002: 10,502,000 shares. Aggregate market value of voting stock held by non-affiliates of the registrant on March 19, 2002: $1,047,824. Documents incorporated by reference: None. Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]
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E-xact Transactions Ltd. FORM 10-KSB TABLE OF CONTENTS [Enlarge/Download Table] Page ---- Part I Item 1. Description of Business .................................................................. 1 Item 2. Description of Property .................................................................. 10 Item 3. Legal Proceedings ........................................................................ 10 Item 4. Submission of Matters to a Vote of Security Holders ...................................... 10 Part II Item 5. Market for Common Equity and Related Stockholder Matters ................................. 10 Item 6. Management's Discussion and Analysis or Plan of Operation ................................ 12 Item 7. Financial Statements ..................................................................... 17 Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ..... 18 Part III Item 9. Directors and Executive Officers; Compliance with Section 16(a) of the Exchange Act ...... 18 Item 10. Executive Compensation ................................................................... 21 Item 11. Security Ownership of Certain Beneficial Owners and Management ........................... 23 Item 12. Certain Relationships and Related Transactions ........................................... 25 Part IV Item 13. Exhibits and Reports on Form 8-K ......................................................... 27
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E-xact Transactions Ltd. FORM 10-KSB FORWARD-LOOKING STATEMENTS Statements made in this Form 10-KSB that are not historical or current facts are "forward-looking statements" made pursuant to the safe harbor provisions of Section 27A of the, Securities Act of 1993 ("The Act") and Section 21E of the Securities Exchange Act of 1934. These statements often can be identified by the use of terms such as "may," "will," "expect," "believes," "anticipate," "estimate," or "continue," or the negative thereof. The Company intends that such forward-looking statements be subject to the safe harbors for such statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. Any forward-looking statements represent management's best judgment as to what may occur in the future. However, forward-looking statements are subject to risks, uncertainties and important factors beyond the control of the Company that could cause actual results and events to differ materially from historical results of operations and events and those presently anticipated or projected. These factors include adverse economic conditions, entry of new and stronger competitors, inadequate capital, unexpected costs, failure to gain product approval in United States or foreign countries and failure to capitalize upon access to new markets. Additional risks and uncertainties that may affect forward-looking statements about the Company's business and prospects include the possibility that a competitor will develop a more comprehensive solution, delays in market awareness of its products, possible delays in marketing strategy, which could have an immediate and material adverse effect by placing the Company behind its competitors. The Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statement or to reflect the occurrence of anticipated or unanticipated events. PART I ITEM 1. DESCRIPTION OF BUSINESS CORPORATE HISTORY E-xact Transactions Ltd. (the "Company") was incorporated under the laws of the Province of British Columbia on August 13, 1998. On July 29, 1999 the Company filed a certificate of domestication and certificate of incorporation with the secretary of state of the State of Delaware, thereby "domesticating" or transitioning from a Canadian company to one organized under the laws of the State of Delaware. The Company's principal office is located at 2410 - 555 West Hastings Street, Vancouver, British Columbia, V6H 4N6 Canada. The Company's registered agent in the U.S. is located at 1209 Orange Street, Wilmington, Delaware 19801 USA. The Company has one subsidiary which operates in Canada. The Company offers an electronic commerce, known as "e-commerce," software solution for real-time transaction processing which allows PC based cash registers, PCs, point-of-sale terminals, computer systems and proprietary product platforms to accept credit card payments and submit those payments to various payment processing companies for authorization and settlement/deposit. The Company has acquired and developed software and a network system to act as a third party payment processor to conduct transaction processing with major banks in North America. The Company is currently approved to conduct transaction processing with major banks and credit unions in Canada and has a gateway with Vital Processing Services, a U.S.-based credit card -1-
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processing network, allowing the Company to process financial transactions with many of the major banks in the U.S. The Company was founded in 1998, by the Sutton Group Financial Services Ltd. ("Sutton Group") and DataDirect Holdings Inc. ("DataDirect"). On September 1, 1998, each of Sutton Group and DataDirect transferred to the Company their respective interests in certain computer software designed by DataDirect, known as the Transaction Software and Processing System, in exchange for ninety-nine shares each of common stock of the Company. The software system offered has real time credit card transaction processing capabilities for other e-commerce providers. Version 2.0 provided the ability to move transactional data between the Company's system and the Royal Bank of Canada, the largest bank in Canada in terms of assets and the only financial institution with which it was certified to process financial transactions at the time. Throughout the autumn of 1998, the Company focused on further testing of its system and enhancing its scalability. Testing was undertaken with six clients, each focused on a different type of application, including an Internet based storefront, a physical point-of-sale location, a telephone based voice response system and a billing system. In January 1999, the Company received certification from Shared Network Systems, a firm that processes financial transactions for most other banks and credit unions in Canada. Version 3.0 of the Company's transaction processing component was released in January 1999. The software allowed other computers to speak to the Company's computers. Following this release, the Company introduced versions for various computer operating systems including LINUX, UNIX and JAVA. In June 1999, the Company released version 4.0 of its software system and it also established its Internet web site. Version 4.0 focused on providing transaction processing, reporting and support services for e-commerce merchants. In November 1999 the Company recruited a CEO to build a management team in the US marketplace. During 2000, US management recruited additional staff to design and build specific technologies to create additional sales opportunities in the North American transaction processing arena. In the fourth quarter of 2000, the Company reassessed its position in the US. It felt that the then existing US management team was unable to achieve US market penetration and as a result, the Company elected to change management and consolidate its operations in Vancouver, B.C. The Company continues to operate out of its Vancouver, B.C. headquarters. NARRATIVE DESCRIPTION OF BUSINESS The Company managed to maintain steady growth throughout 2001 despite a slowdown in the economy. In addition to processing web based transactions in U.S. and Canadian dollars through credit card merchant accounts for Visa, MasterCard, American Express, Discover, Diners Club, and JCB, the Company also offers transaction processing via other applications. The Company's software has been successfully integrated into solutions for call centers, billing systems and other enterprise programs as well as successful trials in the hospitality segment enabling "card present" or "swipe" processing capabilities. The software does not require a lengthy installation or integration process; users need only enable the software within their computer operating environment. The software comes in various versions to support the most popular operating environments. Once activated, merchants are ready to start accepting customer credit cards, provided they have established a merchant account with a bank for funds settlement. The Company also provides merchants a variety of reports with the transaction processing system, such as a full suite of accounting tools that help customers manage their e-commerce activities such as detailed billing statements, transaction search engine, web point-of-sale terminals and reporting services. -2-
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In order to leverage its marketing efforts, the Company offers its e-commerce transaction processing solution to merchants directly as well as to partners, which can offer it in turn to their clients. The Company's partners may receive a percentage of every transaction fee processed by the partner's clients and may use the Company's comprehensive web tools and services for the benefit of such partner's clients or e-merchants. A key advantage of the Company's transaction processing software is that it can be easily integrated with most existing systems and is able to communicate with most banks in North America. Additionally, the Company provides a flexible interface to match a customer's existing operations rather than requiring them to meet and design their systems to the Company's pre-defined protocols. PRODUCTS AND SERVICES The Company's product/service is a combination of an online service and a suite of software that act as a real-time payment mechanism for e-commerce, either over the Internet or via a wide range of other electronic networks. How the system works utilizing the Internet: When a customer makes a purchase using a credit card on the web site of a merchant whose e-commerce system incorporates the Company's transaction component, the payment information is first sent securely in encrypted format to a secure computer called a transaction server. A firewall exists between the Internet and web servers/transaction servers to safeguard against any unauthorized intruders. The encrypted payment information is then sent through another, much more extensive firewall to the Company's Gateway Server, from which it is sent onward to the banking network to be approved or declined. Once approved or declined, the information is returned back securely to the transaction component on the merchant's web site where only the customer can see the results. The information regarding each transaction is also forwarded from the Company's Gateway Server to a database to be logged as part of an audit trail. The entire process takes place almost instantaneously, typically in two to five seconds. The current processing system, released in August 2001, version 5.6, is a combination of custom software applications and processes that run on the Windows 2000 Advanced Server and Windows NT 4.0 operating systems. The primary function of these applications/processes is to perform real-time credit card transaction processing through certified links with the Royal Bank of Canada and BCE Emergis in Canada and Vital Processing Solutions in the United States. The Company's system has five components: Gateway Server Transaction Server Remote Transaction Component Audit Database Secure Web-based Merchant Services THE GATEWAY SERVER facilitates real-time credit card processing with any of the major chartered banks and credit unions in Canada. It currently participates directly with the Royal Bank Merchant Host Network, and also communicates electronically with the BCE Emergis network. Through the Company's certified connection with BCE Emergis, the Gateway Server can process transactions to account holders from any of the major banks in Canada. The Vital Processing System enables the Gateway Server to process transactions with many of the banks in the United States. -3-
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THE TRANSACTION SERVER communicates with the Gateway Server and also provides communications to the Remote Transaction Component. The Transaction Server resides within the Company's network and is accessible on the Internet only via the Remote Transaction Component. THE REMOTE TRANSACTION COMPONENT is a custom software component that can be installed/ integrated in various computer environments to enable credit card transaction processing on the Company's network. Merchants can download this component from the Company's web site at www.e-xact.com in any of the available formats, depending upon which operating system the merchant uses. Once installed on the user's system, the Remote Transaction Component will connect via the Internet to the Company's Transaction Server and subsequently the Gateway Server and the financial networks. The Company requires that merchants have a specific electronic security system known as Secure Socket Layer protocol operational on their site to provide the security necessary to conduct transactions securely via the Internet. Encryption is also part of the component, ensuring that all transmissions between itself and the Transaction Server are safe from other users on the Internet. The current version of the Remote Transaction Component processes transactions to all the major Canadian banks and many of the banks in the United States. THE AUDIT DATABASE writes every transaction that is processed by the Gateway and logs all transaction information to create an audit trail. The database stores all transaction information for a minimum of three years and is the primary component that drives the Company's web based Merchant Services. THE SECURE WEB-BASED MERCHANT SERVICES are a group of reporting, auditing, searching and processing functions available to merchants who have the proper access credentials for the Company's system. The system can be accessed through any popular web browser and data is delivered almost instantly. Added functionality is available through specific tools such as the web based point-of-sale terminal where merchants can process credit card transactions directly to their merchant account from anywhere on the Internet. Through the Company's member services on the web site, merchants can track every sale for up to three years, check statements for totals, deposits made and customer spending, among other functions. Security systems limit access to this information to the merchant authorized for each account. Dedicated transaction servers: For merchants that require a transaction server that is only used by them, the Company can provide a dedicated server to centralize all financially based transactions within a single organization. The servers allow for local auditing and reporting of all transactions conducted through the specific server. Using the Internet (or other communications medium), the merchant can interact directly with the Company's Gateway Server for a comprehensive electronic transaction processing solution, including complete maintenance and audit capabilities. Non-web based transactions: The Company also works with clients to integrate transaction processing services with telephone-based electronic funds transfer and billing services that do not utilize the Internet. Typically, these systems are closed networks that do not require the level of additional firewall security as is required for Internet transactions which can be accessed by anyone in the world. The systems The Company has developed can be applied to virtually any type of electronic network. -4-
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Financial transaction processing certification: Certification with transaction processing networks that handle the financial transactions that the Company's product/service is designed for is an integral and necessary part of the Company being able to offer its services. Banking and other financial networks operate under stringent regulation which requires that their computer networks be highly secured in order to protect privacy and to ensure the integrity of the network. Accordingly, any company that wants to offer a service that would access an existing banking or financial network must undergo a comprehensive process of review and testing prior to being approved to access to the network. Before an applicant company is permitted to go through this review, the bank or processing system must be satisfied that the company is capable of handling mission critical processes meeting its requirements, and that its system will operate correctly and securely. STAGE OF DEVELOPMENT AND COSTS The Company's current Transaction Software and Processing System have been in full operation since June of 1999. The system is fully operational and approximately 8,000 transactions were processed per day through the Company's systems for the year ended December 31, 2001. Since the software deployment in September 1998, the Company has processed approximately 7 million transactions. DEVELOPMENT PLANS The Company intends to continue to upgrade and enhance its combined systems and software focusing on the following key areas. Development and implementation of a new database design to incorporate expanded functions in support of a new proprietary transaction type called "Tagged Transactions". Tagged transactions enable merchants to NOT store customer credit card details but still have access to subsequent transactions with the cardholder. This is especially valuable to subscription based billing models where cardholder details are required for each billing period. Merchants recognize the liability of having card details on their information systems and by utilizing Tagged Transactions they can elect to NEVER store any cardholder details, but still be able to charge the cardholder for monthly subscription fees. Merchants store the transaction TAG and at any time they can send the TAG back as a new transaction and the Company will "build" the card details on behalf of the merchant. In February 2001 the Company released version 5.5 of its transactional software. This version offered improved transactional speed, expanded reporting abilities and new transactional screening capabilities for customers. In addition, version 5.5 was certified to process card present or swipe transactions normally associated with traditional retail environments. This capability opens up a completely new segment for which the Company can sell its services. In August 2001, the Company released version 5.6 of its Windows version which incorporated both the TAG transaction and swipe transaction capabilities for Canadian and US merchants. In September 2001, Visa International revealed a program to increase the overall security of Internet transactions by requiring large volume processors to comply with the requirements for the Visa Account Information Security Program (AIS). In November 2001, the Company underwent an extensive security audit by one of Visa's selected auditors to confirm that all Visa International security requirements were being met. As a result of the security audit, the Company enhanced its merchant account tools and user profile management. -5-
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The Company continues to enhance its reporting capabilities and is researching the development of a real time audit trail for its customers. This audit trail will be treated as a value added service to its customers. The Company will continue its development efforts in moving data transactions via emerging XML technology. CONCENTRATION OF SALES For the year ended December 31, 2001 approximately 19% of the Company's revenues were obtained from two customers (2000 - two customers contributed approximately 45 % of the sales revenue). Two customers accounted for 14 % of accounts receivable at December 31, 2001 (2000 - two receivables accounted for 58% of the Company's total accounts receivable). In 2001 approximately 94% of processing/monthly fee revenues were derived from Canadian sources and 6% was derived from US sources while in 2000, 98% of revenue was derived from Canadian sources and 2% of revenue was obtained from US sources. THE MARKET FOR THE PRODUCT E-commerce: The term "E-commerce" encompasses the use of the Internet for marketing, advertising, trading, and selling goods and services. The ability to use the Internet for marketing and advertising results from the power to communicate information through the Internet to a large number of individuals, businesses as well as consumers. The ability to use the Internet to consummate sales and other commercial transactions results from the power to conduct two-way communication from merchant to buyer and from buyer to merchant through the Internet. Business and the Internet: In order to conduct business over the Internet and accept payment by credit card, a merchant needs a merchant account. A merchant account is an identification number that identifies a business that is authorized to process credit card payments. A merchant account for online sales is different from a merchant account used in a traditional store. Transaction processing: The Internet has opened up new possibilities for processing many types of financial transactions. Continued growth of Internet commerce will depend in part on: (1) the ability of buyers and sellers to use familiar forms of payment online, such as credit and debit cards and checks, in a simple and secure manner; and (2) the availability of payment software and services that: o securely transmit and store payment information with minimal interruption of a consumer's online experience; o are convenient for merchants to install and maintain; o connect merchants to major payment processors and financial institutions; o facilitate familiar types of transactions from the physical world -- (such as bill payment) on the Internet; and o provide common payment platforms for merchants selling goods and services both at physical points-of-sale and electronic storefronts. MARKETING PLAN The Company's management has determined that the most effective means by which to market its transaction processing product/service is in two primary areas. The first is an automated, approach -6-
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to penetrate the software developers community by making our software developer's kit available free of charge with extensive documentation that developers can use to easily integrate our technology into their specific solution without direct interaction with the Company. The Company plans on increasing the visibility of its software by making it available for download directly from the developer's communities' websites. The second approach is a direct sales effort through a number of marketing channels rather than pursuing a mass marketing effort directly to merchants. These channels have been identified as the primary sources which merchants contact and through which they typically work in order to establish their Internet e-commerce systems. Firms within these channels become the Company's partners. Partners in these market channels provide the Transaction Processing Component to the merchant, as if it were part of their own product/service. For example, a financial institution or Internet service provider can provide the Transaction Processing Component to companies it works with as part of its e-commerce services. Where it is necessary, as with financial institutions that become partners, the Company establishes dedicated network connections in order to ensure the integrity of the system and to maximize security. Non-Internet based applications may also require dedicated network connections. In February 2002 the Company announced that its web-based credit card payment processing technology was incorporated into Scotiabank's e-commerce payment plug-in software. Scotiabank is one of Canada's major banks. This relationship will give E-xact access to many of Scotiabank's customers who require web merchant technology. Application developers integrate the Company's payment capabilities into their products, seamlessly providing merchants setting up their own e-commerce web site with the ability to accept secure payments by credit card over the Internet. The Company will provide the partners with a reduced wholesale cost for its services that partners can re-sell to their clients. Partners are required to administer the service to their customers and the Company will bill the partner directly. The Company has two pricing structures, wholesale and retail. Wholesale prices apply to partners such as Internet service providers, web developers, application developers and financial institutions. Retail rates apply to businesses selling products or services directly to consumers. The Company charges an activation fee for each customer that uses the Company's services. This fee is charged only once per account. The monthly service charge is to maintain the merchant account(s) with the Company's servers. Included in this charge is access to the Company's member services that feature tools such as Internet point of sale terminals, transactional searching, and reporting tools. The Company also charges a transaction fee for each transaction that is processed by the Company on behalf of its customers. TARGET MARKET CHANNELS The Company considers Internet service providers, web developers and application developers as technical market channels since they understand software, servers, connectivity and other aspects necessary for integrating the Company's Transaction Processing Component. A key aspect of the Company's marketing to these technical channels is the fact that its software is easy to integrate. The Company provides an interface to communicate with the most common operating systems such as JAVA, LINUX, UNIX and Windows. This reduces the technical barrier and makes it easier for these companies to incorporate the Company's transaction processing component with their existing software and systems. -7-
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A second key aspect of the Company's marketing to these channels is that its Transaction Processing Component can be virtually transparent to end users of products and services provided by the companies in these channels. The Company can be identified only by a company logo. Internet service providers present a dual market by providing the Company Transaction Processing Component as part of e-commerce solutions that they sell to their customers and by using the Company's system to handle their own transaction processing (accepting payment for their Internet access programs and other services). Web developers can provide the Company's Transaction Processing Component as an integrated part of e-commerce solutions that they develop and manage for clients. For each transaction processed through those e-commerce solutions, the web developer would be charged a wholesale fee for the services. Application developers include both those that are developing software designed for Internet e-commerce and developers of other transaction processing applications. An example of another transaction processing application would be a computerized point-of-sale terminal, as where a customer visits a business, makes a purchase, pays by credit card and the credit card information is entered into the terminal or a personal computer by a cashier or sales agent. The transaction is then sent via the Internet through the Company to the bank for approval. Although the approval process travels over the Internet, the actual point of sale may not have been conducted via the Internet. Financial Institutions: The Company has been able to take advantage of having first established a relationship with the Royal Bank to secure additional other clients and to develop relationships with other financial institutions, such as Shared Network Services and, more recently, Scotiabank. Typically, these relationships can provide many referrals of other direct clients. Direct Marketing to Merchants: Direct marketing does not currently comprise a major portion of the Company's marketing strategy; however, it is taking place via the Company's website and through word-of-mouth. The Company will continue to maintain its website making it possible to download the Company's transaction processing component from its web site at www.e-xact.com. Typically, these downloads are from companies with which the Company has had no direct prior contact. . OPERATIONS The processing center for the Company is located in Vancouver B.C. This facility houses the Company's computer center for processing all transactions over the Internet. Network servers providing connectivity to processing systems and the Internet are securely co-located in Vancouver. INTELLECTUAL PROPERTY Generally speaking, the Company relies on general trademark and copyright law to protect its products. The Company has formally registered its primary trademark, E-xact Transactions but has not yet been granted the trademark protection and has not obtained any patent protection for any of its products. -8-
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COMPETITION The market for Internet commerce software and services is relatively new, intensely competitive, quickly evolving, and subject to rapid technological change. Numerous companies are developing e-commerce and online financial transaction technologies and systems. Key competitors include: Authorize.Net Corporation of Provo, UT -- Authorize.Net Corporation develops, markets, and sells Authorize.Net, a line of products and services that provide solutions for authorizing, processing, and managing credit card and electronic check transactions over the Internet. Authorize.Net's transaction processing system sends them on to the financial institutions for processing. Internet Secure Inc. of Oakville, Ontario -- Internet Secure is a Canadian corporation which provides a secure, on-line, real-time credit card processing system for Internet merchants. Internet Secure demonstrated a secure, on-line, real-time credit card processing system that has been approved by two of the top six banks in Canada. Currently the company offers Canadian dollar merchant status for Visa, MasterCard and AMEX and US dollar merchant status for Visa and MasterCard approved and supported by Canadian and American Banks. Verisign Corporation of Mountain View California -- Verisign bought the assets of Cybercash and markets a payment product called Payflow along with its security certificate business. Payflow is a seamless payment processing solution gives you back-end connectivity to all leading payment processing networks and allows your Web site to support multiple payment types. Payflow Pro can be customized to integrate with your existing Web site. E-Commerce Exchange of Irvine, California -- E-Commerce Exchange is a nationwide credit card processing company, specializing in merchant account, credit card and electronic check transaction solutions for non-traditional merchants within the Internet, home-based, phone order/mail order industries. E-Commerce Exchange focuses on serving traditionally hard-to-place businesses, such as home-based or new merchants, business owners with credit problems, high-risk businesses, and others which are considered non-conventional by banks and other credit card processors. RESEARCH AND DEVELOPMENT EXPENDITURES The Company conducts research and development through internal research projects. Costs are incurred from time to time, in specific projects that employ existing technologies for which feasibility has previously been established to develop applications. Production costs for the development of the software used for which technological feasibility has been established but before the product is ready for sale, is capitalized when broad applications are identified within its existing product lines. The Company incurred $146,903 of expenses relating to research and development in 2001 compared to $ 463,832 in 2000. EMPLOYEES As of December 31, 2001, the Company had 7 full-time employees. That number includes one technical support, three programmers, one for marketing, and one accountant/administrator and the President and CEO. -9-
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ITEM 2. DESCRIPTION OF PROPERTY The Company maintains leased facilities in the location listed below. [Download Table] Current Square Term of Annual Function Location Feet Lease Lease Costs -------- -------- ------ ------- ----------- Canadian Office 555 West Hastings Street, 1,300 10/31/02 Cdn $45,174 Suite 2410 Vancouver, B.C. The facility in Vancouver British Columbia, Canada serves as the Company's processing center with the lease expiring October 31, 2002. The Company's business and plan of operations consists of real-time electronic transaction processing as described in Item 1. Accordingly, the Company has no particular policy regarding each of the following types of investments: 1. Investments in real estate or interests in real estate; 2. Investments in real estate mortgages; or 3. Securities of or interests in persons primarily engaged in real estate activities. ITEM 3. LEGAL PROCEEDINGS 3.1. On October 2, 2001 Robert Roker, a former employee (the "Plaintiff") filed a Complaint in the Supreme Court of British Columbia, Vancouver County against the Company in connection with an employment contract dated November 26, 1999. The Plaintiff alleges that he was terminated without cause on September 11, 2001 and is seeking damages of approximately CDN$50,892. The Plaintiff has also brought a claim for punitive damages in the amount of approximately CDN$10,000. On October 23, 2001 the Company filed a Statement of Defense denying the allegation that any money was due to the Plaintiff. The Company is represented by legal counsel in this matter and it believes that the Plaintiff was terminated with reasonable cause and has sufficient evidence to support its case. 3.2. On November 2, 2001 a supplier of bandwidth brought a small claims action against the Company in the Provincial Court of British Columbia (Small Claims Court) in the amount of CDN$9,271. The Company disputed the claim on the basis that services were never rendered as promised. On March 6, 2002, the Company paid the supplier CDN$1,605 in full and final settlement of the disputed amount. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS On March 22, 2000 the Company completed an IPO of it common stock in Canada on the facilities of the Canadian Venture Exchange ("CDNX"). The price to the public in the initial public offering was $1.00 per share. The stock symbol is EXZ.U The Company was a private company for all of 1999 and thus a public quote for the Company's stock does not exist for that year -10-
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Stock quotes for 2001 [Download Table] Date Open price High Low Close Quarterly volume ---- ---------- ----- ----- ----- ---------------- 31-Mar-01 $0.20 $0.20 $0.13 $0.15 106,200 30-Jun-01 0.48 0.49 0.21 0.22 246,300 30-Sep-01 0.16 0.16 0.12 0.12 55,096 31-Dec-01 0.23 0.24 0.15 0.20 93,400 Stock prices for 2000 [Download Table] Date Open price High Low Close ---- ---------- ----- ----- ----- 31-Mar-00 $5.00 $5.00 $4.60 $4.70 30-Jun-00 1.90 1.90 1.80 1.83 29-Sep-00 1.30 1.30 1.30 1.30 28-Dec-00 0.25 0.25 0.25 0.25 There were 57 registered shareholders of the Company as at March 1, 2002 holding in aggregate 10,502,000 shares of which 55 registered shareholders hold in aggregate 2,890,560 shares, and 7,611,440 shares are held by CDS & Co. and First Clearing Corporation in street form. The Company has never declared a dividend on its common stock and intends for the foreseeable future, to retain all earnings, if any, for the development of its business opportunities. The payment of future dividends will be at the discretion of the Company's board of directors and will depend upon, among other things, future earnings, capital requirements, financial condition and general business conditions. The transfer agent for the Company's common stock is Pacific Corporate Trust Company, 625 Howe Street, Suite 830 Vancouver, BC, V6C 3B8. -11-
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ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION The following discussion should be read together with the Company's consolidated financial statements and accompanying notes included elsewhere. Exchange Rates All dollar amounts herein are stated in U.S. dollars except where otherwise indicated. The following table reflects the rate of exchange for Canadian dollars per U.S. $1.00 in effect at the end of the following periods and the average rate of exchange during such periods, based on the Federal Reserve Bank of New York's average noon spot rate of exchange: [Download Table] YEAR ENDED DECEMBER 31 ---------------------------------------- 1999 2000 2001 ---------- ---------- ---------- Rate at end of period: CDN$1.4433 CDN$1.4979 CDN$1.4819 Average rate for period: CDN$1.4858 CDN$1.4851 CDN$1.4995 -------- On March 1, 2002, the Federal Reserve Bank of New York noon spot rate of exchange was U.S. $1.00 = CDN$1.5955 INTRODUCTION The Company was incorporated under the Company Act of British Columbia, Canada on August 13, 1998. On July 29, 1999 the Company was reincorporated in the state of Delaware, USA. The Company earns its revenue by charging its customers a setup fee, a monthly membership fee and a transaction fee. Transaction fees are based on the number of transactions processed in a month. The Company offers electronic commerce software services for real-time transaction processing. The software allows PC based cash registers, PCs, point-of-sale terminals, computer systems and proprietary product platforms to accept credit card payments and to submit those payments to various payment processing companies for pre-authorization and settlement/deposit. The Company has acquired and developed software and a network system toast as a third party payment processor to conduct transaction processing with major banks in North American. The Company is currently approved to conduct transaction processing with major banks and credit unions in Canada and the US. -12-
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During the year ended December 31, 2001, the Company released version 5.5 of its software in Com, Java and Perl platforms. The Company's e-commerce solution is functional across major operating environments and it requires minimal investment of resources from new customers to be fully integrated with E-xact's services. In 2001 the Company processed approximately 2.7 million transactions with an estimated value of approximately $752 million. FISCAL YEAR ENDED DECEMBER 31, 2001 COMPARED TO FISCAL YEAR ENDED DECEMBER 31, 2000 (ALL AMOUNTS ARE EXPRESSED IN US DOLLARS) REVENUES In 2001 the Company focused on improving its customer service as well as streamlining its operations. The Company's revenue consists of setup fees and transactions fees. In 2001 total revenues increased by 63% from $240,504 in 2000 to $392,519 in 2001. The revenues were derived primarily from transaction processing fees and monthly service fees. The Company weeded out many of its unproductive customers and focused its energy on more established customers. This resulted in higher revenue, lower bad debts and better cash flow. GROSS MARGINS The Company's gross profit margin in 2001 was approximately 81% compared to 52% in 2000. The Company's cost of sales consists primarily of bandwidth costs, fees paid to a third party processor and data line charges. Although revenue increased by approximately 63% over the previous year, the existing cost structure was sufficient to support the extra volume of business. In 2000, US bandwidth and data line charges were setup in anticipation of US sales growth. Although sales in the US did not materialize as anticipated, these fixed costs were incurred irrespective of the level of activity. The US costs were terminated in the fourth quarter of 2000. As revenue increases in the future, cost of sales will remain relatively flat as they will not increase in direct proportion to revenue. It is relatively inexpensive to increase bandwidth and data line capacity as all of these services are provided by companies operating in a competitive environment. GENERAL AND ADMINISTRATIVE EXPENSES ( G&A ) G&A expenses decreased from $1,423,701 in 2000 to $378,039 in 2001. Bad debts decreased from $62,622 in 2000 to $16,478 in 2001. This was due to a policy of reviewing the productivity of each receivable. Services were terminated for unproductive or non-performing customers. This resulted in a stable of established customers who are able to generate transactions on a daily basis and therefore more consistent sales revenue for the Company. Office & miscellaneous expenses decreased from $208,242 in 2000 to $96,977 in 2001, telephone & fax decreased from $91,090 in 2000 to $9,556, legal expenses decreased from $134,894 in 2000 -13-
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to $14,558 in 2001, rent decreased from $111,025 in 2000 to $32,919 in 2001, management & consulting expense decreased from $140,736 in 2000 to $43,767 in 2001 and salaries & wages decreased from $470,043 in 2000 to $117,548 in 2001. The large decrease in G&A was due primarily to the closure of the US office in Colorado in the fourth quarter of 2000. SALES & MARKETING (S&M) S&M decreased from $1,100,941 in 2000 to $76,961 in 2001. The decrease in expenses was due to the closure of the US office. The bulk of the S&M expense in 2001 consisted primarily of salaries and wages of personnel engaged in the marketing of the Company's products. RESEARCH AND DEVELOPMENT (R&D) R&D expenses consist of compensation expenses and consulting fees to support the development of the Company's software and services. Production costs for the development of the software for which the technological feasibility has been established but before the product is ready for sale are expensed. R&D expenses decreased from $742,767 in 2000 to $146,903 in 2001. The decrease was due to a reduction of consulting fees, equipments leases and programming expenses as a result of the closure of the US office. INCOME TAXES The Company had income taxes payable of approximately $6,182 as at December 31, 2001. As at March 20, 2002 the Company had not been assessed for the Canadian branch tax return for the tax year June 30, 2000. If the tax loss incurred is disallowed for setoff against the Company's taxable income in the previous tax year, there would be a tax liability of approximately $253,000. NET LOSS The Company incurred a net loss of $270,765 in 2001, compared to a net loss of $2,973,572 in 2000. The Company expects to finance future losses from increased sales revenue and from advances from major shareholders. LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 2001 CAPITAL AND DEBT FINANCING On April 26, 2001 the Company completed a private placement of 2,000,000 special warrants. Each special warrant entitled the holder to receive, without further consideration, one common share and a share purchase warrant. Each share purchase warrant entitled the holder to purchase a further common share over a period of two years at a price of $0.23 per warrant share in the first year and at a price of $0.27 per warrant share in the second year. The special warrants were issued outside the United States pursuant to an exemption from the registration under Regulation S of the Securities Act of 1933, as amended. The special warrants were purchased by non-U.S. persons outside the United States. -14-
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These transactions are regarded as unregistered transactions under the Securities Exchange Act of 1933. In October 2001 the holders of the special warrants exercised the special warrants and converted them into 2,000,000 common shares. The Company also issued 2,000,000 share purchase warrants under terms and conditions mentioned above. The share purchase warrants expire May 31, 2003. At December 31, 2001 the Company had a working capital deficiency of $584,782 compared to a deficiency of approximately $747,000 at December 31, 2000. As at December 31, 2001 the Company had substantial trade accounts payable which have remained unpaid for over one year. The Company has received co-operation and support from these creditors in the past. The Company is unable to pay these debts as they become due. The future operations of the Company is dependant on the support of the Company's major shareholders, the continued support of its creditors and a continuation of the Company's efforts to increase its revenue base in order to achieve break-even point and eventually attain profitability. CASH FLOW During the year ended December 31, 2001, the Company used cash from operations of $247,303 compared to $2,368,672 in 2000. Cash provided by financing activities was $258,683 for the year ended December 31, 2001 compared to $2,269,981 the previous year. The Company successfully completed a private placement of $400,000 on April 26, 2001 of which $370,000 was funded by related parties (see item 11). The proceeds were used to repay advances from stockholders. Although no new equipment was purchased during the year, the Company nevertheless believes it has sufficient equipment on hand to support its planned operations in the short term. CAPITAL RESOURCES Management believes that the working capital deficiency as at December 31, 2001 and future operating losses will be financed by additional equity funding and loans from investors. However, there can be no assurance that such financings will be successful, or that they may be negotiated on terms which are unfavorable or dilutive to existing stockholders or acceptable to existing creditors. The Company's continuation as a going concern is contingent upon achieving operating levels adequate to support its cost structure, the continued support of its creditors and obtaining adequate financial resources through a contemplated financing. The Company has no plans to expand its personnel or purchase or lease any major capital equipment in 2002. Additional staffing requirements will be supplemented with part-time workers or consultants. In the event that cash flow from operations, if any, together with the proceeds of any future financings, are insufficient to meet the Company's current operating expenses, the Company will be required to re-evaluate its planned expenditures and allocate its total resources in such manner as the board of directors and management deems to be in the Company's best interest. This may result in a substantial reduction of the scope of existing and planned operations. As at December 31, 2001 the Company's significant obligations and commitments include payment of trade accounts payable ($551,701) repayment of its shareholder advances ($118,241) and continued payment of obligations under operating premises and equipment leases (see note 10 to the Company's December 31, 2001 consolidated financial statements). -15-
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RECENT ACCOUNTING PRONOUNCEMENTS In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" and SFAS No.142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses the initial recognition and measurement of goodwill and other intangible assets acquired in a business combination and SFAS No. 142 addresses the subsequent recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. These standards require all future business combinations to be accounted for using the purchase method of accounting. Goodwill will no longer be amortized but instead will be subject to impairment tests at least annually. The Company is required to adopt SFAS No. 141 and 142 on a prospective basis as of July 1, 2002; however, certain provisions of these new standards may also apply to any acquisitions concluded subsequent to June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material effect on the Company's financial position or results of operations. The FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in August 2001. SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, supersedes SFAS No. 121 and is effective for fiscal years beginning after December 15, 2001. Therefore, the Company will be required to adopt SFAS No. 144 as of July 1, 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial position or results of operations. Critical Accounting Policies and Estimates: The significant accounting policies are outlined within note 2 to the financial statements. Some of those accounting policies require the Company to make estimates and assumptions that affect the amounts reported by the Company. The following items require the most significant judgment or estimation: Revenue Recognition: New customers are required to complete a Merchant Registration Form and a Transactions Processing Agreement. The term of the Agreement is normally for a year with an automatic renewal at the anniversary date. The Company receives it revenue from three sources: new account activations, monthly service/membership fees and online transactions fees. New account activations fees are recognized as revenue when customers' production accounts are activated while monthly services fees are recognized when customers are invoiced. Online transaction fees are recognized when services have been performed. Accounts Receivable: The Company performs monthly reviews of its accounts receivable. Customers who are in arrear are normally given the opportunity to pay off arrear balances prior to suspension of processing services. Provision for doubtful accounts are normally based on customers who are 90 days in arrear. However, a review is also based on a case-by-case basis depending on the customer's circumstances. A significant change in the financial position of the Company's customers could have a material adverse impact on the collectability of the accounts receivable. -16-
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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 at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Examples include provisions for bad debts, and the contingencies described in Legal Proceedings in item 3 above. Actual results could differ from those estimates. ITEM 7. FINANCIAL STATEMENTS [Download Table] Independent Auditors' Report F-1 Consolidated Balance Sheets -- December 31, 2001 and December 31, 2000 F-2 Consolidated Statements of Operations -- For the years ended December 31, 2001, 2000 and 1999 F-3 Consolidated Statements of (Capital Deficiency) Stockholders' Equity -- For the years ended December 31, 2001, 2000 and 1999 F-4 Consolidated Statements of Cash Flows -- For the years ended December 31, 2001, 2000 and 1999 F-5 Notes to Consolidated Financial Statements F-6 -17-
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INDEPENDENT AUDITORS' REPORT To the Directors and Stockholders of E-xact Transactions Ltd. We have audited the consolidated balance sheets of E-xact Transactions Ltd. as at December 31, 2001 and 2000 the consolidated statements of operations, capital deficiency and cash flows for each of the years in the three year period ended December 31, 2001. 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 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 audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 2001 and 2000 and the results of its operations and its cash flows for each of the years in the three year period ended December 31, 2001 in accordance with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company's recurring losses from operations raise substantial doubt about its ability to continue as a going concern. Management's plans concerning these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. On March 8, 2002, we reported separately to the stockholders of E-xact Transactions Ltd. on consolidated financial statements for the same periods prepared in accordance with generally accepted accounting principles in the Canada. /s/ DELOITTE & TOUCHE LLP Chartered Accountants Vancouver, British Columbia March 8, 2002 F-1
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E-XACT TRANSACTIONS LTD. CONSOLIDATED BALANCE SHEETS (EXPRESSED IN UNITED STATES DOLLARS) [Enlarge/Download Table] December 31, December 31, 2001 2000 ------------ ------------ ASSETS Current Cash ........................................................ $ 20,970 $ 10,476 Accounts receivable (Note 3) ................................ 62,512 72,671 Prepaid expenses and deposits ............................... 7,860 5,356 ------------ ------------ Total current assets ........................................... 91,342 88,503 Capital assets (Note 4) ........................................ 63,491 103,601 ------------ ------------ Total assets ................................................... $ 154,833 $ 192,104 ============ ============ LIABILITIES Current Accounts payable and accrued liabilities (Note 5) ........... $ 551,701 $ 541,163 Income taxes payable ........................................ 6,182 71,909 Advances payable (Note 6) ................................... 118,241 222,558 ------------ ------------ Total current liabilities ...................................... 676,124 835,630 ------------ ------------ Continuing operations (Note 1) Commitments (Note 10) CAPITAL DEFICIENCY Common stock, common shares issued and outstanding (Note 7) 10,502,000 at December 31, 2001 and 8,502,000 at December 31, 2000 ......................................... 10,502 8,502 Share purchase warrants (Note 7 (f)) ........................... 196,500 -- Additional paid-in capital ..................................... 3,322,882 3,128,382 Accumulated deficit ............................................ (4,051,175) (3,780,410) ------------ ------------ Total capital deficiency ....................................... (521,291) (643,526) ------------ ------------ Total capital deficiency and liabilities ....................... $ 154,833 $ 192,104 ============ ============ See Accompanying Notes to the Consolidated Financial Statements. F-2
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E-XACT TRANSACTIONS LTD. CONSOLIDATED STATEMENTS OF OPERATIONS (EXPRESSED IN UNITED STATES DOLLARS) [Enlarge/Download Table] Year ended December 31, ----------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Revenues Online transactions ...................... $ 392,519 $ 240,504 $ 88,721 Web development .......................... -- -- 7,070 ----------- ----------- ----------- Total revenues .............................. 392,519 240,504 95,791 ----------- ----------- ----------- Cost of sales Cost of online transactions .............. 73,072 115,532 26,262 Cost of web development .................. -- -- 3,183 ----------- ----------- ----------- Total cost of sales ......................... 73,072 115,532 29,445 ----------- ----------- ----------- Expenses General and administrative expenses ...... 378,039 1,423,701 467,780 Sales and marketing ...................... 76,961 1,100,941 57,180 Research and development ................. 146,903 742,767 193,765 ----------- ----------- ----------- Total expenses .............................. 601,903 3,267,409 718,725 ----------- ----------- ----------- Operating loss .............................. (282,456) (3,142,437) (652,379) Other income (expense) ...................... 11,691 110,140 (15,967) ----------- ----------- ----------- Loss before income tax ...................... (270,765) (3,032,297) (668,346) Income taxes (Note 11) ...................... -- 58,725 (102,557) ----------- ----------- ----------- Net loss .................................... $ (270,765) $(2,973,572) $ (770,903) =========== =========== =========== Basic and diluted loss per share ............ $ (0.03) $ (0.37) $ (0.17) =========== =========== =========== Weighted average number of common shares used to calculate loss per share ......... 9,866,384 7,932,356 4,553,542 =========== =========== =========== See Accompanying Notes to the Consolidated Financial Statements. F-3
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E-XACT TRANSACTIONS LTD. CONSOLIDATED STATEMENTS OF CAPITAL DEFICIENCY (EXPRESSED IN UNITED STATES DOLLARS) [Enlarge/Download Table] Common Stock Warrants Additional Total ------------------- --------------------- Paid-in Accumulated Capital Shares Amount Number Amount Capital Deficit Deficiency ---------- ------- ---------- --------- ---------- ----------- ---------- Issuance of common stock for cash .......... 42,000 $ 1 $ -- $ -- $ -- $ -- $ 1 Issuance of common stock for acquired software and intangibles ................. 4,158,000 42,129 -- -- -- -- 42,129 Net loss ................................... -- -- -- -- -- (35,935) (35,935) ---------- ------- ---------- --------- ---------- ----------- ----------- Balance at December 31, 1998 ............... 4,200,000 42,130 -- -- -- (35,935) 6,195 Reclassification on reincorporation (Note 7) ................................. -- (37,930) -- -- 37,930 -- -- Warrants issued for consulting fees (Note 7(d)) .............................. -- -- -- -- 58,320 -- 58,320 Issuance of common stock on private placement, net of offering costs of $20,698 and warrants issued for financing services of $142,123 (Note 7 (d)) ............................. 1,697,000 1,697 -- -- 844,613 -- 846,310 Net loss ................................... -- -- -- -- -- (770,903) (770,903) ---------- ------- ---------- --------- ---------- ----------- ----------- Balance at December 31, 1999 ............... 5,897,000 5,897 -- -- 940,863 (806,838) 139,922 Issuance of stock pursuant to exercise of warrants, January 2000 ................... 225,000 225 -- -- 74,334 -- 74,559 Issuance of stock pursuant to IPO, net of cash offering of $509,435, stock issued to the Underwriter of $75,000, and warrants issued for financing services of $138,744 .............................. 2,325,000 2,325 -- -- 1,738,240 -- 1,740,565 Exercise of stock options .................. 25,000 25 -- -- 24,975 -- 25,000 Warrants issued for compensation (Note 7 (d)) ............................. -- -- -- -- 320,000 -- 320,000 Exercise of warrants ....................... 30,000 30 -- -- 29,970 -- 30,000 Net loss ................................... -- -- -- -- -- (2,973,572) (2,973,572) ---------- ------- ---------- --------- ---------- ----------- ----------- Balance at December 31, 2000 ............... 8,502,000 8,502 -- -- 3,128,382 (3,780,410) (643,526) Special warrants issued for cash (net of offering costs of $7,000) (Note 7 (f)) ... -- -- 2,000,000 393,000 -- -- 393,000 Exercise of special warrants into common shares ............................ 2,000,000 2,000 (2,000,000) (393,000) 194,500 -- (196,500) Purchase warrants issued on exercise of special warrants ......................... -- -- 2,000,000 196,500 -- -- 196,500 Net loss ................................... -- -- -- -- -- (270,765) (270,765) ---------- ------- ---------- --------- ---------- ----------- ----------- Balance at December 31, 2001 ............... 10,502,000 $10,502 $ 2,000,000 $ 196,500 $3,322,882 $(4,051,175) $ (521,291) ========== ======= =========== ========= ========== =========== =========== See Accompanying Notes to the Consolidated Financial Statements. F-4
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E-XACT TRANSACTIONS LTD. CONSOLIDATED STATEMENTS OF CASH FLOWS (EXPRESSED IN UNITED STATES DOLLARS) [Enlarge/Download Table] Year ended December 31, ----------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Operating activities: Net loss .............................................................. $ (270,765) $(2,973,572) $ (770,903) Item not affecting cash Amortization of capital assets, acquired software and other intangible assets ............................... 40,996 58,328 36,014 Loss on disposal of fixed assets .................................... -- 78,671 -- Warrants issued to customer ......................................... -- 320,000 -- Warrants issued for financing fees .................................. -- -- 58,320 Net change in operating assets and liabilities Accounts receivable ................................................. 10,159 9,166 (69,058) Prepaid expenses and deposits ....................................... (2,504) (1,022) -- Accounts payable and accrued liabilities ............................ 40,538 170,405 345,887 Income taxes payable ................................................ (65,727) (30,648) 102,557 Advances from stockholders .......................................... -- -- (7,318) ----------- ----------- ----------- (247,303) (2,368,672) (304,501) ----------- ----------- ----------- Financing activities: Proceeds on issuance of capital stock and warrants, net of offering costs ............................................... 363,000 1,870,124 846,310 Deferred share issue costs ............................................ -- 177,299 (177,299) Advances from stockholders ............................................ 247,977 222,558 -- Repayment of stockholder advance ...................................... (352,294) -- -- ----------- ----------- ----------- 258,683 2,269,981 669,011 ----------- ----------- ----------- Investing activities: Purchase of capital assets ............................................ (886) (198,075) (62,948) Proceeds on disposal of fixed assets .................................. -- 2,575 -- ----------- ----------- ----------- (886) (195,500) (62,948) ----------- ----------- ----------- Net cash inflow (outflow) ............................................... 10,494 (294,191) 301,562 Cash, beginning of year ................................................. 10,476 304,668 3,106 ----------- ----------- ----------- Cash, end of year ....................................................... $ 20,970 $ 10,477 $ 304,668 =========== =========== =========== Supplemental non-cash investing and financing cash flow disclosures: Special warrants issued to supplier ..................................... $ 30,000 $ -- $ -- =========== =========== =========== Warrants issued for financing services .................................. $ -- $ 138,744 $ 142,123 =========== =========== =========== Warrants issued to customer ............................................. $ -- $ 320,000 $ -- =========== =========== =========== Common stock issued to underwriters ..................................... $ -- $ 75,000 $ -- =========== =========== =========== See Accompanying Notes to the Consolidated Financial Statements. F-5
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 1. CONTINUING OPERATIONS The Company specializes in online financial transaction processing supporting customers' e-commerce activities. The Company was initially incorporated on August 13, 1998 under the laws of British Columbia, Canada. On July 28, 1999 the Company was continued into the State of Delaware. The Company was formed through the acquisition of certain software and other intangible assets from Sutton Group Financial Services ("Sutton") and Data Direct Holdings Ltd. ("DataDirect"). In consideration for the acquisition of these assets Sutton and Data Direct, two unrelated companies, at the time of the acquisition, each received 2,100,000 common shares. The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company incurred a net loss of $270,765 for the year ended December 31, 2001 and at December 31, 2001 had a working capital deficiency of $584,782 and capital deficiency of $521,291. The success of the Company's future operations is dependent upon attaining profitable operations, and upon its ability to raise additional financing. Management's plans include obtaining the continued support of creditors, raising additional financing and, ultimately, positioning the Company for profitable operations. These factors among others indicate that the Company may be unable to continue as a going concern for a reasonable period of time. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The Company's continuation as a going concern is dependent upon achieving operating levels adequate to support the Company's cost structure and obtaining adequate financial resources through a contemplated financing or otherwise. However, there can be no assurance that such financings will be successful. In the event that cash flow from operations, if any, together with the proceeds of any future financings, are insufficient to meet the Company's current operating expenses, the Company will be required to reevaluate its planned expenditures and allocate its total resources in such manner as the Board of Directors and management deems to be in the Company's best interest. This may result in the substantial reduction of the scope of existing and planned operations. F-6
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 2. SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared in accordance with the following significant accounting polices. (a) Basis of consolidation These consolidated financial statements include the assets, liabilities and operating results of the Company and its wholly-owned subsidiary. (b) 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, liabilities, revenues and expenses and disclosure of contingent assets and liabilities at the date of the financial statements and for the periods presented. Estimates are used for, but not limited to, accounting for doubtful accounts, amortization, recoverability of long-lived assets, income taxes, and contingencies. Actual results may differ from those estimates. (c) Foreign Currency Translation The Company determined that as of April 1, 2000 its functional currency was the United States dollar ("US Dollars"). Previously the functional currency of the Company was the Canadian dollar. The change in the Company's functional currency was made due to the expansion of US operations during the year. The majority of the Company's operating and financing transactions are now denominated in the US dollar. Monetary assets and liabilities denominated in other than the US dollar are translated using the exchange rates prevailing at the balance sheet date. Revenues and expenses are translated using average exchange rates prevailing during the period. Gains and losses on foreign currency transactions are recorded in the consolidated statement of operations. The Company has remeasured its assets, liabilities, revenues and expenses for prior years using the historical exchange rate in existence at the date of the transaction. (d) Research and Development Costs All research and development costs are expensed when incurred unless they meet generally accepted accounting criteria for deferral and amortization. The Company reassesses whether it has met the relevant criteria for deferral and amortization at each reporting date. To date, no development costs have been deferred. F-7
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (e) Capital Assets and Amortization Capital assets are recorded at cost and amortized over the estimated useful lives of the assets on the following basis: Leasehold improvement 5 years on a straight-line basis Computer software 100% declining balance Computer equipment 30% declining balance The Company periodically evaluates the recoverability of its capital assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimates of future cash flows expected to result from the use of an asset and its eventual disposition are less than its carrying amount. No impairment in assets had been identified by the Company in the years ended December 31, 2001, 2000 and 1999. (f) Revenue Recognition The Company's revenue is derived from the following sources: (i) Online Transactions Revenue from the setup, maintenance, customization and processing of online transactions is recognized when the services are performed, the amount of revenue is fixed or determinable and collectibility is reasonably assured. (ii) Web Development Revenue from services related to web development are recognized when the services are performed, the amount of revenue is fixed or determinable and collectibility is reasonably assured. Provision for estimated losses on contracts is recorded when identified. F-8
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (g) Stock-Based Compensation Plans As permitted under Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation, the Company has accounted for employee and directors stock options in accordance with Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and has made the pro forma disclosures required by SFAS No. 123 in Note 7 (c). SFAS No. 123, Accounting for Stock-Based Compensation, requires the use of the fair value based method of accounting for stock options. Under this method, compensation cost is measured at the grant date as the fair value of the options granted and is recognized over the vesting period. Where the Company issues options to individuals other than employees and directors deferred share-based compensation is recorded. These amounts are amortized as charges to operations, over the vesting period of the individual stock options. (h) Income Taxes The Company accounts for income taxes under the provisions of SFAS No. 109, Accounting for Income Taxes. This statement provides for a liability approach under which deferred income taxes are provided based upon enacted tax laws and rates applicable to the periods in which the taxes become payable. Deferred tax assets, if any, are recognized only to the extent that, in the opinion of management, it is more likely than not that the income tax assets will be realized. (i) Basic and Diluted Loss Per Share Basic loss per share is computed by dividing net loss available to common stockholders by the weighted-average number of common shares outstanding for the period along with the contingently issuable common shares from the issuance of special warrants which have been treated as outstanding as all necessary conditions have been satisfied. (j) Comprehensive Income SFAS No. 130, Reporting Comprehensive Income, establishes standards for the reporting and display of comprehensive income and its components (revenue, expenses, gains and losses) in a full set of general-purpose financial statements. The Company has no comprehensive income items, other than the net loss, in any of the periods presented. F-9
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (k) Business Segments SFAS No. 131, Disclosures about Segments of an Enterprises and Related Information, establishes standards for reporting, information about operating segments in annual financial statements. It also establishes standards for disclosures about products and services, geographic areas and major customers. Information related to SFAS No. 131 is contained in Note 12. (l) Accounting for derivative instruments and hedging activities The Company adopted SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, as of the beginning of 2001. The standards require the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in the fair value of the derivatives will either be offset against the change in fair value of the hedged assets, liabilities or firm commitments through earnings, or recognized in other comprehensive income until the hedged item is recognized in earnings. The change in a derivative's fair value related to the ineffective portion of a hedge, if any, will be immediately recognized in earnings. As the Company does not enter into derivative transactions, the effect of adopting SFAS No. 133, as amended, did not have a material effect on the Company's financial position or overall results of operations. (m) Recent Accounting Pronouncements In July 2001,the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, Business Combinations and SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 addresses the initial recognition and measurement of intangible assets acquired in a business combination and SFAS No. 142 addresses the subsequent recognition and measurement of intangible assets acquired outside of a business combination whether acquired individually or with a group of other assets. These standards require all future business combinations to be accounted for using the purchase method of accounting. Goodwill will no longer be amortized but instead will be subject to impairment tests at least annually. The Company is required to adopt SFAS No. 141 and No. 142 on a prospective basis as of July 1, 2002; however, certain provisions of these new standards may also apply to any acquisitions concluded subsequent to June 30, 2001. The adoption of SFAS No. 141 is not expected to have a material effect on the Company's financial position or results of operations. F-10
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (m) Recent Accounting Pronouncements (continued) The FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, in August 2001. SFAS No. 144, which addresses financial accounting and reporting for the impairment of long-lived assets and for long-lived assets to be disposed of, supersedes SFAS No. 121 and is effective for fiscal years beginning after December 15, 2001. Therefore, the Company will be required to adopt SFAS No. 144 as of July 1, 2002. The adoption of SFAS No. 144 is not expected to have a material impact on the Company's financial position or results of operations. 3. ACCOUNTS RECEIVABLE Accounts receivable are recorded net of a $12,916 allowance for doubtful accounts at December 31, 2001 (2000 - $65,581). 4. CAPITAL ASSETS [Download Table] December 31, ----------------------------------------------- 2001 2000 ---------------------------------- -------- Accumulated Net Book Net Book Cost Amortization Value Value -------- ------------ -------- -------- Leasehold improvements .... $ 4,940 $ 1,477 $ 3,463 $ 4,446 Computer software ......... 88,138 87,616 522 14,344 Computer equipment ........ 119,165 59,659 59,506 84,811 -------- -------- -------- -------- $212,243 $148,752 $ 63,491 $103,601 ======== ======== ======== ======== F-11
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 5. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES The principal components of accounts payable and accrued liabilities were as follows: [Download Table] December 31, ------------------- 2001 2000 -------- -------- Trade payables ............... $530,651 $498,149 Other accrued liabilities .... 21,050 43,014 -------- -------- $551,701 $541,163 ======== ======== 6. ADVANCES PAYABLE The advances payable from certain stockholders of the Company bear interest at prime plus one per cent and have no fixed terms of repayment. $30,000 of advances are secured by stock of the Company held by a major stockholder. Advances are secured by certain assets of the Company. 7. STOCKHOLDERS' EQUITY (a) Authorized Stock The Company was initially incorporated on August 13, 1998 under the laws of British Columbia, Canada with 50,000,000 authorized common stock with no par value. On July 28, 1999 the Company was reincorporated in the State of Delaware. The Company has authorized 50,000,000 common stock with a par value of $0.001 per share. As a result of the reincorporation and change to par value shares, $37,930 was reclassified during 1998 from common stock to additional paid in capital. (b) On September 2, 1999 the Company's common stock were split, twenty-one thousand-for-one. All per share amounts of prior periods have been adjusted to reflect the split. (c) Stock-Based Compensation Plans During 1999, the Company established a Share Option Plan (the "option plan") which provides for options to be granted by the Company to its directors, officers, employees and consultants of the Company and affiliated companies. No options were granted prior to the establishment of the plan. At the date options are granted, the exercise price for an option shall not be less than the then market price of the common shares of the Company. Options granted are subject to certain vesting requirements. F-12
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 7. STOCKHOLDERS' EQUITY (CONTINUED) (c) Stock-Based Compensation Plans (continued) During 2001, the Company amended the stock option plan, reserving a maximum of 2,095,000 common shares for issuance under the plan. A summary of the status of the Company's stock option plan as of December 31, 2001, 2000 and 1999 and changes during the periods ending on those dates is presented below: [Enlarge/Download Table] 2001 2000 1999 ------------------------ ---------------------- ----------------------- Weighted- Weighted- Weighted- Average Average Average Common Exercise Common Exercise Common Exercise Options Shares Price Shares Price Shares Price ------- ---------- ---------- -------- ---------- ---------- ---------- Outstanding at beginning of period ..................... 545,500 $ 1.42 650,000 $ 1.00 -- $ -- Granted ..................... 675,000 0.25 900,500 1.34 650,000 1.00 Exercised ................... -- -- (25,000) 1.00 -- -- Cancelled ................... (147,000) 0.72 (980,000) 1.10 -- -- ---------- ---------- -------- ---------- ---------- ---------- Outstanding at end of period .... 1,073,500 $ 0.74 545,500 $ 1.42 650,000 $ 1.00 ========== ========== ======== ========== ========== ========== Exercisable at end of period .... 380,821 $ 1.17 200,000 $ 1.39 4,167 $ 1.00 ========== ========== ======== ========== ========== ========== The following table summarizes information about stock options outstanding at December 31, 2001: [Download Table] Options Outstanding ------------------------------------------------------------------ Number Weighted- Number Range of Outstanding Average Exercisable Exercise at December 31, Remaining at December 31, Price 2001 Contractual Life 2001 -------- --------------- ---------------- --------------- $ 0.25 625,000 4.3 years 75,342 1.00 370,000 3.0 years 253,584 3.35 78,500 3.4 years 51,895 --------- ------- 1,073,500 380,821 ========= ======= Under APB No. 25, because the exercise price of the Company's employee stock options generally equals the fair value of the underlying stock on the date of grant, no compensation expense is recognized. F-13
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 7. STOCKHOLDERS' EQUITY (CONTINUED) (c) Stock-Based Compensation Plans (continued) Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation, issued in October 1995, requires the use of the fair value based method of accounting for stock options. Under this method, compensation cost is measured at the grant date as the fair value of the options granted and is recognized over the exercise period. During the periods ended December 31, 2001 and 2000, the Company issued no options to individuals other than employees and directors. SFAS 123, allows the Company to continue to measure the compensation cost of employee related stock options in accordance with APB 25. The Company has therefore adopted the disclosure-only provision of SFAS 123. Had compensation cost for the Company's share options granted to employees and directors been determined based on the Black-Scholes value at the grant dates for awards as prescribed by SFAS No. 123, pro forma net loss and net loss per share would have been as follows: [Download Table] Year Ended December 31, ----------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Net loss As reported .......................... $ (270,765) $(2,973,572) $ (770,903) SFAS No. 123 pro forma adjustment .... (285,422) (429,209) (9,271) ----------- ----------- ----------- Pro forma net loss ..................... (556,187) (3,402,781) (780,174) =========== =========== =========== Loss per share, as reported ............ $ (0.03) $ (0.37) $ (0.17) SFAS No. 123 pro forma adjustment ...... (0.03) (0.02) -- ----------- ----------- ----------- Pro forma loss per share ............... $ (0.06) $ (0.39) $ (0.17) =========== =========== =========== The weighted average Black-Scholes option pricing model value of options granted under the share option plan during the periods ended December 31, 2001, 2000 and 1999 were $0.18, $1.04 and $0.17 per share, respectively. The fair value for these options was estimated at the date of grant using the following weighted average assumptions: [Download Table] Year Ended December 31, ----------------------------- 2001 2000 1999 ------- ------- ------- Assumption Volatility factor of expected market price of the Company's shares ..................... 144.0% 109.0% 5.3% Dividend yield ................................ 0.0% 0.0% 0.0% Weighted average expected life of stock options ............................... 5 years 5 years 3 years Risk free interest rate ....................... 4.61% 5.32% 6.55% F-14
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 7. STOCKHOLDERS' EQUITY (CONTINUED) (d) Warrants On August 2, 2000, under an arrangement with a customer, the Company granted warrants to purchase 549,532 shares of the Company. The term of the warrant was two years and will terminate earlier if not exercised on the fifteenth day that the Company's common shares close trading at a price equal to 200% of the warrant exercise price of $2.25 per share. The Company recorded a non-cash charge of $320,000. This amount was determined using an option pricing model assuming no dividends, full vesting on date of grant, a volatility of 43% and a weighted-average annualized risk-free rate of 6.0%. On July 28, 1999, and amended January 18, 2000 and February 15, 2000, the Company entered into an agreement with Bolder Venture Partners ("BVP") to have BVP complete a financing plan which will include an initial private placement (b), an Initial Public Offering ("IPO") (c), and a Follow-On Placement. In partial consideration of BVP's services, the Company will issue BVP warrants to purchase 1,232,136 shares exercisable for a five-year term from July 28, 1999. 225,000 of the Warrants were exercised at $0.25 per share on January 18, 2000. As these Warrants became exercisable on August 28, 1999, the Company has recorded the fair value of these warrants of $58,320 as a corporate finance fee in the year ended December 31, 1999. The remaining Warrants became exercisable or will be exercisable as follows: (i) 557,136 of the Warrants became exercisable as of October 14, 1999 at a price of $1.00 per share; (ii) 225,000 of the Warrants were exercisable upon completion of the IPO as of March 22, 2000 at a price per share equal to the IPO price (estimated to be $1.00 per share); and (iii) 225,000 of the Warrants will be exercisable immediately upon completion of the Follow-On Placement of not less than $3,000,000, at a price equal to the Follow-On private placement price. The exercise price of all warrants increase by 15% in each of the second, third, fourth and fifth years of the term of the Warrants. F-15
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 7. STOCKHOLDERS' EQUITY (CONTINUED) (d) Warrants (continued) The 225,000 Warrants exercised January 18, 2000 were not contingent on obtaining financing and therefore have been accounted for as a compensatory finance fee equal to the fair market value of the shares on August 28, 1999 less the option price which amounted to $58,320. The remaining tranches will be accounted for in a similar manner except any difference between the fair value and the option price will be offset against share capital as receiving the warrants is contingent on raising the applicable capital. On October 14, 1999, 557,136 Warrants became exercisable on completion of a private placement. These warrants had a fair value of $142,123 and were recorded as an additional cost of raising the applicable capital. Under the agreement, BVP agreed to serve as corporate and financial advisors to the Company for a period of twelve months, commencing July 1, 1999 at a rate of $10,000 per month. On March 22, 2000 the second tranche of 225,000 warrants vested upon completion of the initial public offering. (e) Initial Public Offering On March 22, 2000, the Company successfully completed its initial public offering in Canada of 2,250,000 shares of the Company's common stock at an offering price of $1.00 per share on the Canadian Venture Exchange ("CDNX"). In connection with the Company's Initial Public Offering (the "IPO"), the Company granted to Canaccord Capital Corporation and Haywood Securities Inc. (the "Agents"), an aggregate of 225,000 share purchase warrants (the "Agents' Warrants") entitling the Agents up to 225,000 shares of the Company's common stock at any time up to the close of business on the first anniversary of the Company's listing on the CDNX at a price of $1.00 per share. 30,000 of these Agents' Warrants were exercised in September 2000, leaving an aggregate of 195,000 Agents' warrants, which expired March 22, 2001. The Company incurred cash costs of $509,435 in connection with the initial public offering. In addition, the Company recorded non-cash share issue costs of $138,744 and $75,000 relating to the issuance of Warrants and common stock as a result of the offering. The Company received net proceeds from the initial public offering of $1,740,565. (f) Special Warrants On April 26, 2001, the Company completed an offering of 2,000,000 special warrants at $0.20 per special warrant for total proceeds of $400,000. Each warrants consists of one common share and one purchase warrant. Each purchase warrant will entitle the holder to purchase one additional common share at a price of $0.23 per share in the first year and $0.27 per share in the second year. F-16
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 7. STOCKHOLDERS' EQUITY (CONTINUED) (f) Special Warrants (continued) 150,000 of the special warrants were purchased by a supplier. The consideration received by the Company was the settlement of a $30,000 trade liability. In October 2001, the special warrants were exercised for 2,000,000 common shares and 2,000,000 purchase warrants. Upon conversion, the net proceeds of $393,000 from the special warrants were allocated $196,500 to common shares and $196,500 to the purchase warrants based on the relative fair values. 8. FINANCIAL INSTRUMENTS (a) Fair Value The carrying values of cash, accounts receivable, deposits, accounts payable and accrued liabilities, income taxes payable and advances payable, as reflected in the balance sheet, approximate their respective fair values as at December 31, 2001 and 2000 because of the demand or short-term maturity of these instruments. (b) Credit Risk and Economic Dependence Financial instruments which potentially subject the Company to credit risk consist of bank deposits and accounts receivable. Cash is deposited with high credit quality financial institutions. Accounts receivable consist of amounts receivable from trade and other receivables. The Company does not require collateral or other security to support accounts receivable. The Company estimates its allowance for doubtful accounts based on analysis of specific accounts and its operating history. The Company is subject to credit risk as it earns revenue from a limited number of customers. During the year ended December 31, 2001 - $58,661 (year ended December 31, 2000 - $75,973; year ended December 31, 1999 - $58,418) of revenue was derived from a single customer. As at December 31, 2001 accounts receivable included $6,235 (2000 - $45,398) due from a single customer. (c) Foreign Exchange Risk The Company also undertakes certain transactions in Canadian dollars and as such is subject to risk due to fluctuations in exchange rates. The Company does not use derivative instruments to reduce exposure to foreign exchange risk. F-17
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 9. RELATED PARTY TRANSACTIONS Related party transactions not otherwise disclosed in these financial statements include: (a) During the year ended December 31, 2001 the Company paid consulting fees of $Nil (year ended December 31, 2000 - $118,196; year ended December 31, 1999 - $181,784) to a corporate stockholder for research, development and computer services; (b) As at December 31, 2001 accounts payable and accrued liabilities include $52,127 (2000 - $58,649) due to a corporate stockholder for operating costs paid on its behalf (c) During the year ended December 31, 2001, the Company incurred interest of $12,364 (year ended December 31, 2000 - $1,973; year ended December 31, 1999 - $Nil) on advances from certain stockholders of the Company; (d) As at December 31, 2001, accounts payable and accrued liabilities include $145,965 (2000 - $86,154) due to stockholders and directors of the Company; and (e) During the year ended December 31, 2001, the Company paid management fees of $27,207 (2000 - $Nil) to a director of the Company. 10. COMMITMENTS Future minimum operating lease payment for premises and equipment leases for the years ended December 31, are due as follows: [Download Table] 2002 ............................................................. $28,516 2003 ............................................................. 4,614 2004 ............................................................. 627 ------- $33,757 ======= 11. INCOME TAXES Income tax expense for the periods ended December 31, 2001, 2000 and 1999 was as follows: [Download Table] Year Ended December 31, ------------------------------ 2001 2000 1999 ------- --------- -------- Current .................................. $ -- $(58,725) $102,557 Deferred (recovery) ...................... -- -- -- ------- -------- -------- $ -- $(58,725) $102,557 ======= ======== ========= F-18
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 11. INCOME TAXES (CONTINUED) The reported income tax provision differs from the amount computed by applying the statutory rate to the loss before income taxes. The reasons for this difference and the related tax effects are as follows: [Enlarge/Download Table] Year Ended December 31, ------------------------------------------- 2001 2000 1999 ----------- ----------- ----------- Statutory tax rate ........................... 35% 35% 35% Expected income tax (recovery) ............... $ (94,768) $(1,061,304) $ (232,866) Foreign tax rate differences and other ....... (6,633) 57,975 (48,185) Losses producing no current tax benefit ...... 101,084 782,030 148,054 Non-deductible expenses ...................... 317 162,574 -- Benefit of prior year losses (recognized) .... -- -- (16,172) Foreign taxes on redomocile of Company ....... -- -- 251,726 ----------- ----------- ----------- $ -- $ (58,725) $ 102,557 =========== =========== =========== On July 28, 1999, the Company was continued into the State of Delaware. This event resulted in a deemed tax year-end and a taxable gain for Canadian tax purposes, based on the excess of the fair market value of the Company's assets over their related tax cost. Accordingly, a provision for the Canadian taxes on the estimated taxable gain has been recorded, which has been partially eliminated by the use of available current tax losses in Canada. Deferred income taxes result principally from temporary differences in the recognition of certain revenue and expense items for financial and income tax reporting purposes. Significant components of the company's deferred tax assets and liabilities as of December 31, 2001 and 2000 are as follows: [Download Table] December 31, -------------------------- 2001 2000 ----------- ----------- Deferred income tax assets Book tax base difference in assets ................. $ 354,835 $ 170,936 Net operating tax loss carry forwards .............. 1,301,948 930,084 Valuation allowance for deferred income tax asset .. (1,656,783) (1,101,020) ----------- ----------- Net deferred income tax assets ....................... -- -- ----------- ----------- Deferred income tax liabilities ...................... $ -- $ -- =========== =========== Due to the uncertainty surrounding realization of the deferred income tax assets, the Company has 100% valuation allowance against its future income tax assets. As of December 31, 2001, the Company has U.S. and Canadian tax loss carry forwards of approximately $3.6 million, which expire between 2007 and 2021, available to reduce future years' income for tax purposes. F-19
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E-XACT TRANSACTIONS LTD. NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (EXPRESSED IN UNITED STATES DOLLARS) 12. SEGMENTED INFORMATION The Company operates in one segment - electronic commerce services. The Company attributes revenue among geographical areas based on the location of the customers. During the year ended December 31, 2001, 94% of revenues were derived in Canada (year ended December 31, 2000 - 98%). Long-lived assets include capital assets and are located in Canada. The Company's customer sales concentration is discussed in Note 8(b). F-20
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ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None. PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT The directors and executive officers of the Company are listed below. Directors are elected to hold office until the next annual meeting of shareholders and until their respective successors have been elected and qualified. Executive officers are elected by the Board of Directors and hold office until their successors are elected and qualified. The Board of Directors has established a compensation committee and an audit committee. [Download Table] Name Age Positions ---- --- --------- Peter Fahlman(2) 38 President, Chief Executive Officer and Director Lance Tracey(1)(2) 55 Director Dieter Heidrich(1) 62 Director Paul MacNeill(2) 47 Director John Rose(1) 56 Director Edmund Shung 47 Chief Financial Officer (1) Member of the Company's Compensation Committee. (2) Member of the Company's Audit Committee. BIOGRAPHICAL INFORMATION Peter Fahlman -- Mr. Fahlman, has been President of the Company since November 11, 2000 and director since September 1, 1998. Mr. Fahlman was previously the Vice President of Business Development from September 1, 1998 to November 11, 2000. Mr. Fahlman was a partner in Data Direct Consulting Services, an Internet software development company, since November, 1997; prior to that he was President of Prophase Development Corp., an online print services company, from May 1996 to December 1997; prior to that he was a consultant to Cybernet Technologies, from September 1995 to April 1996; prior to that he was a partner in Hyper Sound Recording, a high-tech music retail operation located in Vernon, British Columbia from May 1989 to January 1996. Lance Tracey -- Secretary and a director of the Company since September 1, 1998; President of Code Marketing Ltd. since January 1990; President and Director of Sutton Group Realty Services Inc. from January 1986 to present. -18-
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Dieter Heidrich -- Managing Director of Opus Capital, LLP, a Boulder, Colorado venture capital company, since October 1993 and a Director of the Company since September 1, 1998. Prior to that he was a general partner with Weiss, Peck, and Greer Venture Partners from October 1986 to October 1993 Paul C. MacNeill -- Partner with Campney & Murphy, Barristers and Solicitors, of Vancouver B.C., since 1981 and a Director of the Company since September 1, 1999. John T. Rose -- Mr. Rose is currently an active investor in nine Internet, software and communications companies. He also serves on the board of FatPipeU, a nation wide broadband skills training company based in Irvine, California. Mr. Rose was formerly the Senior Vice-President and General Manager for Compaq Computer Corporation's enterprise business with the responsibility for twelve operating divisions and approximately $14 billion in revenue. Prior to that appointment, he was the Group General Manager for Compaq's Desktop and Consumer Businesses. Mr. Rose led the acquisitions of both Tandem Computers and Digital Equipment Corporation. Mr. Rose has been a director of the Company since May 17, 2000. Edmund Shung -- Chief Financial Officer of the Company since November 1998. Mr. Shung is currently a part-time independent contractor to the Company. Mr. Shung devotes 25% of his time to the Company and has served the Company in this capacity since November 1998. In June 2000 Mr. Shung was appointed CFO and Secretary of Sourcesmith Industries Ltd. Mr. Shung has also been the CFO of Sutton Group Financial Services Ltd., a technology based real estate franchise company from October 1998 to present. Prior to that he was President of Totemcolor Film Labs Ltd., a photo processing facility, from October 1991 to November 1995. -19-
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Other Associations During the past five years, the principals of the Company have served as principals of the following reporting issuers during the periods and in the capacities noted below: [Enlarge/Download Table] SYMBOL/ PRINCIPAL REPORTING ISSUER EXCHANGE CAPACITY PERIOD --------- ---------------- -------- -------- ------ Lance Tracey Sutton Group Financial Services Ltd. SUG/TSE Director 12/98 - present I.D. Internet Direct Ltd. LKC/CDNX Director 01/93 - 11/99 Officer 01/93 - 11/99 Sourcesmith Industries Ltd. SSM/CDNX Director 06/00 - present Paul C. MacNeill American Minerals Fields Inc. AMZ/TSE Director 03/98 - present Anaconda Uranium Corp. ANU/CDNX Director 12/97 - 12/01 Axion Communications Inc. AXN/CDNX Director 08/96 - present Diagem International Resource Corp DGM/CDNX Director 12/97 - present Jordex Resources Inc. Director 05/95 - present Minefinders Corp. Inc. MFL/TSE Secretary 07/95 - present Director 05/95 - present Prospex Mining Inc. PRN/CDNX Director 07/97 - 01/01 Unique Broadband Systems Inc. UBS/CDNX Secretary 07/97 - 08/97 Director 07/97 - 01/01 Vision Gate Ventures Limited VGV/CDNX Director 12/99 - present Edmund Shung Sutton Group Financial Services Ltd SUG/TSE Secretary 10/98 - present CFO 10/00 - present Sourcesmith Industries Ltd. SSM/CDNX Sec/CFO 06/00 - 03/02 There are no family relationships amongst the directors and executive officers. During the past five years, none of the principals of the Company was a principal of another reporting issuer that was, during his tenure, struck from the register of companies (or a similar authority in the issuer's jurisdiction of incorporation if the issuer was incorporated outside of B.C.), or the securities of which were the subject of a cease trade or suspension order for a period of more than 30 consecutive days. Similarly, none of the principals of the Company has, during the past ten years, been the subject of any penalties or sanctions by a court or securities regulatory authority relating to the trading in securities or the promotion, formation or management of a publicly traded company or involving theft or fraud. None of the principals of the Company has, during the past five years, been declared bankrupt or made a voluntary assignment in bankruptcy or made a proposal under bankruptcy or insolvency legislation or been subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold his assets. -20-
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ITEM 10. EXECUTIVE COMPENSATION The following table sets forth information regarding compensation paid during the past three fiscal years to the Company's Chief Executive Officer and the named executive officers as required under the regulation. All figures are in US dollars. SUMMARY COMPENSATION TABLE [Enlarge/Download Table] Long term compensation Annual compensation Awards payouts ----------------------------- ---------------------------------------- ------------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Securities Restricted underlying All other Name and Principal Other annual Stock Option/SAR's LTIP compensation Position Year Salary ($) Bonus ($) Comp. ($) Awards ($) ($) payouts ($) ($) ------------------ ---- ---------- -------- ------------ ---------- ------------ ----------- ------------ Peter Fahlman President & CEO 2001 $72,000 $ -- $ -- $ -- $ -- $ -- $ -- President & CEO 2000 63,780 -- -- -- -- -- -- Interim President 1999 5,196 -- -- -- -- -- -- & CEO Edmund Shung 2001 $ -- $ -- $ -- $ -- $ -- $ -- $ -- CFO 2000 -- -- -- -- -- -- -- 1999 -- -- -- -- -- -- -- OPTION/SAR GRANTS IN FISCAL YEAR 2001 Prior to the adoption of the stock option plan described below, no stock options were ever granted to or exercised by executive officers of the Company. On October 14, 1999, the Board of Directors adopted a stock option plan (the "Plan"), which provides for incentive stock options and non-statutory options to be granted to officers, employees, directors and consultants to the Company. The Plan was amended on June 29, 2001. The exercise price of each stock option granted shall not be less than the fair market value of the common stock of the Company listed on the CDNX. The options granted pursuant to the Plan shall vest according to the terms set forth in each particular grant. The options granted pursuant to the Plan shall not vest at a rate which is less than 20% per year from the date of grant. The term of the options cannot exceed five years. Options to purchase up to 2,095,000 shares of the Company's common stock may be granted under the Plan. During 2001, 675,000 options were granted to employees and 50,000 of those options were subsequently cancelled. As of March 2, 2002, 1,073,500 stock options remained outstanding under the Plan. -21-
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In the fiscal year ending December 31, 2001, stock options were granted as follows: OPTIONS/SAR GRANTS IN FISCAL YEAR 2001 [Download Table] Number of % of total shares options underlying granted to options employees Exercise Expiration Name granted in fiscal year price date ---- ---------- -------------- -------- ---------- Peter Fahlman 150,000 24.00% $0.25 23/04/2006 Brian Archer 100,000 16.00% 0.25 23/04/2006 Edmund Shung 35,000 5.60% 0.25 23/04/2006 Shawn Harrison 75,000 12.00% 0.25 23/04/2006 Tara Gregg 50,000 8.00% 0.25 23/04/2006 Derek Thompson 50,000 8.00% 0.25 23/04/2006 Jan Mark 15,000 2.40% 0.25 23/04/2006 John McKitrick 50,000 8.00% 0.25 23/04/2006 Paul MacNeill 25,000 4.00% 0.25 23/04/2006 Lance Tracey 25,000 4.00% 0.25 23/04/2006 K. Dieter Heidrich 25,000 4.00% 0.25 23/04/2006 John Rose 25,000 4.00% 0.25 23/04/2006 ------- ------ 625,000 100.00% ------- ------ AGGREGATED OPTION/SAR EXERCISES FISCAL YEAR END 2001 OPTION/SAR VALUES [Enlarge/Download Table] (a) (b) (c) (d) (e) Number of securities Value of Unexercised underlying unexercised in-the money options/SARs Shares acquired options/SARs at fiscal YE at fiscal YE Name on exercise Value Realized Exercisable/Unexercisable Exercisable/unexercisable ---- --------------- -------------- ------------------------- -------------------------- Peter Fahlman, President and CEO $Nil $Nil 123,611/101,389 $Nil/$Nil(1) Edmund Shung, Chief Financial Officer $Nil $Nil 13,750/26,250 $Nil/$Nil(1) Note 1: The year-end value represents the difference between the option exercise prices of US $0.25 to $1.00 and the current market value of the common stock. The market price as at December 29, 2001 was US$0.20 with the result that none of the options were in the money. Compensation of Directors: The directors of the Company are not currently compensated for serving as directors, each director has been granted an option to purchase 75,000 shares of Common Stock at $1.00 per share. 25,000 shares vested on January 12, 2000 and 25,000 will on each anniversary date through 2002. On August 22, 2001, an additional 25,000 stock options were granted to each of the directors exercisable at a price of $0.25 per share. These options vest over a period of 36 months. Outside director's travel expenses are reimbursed by the Company. Mr. Fahlman receives compensation as an officer of the Company. -22-
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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of March 22, 2002, the number of the Company's Common Shares beneficially owned by (a) owners of more than five percent of the Company's outstanding Common Shares who are known to the Company and (b) the directors and executive officers of the Company individually, and the executive officers and directors of the Company as a group, and (c) the percentage of ownership of the outstanding Common Shares represented by such shares. The security holders listed below are deemed to be the beneficial owners of shares of Common Shares underlying options and warrants which are exercisable within 60 days from the above date. Unless otherwise indicated, the shareholders listed possess sole voting and investment power with respect to the shares shown. The information appearing below concerning persons other than officers and directors of the Company is to the Company's best knowledge based on information obtained from the Company's transfer agent. [Download Table] Name and Address of Amount and Nature Title of Class Beneficial Owner of Beneficial Owner Percent of Class -------------- ------------------- ------------------- ---------------- Common Peter Fahlman 101,389(1) 0.95% 855-55A Street, Delta. B.C., V4M 3M3 Common Paul C. MacNeill 81,250(2) 0.76% 2100-1111 West Georgia Street Vancouver, B.C. V6J 5B3 Common Lance Tracey 101,250(3) 0.95% 1628-555 West Hastings Street, Vancouver, B.C. V6B 4N6 Common K. Dieter Heidrich 1,279,610(4) 12.09% 230 Green Rock Drive, Boulder, Colorado 80302 Common John T. Rose 861,250(5) 8.14% 13826 Vintage Center Drive, Houston, Texas, 77069 -23-
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[Download Table] Name and Address of Amount and Nature Title of Class Beneficial Owner of Beneficial Owner Percent of Class -------------- ------------------- ------------------- ---------------- Common Edmund Shung 27,750(6) 0.26% C/O 1628-555 West Hastings Street, Vancouver, B.C. V6B 4N6 Common Sutton Group Financial 1,750,000(7) 16.67% Services Ltd. Common DataDirect Holdings Ltd. 1,750,000(8) 16.67% Common Acacia Management Ltd. 700,000 6.67% Kuttellgasse 4 CH-8001, Zurich, Switzerland Common Bolder Venture Partners LLC 782,136(9) 6.93% 1327 Spruce Street, Suite 300, Boulder, Colorado 80302 Common Layton Management Ltd. 925,000(10) 8.10% 1797 Layton Drive, North Vancouver, B.C. V7H 1X7 Common Maine Securities Ltd. 925,000(11) 8.10% 3251 West 3rd Avenue, Vancouver, B.C. V6K 1N5 Common Officers and directors 2,452,499(12) 23.17% as a group (1) Consists of 101,389 options exercisable presently or within 60 days. (2) Consists of 81,250 options exercisable presently or within 60 days. (3) Includes 81,250 options exercisable presently or within 60 days and 20,000 shares held in the name of Mr. Tracey's wife. (4) Includes 81,250 options exercisable presently or within 60 days, 45,450 of the shares are held jointly by Mr. Heidrich and his wife. 80,000 shares are held by Heidrich Family LLP, 882,000 shares are owned by Opus Capital Fund, LLC of which Mr. Heidrich is a general partner and manager of the fund giving beneficial ownership to Mr. Heidrich, 190,910 shares are held by Opus Capital LLC. (5) Included 81,250 options exercisable presently or within 60 days. (6) Includes 13,750 options exercisable presently or within 60 days -24-
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(7) Mr. Tracey, a director of the Company is a director and officer Sutton Group Financial Services Ltd. ("Sutton"), and he and his wife are the beneficial owners of 16.26% and 12.035% respectively, of the issued and outstanding shares of Sutton. (8) Mr. Fahlman, a director of this company, is a director of DataDirect Holdings, Inc. ("DataDirect"), a private company and is a beneficial shareholder of 40% of the issued and outstanding shares of DataDirect. (9) Consists of 782,136 warrants exercisable presently or within 60 days. (10) Consists of 925,000 warrants exercisable presently or within 60 days. (11) Consists of 925,000 warrants exercisable presently or within 60 days. (12) Includes 440,139 options held by the directors and officers as disclosed above, exercisable presently or within 60 days. ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The Company has entered into transactions with its officers and directors, and with principal shareholders listed in Item 11 or affiliated entities as described below. EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS Peter Fahlman -- On November 26, 1999 the Company and Mr. Fahlman, the current President and CEO and a director of the Company and formerly the Vice President of Business Development, entered into an employment agreement commencing on November 26, 1999. Under the terms of the agreement, the Company will pay to Mr. Fahlman the sum of Cdn. $7,500 per month. Effective November 16, 2000 Mr. Fahlman's salary was increased to CAD $ 9,860 per month or US$6,000 per month Mr. Fahlman continues to hold incentive stock options to acquire 50,000 shares of the Company's common stock at a price of US $1.00 per share for a period of five years. The options vest over a thirty-six month period. The options vest immediately if Mr. Fahlman is terminated for good reason or is terminated without cause. In his capacity as a director of the Company, Mr. Fahlman was subsequently granted stock options to acquire an additional 25,000 common shares at $1.00 per share which stock options vested immediately. On April 24, 2001 Mr. Fahlman was granted 150,000 stock options exercisable at a price of $0.25 per share. These options vest over a period of 36 months. Other Employment Agreements The Company entered into employment agreements with Brian Archer and Robert Roker. Mr. Roker and Mr. Archer were each paid CAD$7,500 per month. The employment agreements have no fixed term. Under the agreements the employees were each granted incentive stock options to purchase 50,000 shares of the Company's common stock at exercise prices of US $1.00 per share. On August 22, 2001, Mr. Archer and Mr. Roker were granted a total of 150,000 stock options exercisable at $0.25 per share. These options vest over a period of 36 months. The employment agreements also contain twelve months non-competition and confidentiality provisions, and provide for the immediate vesting of all stock options and six months severance pay in the event the agreement is terminated by the employee as a result of a failure by the Company -25-
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to pay an amount due to the employee under the agreement, or if the agreement is terminated by the Company without cause. Mr. Roker's employment with the Company was terminated on September 11, 2001. Mr. Roker's options were cancelled thirty days after he left the Company. The Company and executives of the Company have entered into confidentiality agreements that include non-confidential and non-disclosure provisions with respect to confidential information obtained by the executives in the course of their employment with the Company. RELATED PARTIES Consulting Agreement The Company is party to a consulting agreement (the "Consulting Agreement") with Bolder Venture Partners L.L.C. ("Bolder") made July 28, 1999 and amended on February 15, 2000. Bolder Venture Partners is a limited liability company incorporated under the laws of the State of Colorado. Under the terms of the Consulting Agreement, Bolder agreed to provide consulting services to the officers of the Company relating to matters of corporate development, strategic planning, raising of capital and other financial matters, and to assist with certain private placements and public offerings of the Company's securities, including this offering. In consideration of these services, the Company agreed to pay Bolder Venture Partners a monthly retainer of US $10,000, and purchase warrants to acquire up to 1,232,136 shares of the Company's common stock for a period of five years from July 28, 1999. The remaining warrants will be exercisable as follows: o 225,000 of the warrants at US $0.25 per share on July 28, 1999 were exercised; o 557,136 at US $1.00 per share as amended on February 15, 2000; o 225,000 at US $1.00 per share upon completion of this offering; and o 225,000 at a price per share equal to the price per share under a future private placement of not less than US $3,000,000, if such a private placement is made. The exercise price of all of the Warrants referred to herein will increase by 15% in each of the second, third, fourth and fifth year of the term of the share purchase warrants until exercised. The exercise price of the warrants as at March 22, 2002 was approximately $1.32. The term of the Consulting Agreement ended on June 30, 2000. Sutton Group Financial Services Ltd. The Company has accounts payables and accrued liabilities of $52,127 (2000-$58,649) due to Sutton Group Realty Services Ltd. ("SGRS") for operating costs paid by SGRS on behalf of the Company. SGRS is a wholly owned subsidiary of Sutton Group Financial Services Ltd. ("Sutton"). Sutton is 16.26% beneficially owned by Lance Tracey. -26-
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PART IV ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS. The following Exhibits are filed herewith or have been previously filed with the Securities and Exchange Commission and are incorporated by reference herein: [Download Table] EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.1 Certificate of Domestication of E-xact Transactions Ltd.* 3.2 Certificate of Incorporation of E-xact Transactions Ltd.* 3.3 Bylaws* 10.1 Amended Sponsorship Agreement dated January, 2000 between E-xact Transactions Ltd., Inc. and Canaccord Capital Corporation* 10.2 Lease dated April 22, 1999 between Harbour Centre Complex Limited as attorney-in-fact for Lord Realty Holdings Limited and Privest Properties Ltd. (Landlord) and E-xact Transactions Ltd.* 10.3 Stock Option Plan* 10.4 Letter Agreement dated September 16, 1999 between E-xact Transactions Ltd. And Ted Henderson.* 10.5 Letter Agreement dated July 28, 1999 between E-xact Transactions Ltd. And Bolder Venture Partners, LLC.* 10.6 Management Agreement dated April 15, 1999 between DataDirect Holdings, Inc. and Peter Fahlman, and Robert Roker, and E-xact Transactions Ltd.* 10.7 Form of Employment Agreement executed between E-xact Transactions Ltd. and each of Peter Fahlman, Robert Roker and Brian Archer** 10.8 Confidentiality Agreement dated December 10, 1999 between E-xact Transactions Ltd. and Ted Henderson** 10.9 Amended Letter Agreement dated January 18, 2000 between E-xact Transactions Ltd. and Bolder Venture Partners, LLC.*** 10.1 Agency Agreement Amendment dated January 19, 2000 between E-xact Transactions Ltd. and Canaccord Capital Corporation.*** 10.11 Sublease Agreement dated December 14, 1999 between E-xact Transactions Ltd. and Kinder Morgan, Inc.*** 23.1 Consent of Deloitte & Touche LLP, Independent Auditors. --------- * Filed with Registration Statement on Form SB-2 filed October 22, 1999. ** Filed with Registration Statement on Amendment No. 1 to Form SB-2 filed December 22, 1999. *** Filed with Registration Statement Amendment No. 2 to Form SB-2 filed February 8, 2000. **** Filed with Registration Statement Amendment No. 3 to Form SB-2 filed February 11,2000. b) Reports on Form 8-K. During the last quarter of the period covered by this report: There were no reports on Form 8-K filed during the last quarter of the Company's fiscal year ended December 31, 2001. -27-
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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. E-xact Transaction Ltd. Date: April 1, 2002 By: /s/ Peter Fahlman ------------- ----------------------------- Peter Fahlman President and CEO Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated: [Download Table] Signatures Title Date ---------- ----- ---- /s/ Peter Fahlman President and April 1, 2002 ------------------- Director Peter Fahlman /s/ Edmund Shung Chief Financial Officer and April 1, 2002 ------------------- Principal Accounting Officer Edmund Shung /s/ Lance Tracey Director April 1, 2002 ------------------- Lance Tracey /s/ Dieter Heidrich Director April 1, 2002 ------------------- Dieter Heidrich /s/ John Rose Director April 1, 2002 ------------------- John Rose /s/ Paul MacNeill Director April 1, 2002 ------------------- Paul MacNeill -28-
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INDEX TO EXHIBITS [Download Table] EXHIBIT NUMBER DESCRIPTION OF EXHIBIT ------- ---------------------- 3.1 Certificate of Domestication of E-xact Transactions Ltd.* 3.2 Certificate of Incorporation of E-xact Transactions Ltd.* 3.3 Bylaws* 10.1 Amended Sponsorship Agreement dated January, 2000 between E-xact Transactions Ltd., Inc. and Canaccord Capital Corporation* 10.2 Lease dated April 22, 1999 between Harbour Centre Complex Limited as attorney-in-fact for Lord Realty Holdings Limited and Privest Properties Ltd. (Landlord) and E-xact Transactions Ltd.* 10.3 Stock Option Plan* 10.4 Letter Agreement dated September 16, 1999 between E-xact Transactions Ltd. And Ted Henderson.* 10.5 Letter Agreement dated July 28, 1999 between E-xact Transactions Ltd. And Bolder Venture Partners, LLC.* 10.6 Management Agreement dated April 15, 1999 between DataDirect Holdings, Inc. and Peter Fahlman, and Robert Roker, and E-xact Transactions Ltd.* 10.7 Form of Employment Agreement executed between E-xact Transactions Ltd. and each of Peter Fahlman, Robert Roker and Brian Archer** 10.8 Confidentiality Agreement dated December 10, 1999 between E-xact Transactions Ltd. and Ted Henderson** 10.9 Amended Letter Agreement dated January 18, 2000 between E-xact Transactions Ltd. and Bolder Venture Partners, LLC.*** 10.1 Agency Agreement Amendment dated January 19, 2000 between E-xact Transactions Ltd. and Canaccord Capital Corporation.*** 10.11 Sublease Agreement dated December 14, 1999 between E-xact Transactions Ltd. and Kinder Morgan, Inc.*** 23.1 Consent of Deloitte & Touche LLP, Independent Auditors. --------- * Filed with Registration Statement on Form SB-2 filed October 22, 1999. ** Filed with Registration Statement on Amendment No. 1 to Form SB-2 filed December 22, 1999. *** Filed with Registration Statement Amendment No. 2 to Form SB-2 filed February 8, 2000. **** Filed with Registration Statement Amendment No. 3 to Form SB-2 filed February 11,2000.

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