Filed On 6/4/02 · SEC File 0-31068 · Accession Number 1125282-2-1899
As Of Filer Filing As/For/On Docs:Pgs Issuer Agent
6/04/02 Belzberg Technologies Inc 6-K 6/03/02 4:59 St Ives Financial Inc/FA
Document/Exhibit Description Pages Size
1: 6-K Report of Foreign Issuer 3 8K
2: EX-99.1 Press Release 2± 10K
3: EX-99.2 Annual Report 41 197K
4: EX-99.3 Quarterly Report 13 77K
Exhibit 99.2
BELZBERG TECHNOLOGIES INC.
Annual Report 2001
BELZBERG TECHNOLOGIES
ANNUAL REPORT 2001
THE SCIENCE OF TRADING
Trade on any market from one screen.
Belzberg Technologies Inc. provides electronic trading systems to financial
institutions in the United States, Canada, and Europe. Our real-time order
routing and trade execution system provides instant confirmation of executed
transactions through our network, which connects to all North American stock and
options exchanges, Electronic Communication Networks (ECNs), and major European
equities exchanges.
Our core range of products includes:
o The Belzberg Suite of Trading Applications combines interactive order
execution and fill reports with live market quotes and analysis, and
includes the following:
o Single Order Entry
o Spreadsheets-based Basket Trading Software
o Arbitrage Launcher
o FX calculator;
o The Belzberg Gateway processes incoming electronic orders from
customers and routes them to the appropriate stock or options exchange;
and
o The Belzberg Order Management System (OMS) helps brokerage houses
manage their order flow.
Our technology promotes the full benefits of electronic trading by enabling
straight through processing (STP), by gathering orders electronically from OMS
systems, by delivering trade details electronically to clearing or other
back-office accounting systems, and by connecting, on a real-time basis, to risk
management and analytic systems.
2001 has been another year of rapid growth for Belzberg Technologies. We
are pleased to report revenues of $24.5 million in 2001, up from $12 million in
2000-an increase of 104%. We had a small deficit in 2001, from continuing
operations before unusual items, of $768,842.
Our business plan is based upon a continually expanding core of recurring,
monthly revenue. Traditionally, we have offered a service based on a monthly
subscription fee. In 1999, we introduced a transaction fee model, thus ensuring
a more rapid growth of revenues. This will be part of a consistent pattern of
growth: in the last five years our revenues have grown 1225 %.
The equity and equity derivative markets are quickly moving to
electronic access. Belzberg is uniquely situated to meet this growing demand for
global trading solutions.
Safe Harbor: Except for historical information, this annual report
contains forward- looking statements that reflect the Company's current
expectation regarding future events. These forward-looking statements involve
risks and uncertainties that may cause actual results to differ materially from
those statements. Those risks and uncertainties include, but are not limited to,
changing market conditions, economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products and
prices and other factors and other risks detailed from time-to-time in the
Company's quarterly reports, annual reports and other publications. Although the
Company believes that such statements contained in this report are reasonable,
it can give no assurance that the Company's expectations are correct. All
forward-looking statements are expressly qualified in their entirety by this
Cautionary Statement.
Page 1 of 40
REPORT TO SHAREHOLDERS
Belzberg Technologies Annual Report 2001
The year 2001 was, again, one of rapid growth for your company.
Revenues grew by 105% to over $24 million. Currently we are annualized at $28
million per year and growing.
The company had a small operating deficit for the year 2001. Several
initiatives are now underway to streamline our operations so that profits will
flow from these revenues. These include:
Becoming a member of various exchanges and clearing corporations to
avoid the cost of using other brokerage houses' facilities to clear and execute
trades. A critical mass of order flow has now been achieved to make
self-clearing, and becoming a member of various US exchanges, a viable and
important alternative.
Additionally, we closed non-producing US offices and centralized these
operations in New York. Further cost cutting initiatives are underway, including
lowering data and network procurement expenses.
More importantly, several key alliances formed recently with large
clearing brokers, are now fueling Belzberg's growth.
Many of the large houses in the United States have outsourced the
electronic trading services demanded of them by their institutional clients.
This has created great opportunities for our company. Belzberg Technologies'
best ambassadors for sales are often brokerage houses offering their
institutional clients our products and services.
During the year, Belzberg Technologies purchased a floor brokerage
operation on the CBOE that executes a significant percentage of the CBOE's
monthly volume. This options division proved to be highly profitable in its own
right, in addition to being an important catalyst in attracting customers who
require an electronic trading system to trade equities.
In an economic environment, where growth has proven to be very
challenging for many companies, Belzberg Technologies continues to thrive. We
made great progress in further establishing a strong foundation for our future
growth. The company is positioned as a low cost electronic order execution
provider of equities and options. This has proven to be irresistible to many
clients who, by trading through us, can significantly reduce their cost of
trading and, at the same time, enjoy the added bonus of state of the art
electronic trading technology.
Subsequent to 2001, your company completed a private placement that
netted $13.5 million, giving the company a healthy balance sheet with
approximately $20 million of net liquid assets. This leaves the company well
positioned to execute its strategy of being a low cost order execution provider
in many venues, whilst offering world-class electronic trading technologies.
The company is poised to deliver increased value to shareholders
through well planned growth and strategic acquisitions. We will continue to
expand internationally and to create new products that will facilitate seamless
global trading.
Again, I would like to thank our management, directors, and staff - a
family of over one hundred and thirty talented and dedicated professionals - for
all their efforts in bringing about our growth to date. We thank our customers
for entrusting a crucial part of their technology. And a special thanks goes to
those who have invested in our company and our future. All of us at Belzberg
Technologies look forward to reporting to you on our future success.
Sidney H. Belzberg
Chairman and CEO
June 2002
Page 2 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
The following discussion and analysis should be read in conjunction
with the audited consolidated financial statements of the Corporation and the
notes thereto for the year ended December 31, 2001. This discussion and analysis
contains forward-looking statements that involve risks and uncertainties that
could cause actual results to differ materially from those contemplated by these
forward-looking statements. Additional information concerning such risks and
uncertainties is contained in the Corporation's filings with Canadian and United
States securities regulatory authorities.
General
The Corporation is a provider of exchange connectivity, trade
execution, order management and routing software for the financial industry. In
addition to its technology, through one of its wholly owned subsidiaries, an
agency-only broker-dealer, Belzberg offers low cost trade execution.
The Corporation's customers, who include both broker-dealers and their
customers, use Belzberg trading software to buy and sell equities and stock
options on a variety of stock exchanges, ECNs and through NASDAQ market makers.
Belzberg products enable traders to execute and manage large volumes of
transactions with great reliability and security.
Major financial institutions, broker-dealers, buy-side institutions,
banks, and others use all or a subset of Belzberg trading products to automate
their order execution, basket trading, arbitrage, retail order management, and
real-time inventory management.
In 2001, we expanded our business by (i) setting up a broker-dealer
(EBS) which enabled us to begin to charge our customers on a transaction fee
basis, and (ii) acquiring a floor brokerage operation (RCS) that facilitates for
the execution of exchange-traded equity and index options and futures on the
CBOE and other exchanges.
Selected Financial Data - 2001 (unaudited)
[Enlarge/Download Table]
$000's except per share data Q1 Q2 Q3 Q4
-----------------------------------------------------------------------------------------
Revenue $ 4,550 $ 6,444 $ 6,332 $ 7,134
Gross Margin 2,934 4,046 3,529 3,438
Loss from continuing operations (134) (675) (888) (1,194)
Loss from discontinued operations (249) (282) (662) --
Net loss $ (383) $ (957) $ (1,550) $ (1,194)
Basic and diluted loss per common share
- from continuing operations $ (0.01) $ (0.06) $ (0.08) $ (0.11)
- from discontinued operations (0.02) (0.03) (0.06) --
Basic and diluted loss per common share $ (0.04) $ (0.09) $ (0.14) $ (0.11)
Balance Sheet Data:
Cash and cash equivalents $ 9,110 $ 9,070 $ 7,049 $ 6,361
Working capital 11,796 9,786 8,295 6,913
Total assets 19,524 20,881 18,438 17,451
Long-term lease obligations 1,733 1,573 1,561 1,502
Shareholders' equity 14,553 13,618 11,849 10,805
=========================================================================================
Numbers may not total due to rounding. Certain figures have been
reclassified for comparative purposes to conform to the year-end financial
statement presentation.
Page 3 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
Selected Financial Data - 2000 (unaudited)
[Enlarge/Download Table]
$000's except per share data Q1 Q2 Q3 Q4
------------------------------------------------------------------------------------------------
Revenue $ 2,444 $ 2,592 $ 2,935 $ 3,980
Gross Margin 1,745 1,611 1,969 2,096
Earnings (loss) from continuing operations 35 (251) (151) 219
Loss from discontinued operations -- -- (66) (132)
Net earnings (loss) $ 35 $ (251) $ (217) $ 87
Basic and diluted earnings (loss) per common
share
- from continuing operations $ 0.02 $ (0.04) $ (0.02) $ 0.02
- from discontinued operations -- -- (0.01) (0.01)
Basic and diluted earnings (loss) per common $ 0.02 $ (0.04) $ (0.03) $ 0.01
share
Balance Sheet Data:
Cash and cash equivalents $ 5,530 $ 4,640 $ 4,050 $ 5,642
Working capital 5,563 4,922 5,076 7,562
Total assets 8,926 9,250 11,443 15,460
Long-term lease obligations 264 201 1,011 1,418
Shareholders' equity 7,046 6,942 7,448 10,665
------------------------------------------------------------------------------------------------
Numbers may not total due to rounding. Certain figures have been
reclassified for comparative purposes to conform to the year-end financial
statement presentation.
Overview of Year 2001
In 2001 revenue increased from $12.0 million in year 2000 to $24.5
million in year 2001, an increase of 105%. In year 2000, revenue increased to
$12.0 million from $5.9 million in 1999, an increase of 102%. Belzberg has now
had an increase in revenue for 10 consecutive fiscal quarters, except for the
3rd quarter of 2001 when revenue declined slightly as a result of our New York
operations being closed for one full week due to the September 11, 2001
terrorist attack.
In January 2001, the Corporation completed a private placement, which
netted $4.7 million (issue price of $15.00 per share). Proceeds from the
exercise of employee options at an average price of $3.08 netted $0.2 million.
During the year $0.8 million was utilized to purchase shares in the market under
the Corporation's normal course issuer bid at an average price over the year of
$8.88. Cash was also utilized to purchase capital assets and to repay lease
obligations. The overall cash position increased by $0.7 million in 2001.
In 2001 the Corporation continued its expansion by developing new
products, building connectivity to European exchanges and through acquisition.
In April 2001, the Corporation acquired all of the issued shares of the
predecessor of RCS, a floor broker on the floor of the CBOE in Chicago, thereby
acquiring access to the floor of the CBOE. The floor-brokerage operation is a
key component of the Corporation's strategy of being able to provide customers
with connectivity to both equity and options markets from one trading platform.
In May 2001, the Corporation opened its first European office by
incorporating BT(UK), a wholly owned subsidiary, in London, England. Belzberg is
now able to route orders from European customers to North American exchanges. In
due course, the Corporation intends to be able to route orders from European
customers to European exchanges.
Page 4 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
In September 2001, the Corporation discontinued the operations of
eContracts, its only subsidiary that was not part of the business model, in
order to fully concentrate on the core business. Revenue for this subsidiary
commenced in the year 2001 and were insignificant. Operations in the year 2000
were immaterial. Year 2001 revenue and expenses are disclosed as "Discontinued
Operations".
In September 2001, the Corporation opened a subsidiary in Philadelphia
and located there a new President for the Corporation together with a new Vice
President of Sales and supporting staff. Unfortunately, no additional revenue
was generated, nor were any cost efficiencies achieved. This office was closed
in March 2002, and the relationship with the new President and other staff
ended.
As a result of the continuing strategy of the Corporation, revenue
continued to increase from the United States, reaching $15.7 million in 2001 as
compared to $5.9 million in 2000. The Corporation anticipates that revenue from
the United States will continue to increase at a greater rate than revenue from
Canada.
In December 2001, the Corporation's renovation of both its new and
existing space at its head office in Toronto was completed, and the Corporation
moved into the new premises. As part of this move, leasehold improvements in the
old space were demolished in order to completely rebuild the premises, and the
remaining unamortized original cost of the leasehold improvements in this
renovated area was written off.
The cost of the Corporation's rapid expansion is shown in the loss for
the year of $2.9 million from continuing operations, as significant new staff
were added and our internal data networks were upgraded significantly.
Total operating expenses increased from $6.3 million in 2000 to $14.7
million in 2001, an increase of 133%. Cash flow from operations however in 2001
was a positive $12,000 as compared to a utilization of $4.1 million in 2000.
Summary
2001 represented a significant improvement in the Corporation's
competitive position. The following chart gives a comparison of the changes in
revenue over the past three years, the growth in numbers of employees, and the
growth in revenue per employee.
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----------------------------------------------- ---------------------- ---------------------- ---------------------
Revenue by Segment per Employee for the Year Ended December 31,
($000s)
-------------------------------------------------------------------
2001 2000 1999
----------------------------------------------- ---------------------- ---------------------- ---------------------
Core Business Revenue $ 20,787 $ 11,951 $ 5,904
Brokerage Business Revenue $ 3,673 $ -- $ --
Total Revenue $ 24,460 $ 11,951 $ 5,904
Number of Employees - Core Business 109 78 48
Number of Employees - Brokerage Business 22 -- --
Number of Total Employees 131 78 48
Revenue per Employee - Core Business $ 191 $ 153 $ 123
Revenue per Employee - Brokerage Business $ 167 $ -- $ --
Total Revenue per Employee $ 187 $ 153 $ 123
----------------------------------------------- ---------------------- ---------------------- ---------------------
Page 5 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
Acquisition
Robert C. Sheehan & Associates, Inc. In April 2001, the Corporation
acquired all of the outstanding shares of the predecessor of RCS for cash
consideration of $1.7 million. As of December 31, 2001, $0.4 million of the cash
consideration remained payable to the vendor of RCS, which amount was
subsequently paid in January 2002.
RCS is a broker-dealer that executes exchange-traded equity and index
options on the CBOE and is a key component of the Corporation's strategy of
being able to provide customers with connectivity to both equity and options
markets from one trading platform.
Consolidated Results of Continuing Operations
Revenue
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========================================== ==============================================================================
Total Revenue for the Years ended December 31,
($000s)
------------------------------------------------------------------------------
2001 % of 2000 % of 1999 % of
Revenue Revenue Revenue
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Subscription Fees $ 10,596 43% $ 6,080 51% $ 4,526 77%
Transaction Fees 8,900 36% 3,276 27% 644 11%
Commissions 3,594 15% -- -- -- --
Software Development and Installation 772 3% 2,059 17% 667 11%
Other 598 3% 536 5% 67 1%
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Total Revenue $ 24,460 $ 11,951 $ 5,904
========================================== ============= ============= ============ =========== ============ ============
Total revenue increased from $5.9 million in 1999 to $12.0 million in
2000 (an increase of 102%), and to $24.5 million in 2001 (an increase of 105%).
Subscription fee revenue, which is based on customers paying a fixed monthly fee
for each terminal connected to our Transactions Gateway, increased by 74% in
2001 as compared to 2000 and accounted for 43% of total revenue in 2001 as
compared to 51% of total revenue in 2000 and 77% of total revenue in 1999. The
Corporation expects subscription fee revenue as a percentage of total revenue to
decrease in the future as more customers are expected to switch to a transaction
fee model. Transaction fee revenue, which is based on customers paying a fee per
transaction routed through our Transactions Gateway, increased by 172% in 2001
as compared to 2000 and accounted for 36% of total revenue in 2001 as compared
to 27% of total revenue in 2000 and 11% of total revenue in 1999.
In 2001, the Corporation acquired the predecessor of RCS, a
broker-dealer that executes exchange-traded equity and index options on the
CBOE. For the nine months ended December 31, 2001, RCS generated $3.6 million in
commission income that accounted for 15% of total revenue in 2001.
Software development and installation fees decreased by 63% in 2001 as
compared to 2000 and accounted for 3% of total revenue in 2001 as compared to
17% of total revenue in 2000 and 11% of total revenue in 1999. The Corporation
expects that this revenue stream will be a significantly smaller percentage of
the overall business in future years. Other revenue which include revenue from
connectivity to our Transactions Gateway as well as revenue from information
distribution, increased by 12% in 2001 to $0.6 million as compared to $0.54
million in 2000.
Page 6 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
[Enlarge/Download Table]
========================================== ==============================================================================
Revenue by Country for the Years ended December 31,
($000s)
------------------------------------------------------------------------------
2001 % of 2000 % of 1999 % of
Revenue Revenue Revenue
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Canada
Subscription Fees $ 6,512 74% $ 3,213 53% $ 2,012 75%
Transaction Fees 1,336 15% 558 9% 203 8%
Commissions -- -- -- -- -- --
Software Development and Installation 447 5% 1,783 29% 415 15%
Other 490 6% 523 9% 50 2%
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Revenue from Canada $ 8,785 $ 6,077 $ 2,680
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
United States
Subscription Fees $ 4,084 26% $ 2,867 49% $ 2,514 78%
Transaction Fees 7,563 48% 2,718 46% 441 14%
Commissions 3,594 23% -- -- -- --
Software Development and Installation 325 2% 277 5% 252 8%
Other 109 1% 12 -- 17 --
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Revenue from United States $ 15,675 $ 5,874 $ 3,224
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
The Corporation generated approximately 64% of its revenue in the
United States and 36% of its revenue in Canada. Revenue increased in both Canada
and the United States from 2000 with significant growth occurring in the United
States. Revenue in Canada increased from $6.1 million in 2000 to $8.8 million in
2001, an increase of 45%, compared to the 127% increase in 2000 from 1999
revenue of $2.7 million. Revenue in the United States increased from $5.9
million in 2000 to $15.7 million in 2001, an increase of 167%, compared to the
82% increase in 2000 from 1999 revenue of $3.2 million. The Corporation
anticipates that revenue from the United States will continue to increase at a
greater rate than revenue from Canada.
Page 7 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
Gross Margin
[Download Table]
============================ ================================================
Gross Margin for the Years Ended December 31,
($000s)
------------------------------------------------
2001 2000 1999
---------------------------- -------------- ---------------- ----------------
Revenue $ 24,460 $ 11,951 $ 5,904
Cost of Revenue 10,513 4,530 2,173
---------------------------- -------------- ---------------- ----------------
Gross Margin $ 13,947 $ 7,421 $ 3,731
---------------------------- -------------- ---------------- ----------------
Gross Margin % 57% 62% 63%
Gross margin as a percentage of revenue declined to 57% in 2001, from
62% in 2000 and 63% in 1999. The decline in margin is attributable to a change
in the sales mix that now includes the lower margin brokerage business as well
as an increase in direct costs incurred in 2001 to expand capacity and
connectivity to new markets. The Corporation expects the margin on the brokerage
business to improve in future years as the Corporation intends to move towards
becoming self-clearing.
Operating Expenses
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========================================== ==============================================================================
Operating Expenses for the Years ended December 31,
($000s)
------------------------------------------------------------------------------
2001 % of 2000 % of 1999 % of
Revenue Revenue Revenue
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Sales and Marketing $ 5,072 21% $ 2,721 23% $ 1,874 32%
Research and Development 3,062 12% 2,011 17% 1,794 30%
Government Assistance -- -- (1,150) (10)% -- --
Administration 6,582 27% 2,676 22% 2,356 40%
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Total Operating Expenses $ 14,716 60% $ 6,258 52% $ 6,024 102%
========================================== ============= ============= ============ =========== ============ ============
Sales and Marketing Expenses. Sales and marketing expenses totaled $5.1
million in 2001, $2.7 million in 2000 and $1.9 million in 1999. Sales and
marketing expenses increased by $2.4 million or 86% in 2001 over 2000 and by
$0.8 million or 45% in 2000 over 1999. As a percentage of revenue, sales and
marketing expenses were 21% of sales in 2001, compared to 23% of sales in 2000
and 32% of sales in 1999. The primary factors that contributed to the increase
in sales and marketing expenses in 2001 were headcount additions and increased
spending on advertising and promotions.
Research and Development Expenses and Government Assistance. Research
and development expenses totaled $3.1 million in 2001, $2.0 million in 2000 and
$1.8 million in 1999. Research and development expenses increased by $1.1
million or 52% in 2001 over 2000, and by $0.2 million or 12% in 2000 over 1999.
As a percentage of revenue, research and development expenses were 12% of sales
in 2001, compared to 17% of sales in 2000 and 30% of sales in 1999. The primary
factor that contributed to the increase in research and development expenses in
2001 was headcount additions as the Corporation is committed to expand its
product capabilities and connectivity to additional markets in order to increase
its customer base.
Page 8 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
In 2000, the Corporation recognized a recovery of $1.2 million against
research and development expenses relating to scientific research and
developmental assistance for the taxation years 1996 to 1999 provided by the
Government of Canada. This amount was received in 2001. Any future
reimbursements that the Corporation may be entitled to, will only be obtainable
as a credit against income taxes payable in Canada.
Administration Expenses. Administration expenses totaled $6.6 million
in 2001, $2.7 million in 2000 and $2.4 million in 1999. Administration expenses
increased by $3.9 million or 146% in 2001 over 2000, and by $0.3 million or 14%
in 2000 over 1999. As a percentage of revenue, administration expenses were 27%
of sales in 2001, compared to 22% of sales in 2000 and 40% of sales in 1999. The
primary factors that contributed to the increase in administration expenses in
2001 were headcount additions, costs related to additional office space in
Toronto, Philadelphia and London, England and an increase in the administrative
overhead to support the growth in sales and size of the Corporation.
Other Income and Expenses
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Other Income and Expenses for the Years ended December 31,
($000s)
------------------------------------------------------------------------------
2001 % of 2000 % of 1999 % of
Revenue Revenue Revenue
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Amortization of Capital Assets $ 1,646 6% $ 793 7% $ 220 4%
Amortization of Goodwill 153 1% 48 1% -- --
Write-down of Leasehold Improvements 153 1% -- -- 113 2%
Interest Expense 466 2% 166 1% 25 --
Interest Income (312) (1)% (227) (2)% -- --
Stock Exchange Listing Costs -- -- 525 4% -- --
------------------------------------------ ------------- ------------- ------------ ----------- ------------ ------------
Other Expenses, Net $ 2,106 9% $ 1,305 11% $ 358 6%
========================================== ============= ============= ============ =========== ============ ============
Amortization of Capital Assets. Amortization of capital assets totaled
$1.6 million in 2001, $0.8 million in 2000 and $0.2 million in 1999.
Amortization of capital assets increased by $0.8 million or 107% in 2001 over
2000 and by $0.6 million or 260% in 2000 over 1999. The increase in amortization
of capital assets in 2001 resulted from acquisitions of both owned and leased
computer equipment of approximately $1.4 million as well as capital expenditures
on leasehold improvements and furniture of approximately $1.3 million in 2001.
The computer equipment additions improved our high-speed connectivity between
customers, the Corporation and a multitude of exchanges and other markets for
live trade execution.
Amortization of Goodwill. Amortization of goodwill totaled $153,000 in
2001, $48,000 in 2000 and nil in 1999. The increase in goodwill amortization in
2001 resulted from the acquisition of RCS.
Effective January 1, 2002 the Corporation will cease to amortize
goodwill in accordance with the new CICA Section 3062 and will review goodwill
annually for impairment.
Write-down of Leasehold Improvements. During 2001 the Corporation
completed its leasehold improvements on its new expanded facilities in Toronto
and rebuilt a portion of its existing facilities. The rebuild of the existing
facilities resulted in a write-down of the old leasehold improvements of
$153,000.
Page 9 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
Interest Expense. Interest expense totaled $466,000 in 2001, $166,000
in 2000 and $25,000 in 1999. Interest expense increased by $300,000 or 180% in
2001 over 2000 and by $141,000 or 564% in 2000 over 1999. The increase in the
interest expense is mainly attributable to the significant increase in capital
lease obligations in 2001 of $1.2 million and $2.7 million in 2000. The
Corporation utilizes capital leases to finance the significant amount of capital
expenditures required for its network infrastructure.
Interest Income. Interest income totaled $312,000 in 2001, $227,000 in
2000 and nil in 1999. The increase in interest income in 2001 of $85,000
compared with 2000 is due mainly to the cash invested following the private
placement of common shares in January 2001.
Stock Exchange Listing Costs. Stock exchange listing costs of $525,000
relate to the costs of the Corporation's listing on the TSX in November 2000 and
the filing of the Corporation's Registration Statement on Form 20-F with the SEC
in 2000. No additional significant costs are expected.
Income Taxes. Income taxes totaled $15,685, $5,063 and $9,019 in 2001,
2000 and 1999 respectively. The Corporation has net operating loss carryforwards
in Canada of approximately $3.5 million and in the United States of
approximately $8.5 million that may be used to offset future taxable earnings.
The benefits of these losses have not been reflected in the consolidated
financial statements as the Corporation has recorded a valuation allowance
against the tax benefit of these losses. The losses expire in Canada beginning
in 2004 and expire in the United States beginning in 2011.
Net Loss from Continuing Operations. As a result of the factors
discussed above, the net loss from continuing operations increased to $2.9
million in 2001 from $0.1 million in 2000 as compared to a reduction in the loss
from 1999 of $2.7 million to $0.1 million in 2000. The loss per share from
continuing operations increased to $0.26 per share as compared to a loss of
$0.02 per share in 2000 and a loss of $0.38 per share in 1999.
Loss from Discontinued Operations. In September 2001, the Corporation
ceased operations of its wholly-owned subsidiary, eContracts, a developer and
supplier of on-line procurement and supply chain integration solutions.
Accordingly, the consolidated financial statements for all periods presented
have reflected this business separately from continuing operations. The
Corporation recorded a loss from discontinued operations in 2001 of $1.2 million
which included an impairment charge for goodwill of $0.3 million, a stock
compensation expense of $0.1 million relating to contingent stock consideration
paid and a loss from the operations of eContracts of $0.8 million.
Liquidity and Capital Resources
As of year-end the Corporation had cash and cash equivalents of $6.4
million, an increase of $0.8 million or 14% from the $5.6 million at the 2000
year-end. Cash generated from continuing operations for the 2001 year was
$12,000 as compared to cash utilized by continuing operations in the 2000 year
of $4.1 million. The Corporation has a demand operating facility of $1 million
that may be used to finance general corporate requirements and a demand facility
of US $0.6 million that may be used to finance leasehold improvements in the
Corporation's United States operations. As of year-end the Corporation had
utilized $0.7 million of the Canadian facility and utilized the remaining
Canadian facility subsequent to year-end. The Corporation believes that its
working capital of $6.9 million will be sufficient to meet the anticipated daily
cash requirements throughout fiscal 2002, although the Corporation may seek to
raise additional capital in 2002 to fund expansion plans or potential
acquisitions.
The Corporation used $2.1 million for investing activities in 2001
compared to using $0.7 million in 2000. This increase was attributable to the
acquisition of RCS that was paid for in cash as well as capital expenditures on
leasehold improvements and furniture and equipment at the Toronto corporate
office of approximately $1.3 million. The Corporation also incurred significant
capital expenditures for computer equipment in 2001 of approximately $1.4
million, of which approximately $1.2 million was financed through a capital
leasing program. In 2000, the Corporation received proceeds of $0.8 million on
the sale and lease-back of certain computer equipment.
Page 10 of 40
MANAGEMENT'S DISCUSSION AND ANALYSIS
Belzberg Technologies Annual Report 2001
The Corporation operates a large enterprise network providing
connectivity between its clients, its offices and high-speed access to a
multitude of destinations for live trade execution and as a result anticipates
continuing capital expenditures on computer equipment during 2002, such capital
expenditures to be funded through a capital leasing program.
The Corporation generated cash of $3.6 million from financing
activities in 2001 compared to generating cash of $10.6 million in 2000. In
2001, the Corporation issued 333,334 Common Shares from treasury for net
proceeds of $4.7 million in private placements and repurchased 91,900 Common
Shares for cancellation under a normal course issuer bid for a cost of $0.8
million. In 2000, the Corporation issued 2,013,800 Common Shares from treasury
for net proceeds of $7.6 million and issued 1,800,000 share purchase warrants
for proceeds of $1.8 million in private placements. The Corporation issued
66,600 Common Shares in 2001 upon the exercise of stock options by employees for
proceeds of $205,000 and issued 899,000 Common Shares in 2000 upon the exercise
of stock options by employees and directors for proceeds of $3.2 million.
The Corporation made repayments under capital lease obligations of $1.1
million in 2001 and repayments under capital lease obligations of $0.8 million
in 2000. The Corporation received proceeds of $0.7 million from a bank loan in
2001 and repaid $0.1 million of the loan in 2001. The Corporation repaid a note
payable of $1.2 million in 2000.
Subsequent to year-end the TSX approved a normal course issuer bid for
the Corporation to repurchase, at its discretion, up to 553,000 of its common
shares in 2002.
Future Outlook
The Corporation intends to continue its present revenue model by
concentrating on developing connectivity to exchanges around the world and
promoting its transaction based fee model. While the Corporation expects that
subscription fee revenue will continue to increase at a modest rate, transaction
fee based revenue is expected to continue to increase. As well, continued
expansion in the United States is expected to generate an increasing percentage
of revenue.
The acquisition of RCS proved to be a successful strategy in giving the
Corporation not only an additional revenue stream but also access to potential
new customers. The Corporation will look favourably upon possible future similar
acquisitions.
Building connectivity to an increasing number of destinations will
remain a priority.
The Corporation expects to realize improving gross profit margins as it
intends to move towards becoming self-clearing, thereby making each transaction
more profitable.
The Corporation expects that its London office will provide an
opportunity to increase European business.
The Corporation faces a number of risks in its business that are
identified under "Risk Factors". The occurrence of one or more of the events
described therein may have a materially adverse effect upon the Corporation's
results of operations, financial condition and future prospects.
Page 11 of 40
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL REPORTING
Belzberg Technologies Annual Report 2001
Management of Belzberg Technologies is responsible for the preparation
and integrity of the financial statements as well as the information contained
in this report. The following financial statements of Belzberg Technologies have
been prepared in accordance with Canadian generally accepted accounting
principles and United States generally accepted auditing standards that involve
management's best estimates and judgments based on available information.
Belzberg Technologies' accounting procedures and related systems of
internal control are designed to provide reasonable assurance that its assets
are safeguarded and its financial records are reliable. In recognizing that the
Company is responsible for both the integrity and objectivity of the financial
statements, management is satisfied that the financial statements have been
prepared according to and within reasonable limits of materiality and that the
financial information throughout this report is consistent with these.
The Audit Committee is appointed by the Board and consists of three
directors of which two are independent. The Committee meets periodically with
management, as well as the external auditors, to discuss internal controls over
the financial reporting process, auditing matters, and financial reporting
issues, to satisfy itself that each party is discharging its responsibilities
effectively, and to review the annual report, the consolidated financial
statements, and the external auditors' report. The Committee reports its
findings to the Board for consideration when approving the consolidated
financial statements for issuance to the shareholders. The Committee also
considers, for review by the Board and approval by the shareholders, the
engagement or re-appointment of the external auditors.
Deloitte and Touche LLP have been appointed Belzberg Technologies'
auditors. The Board of Directors of Belzberg Technologies and the management
team have reviewed and approved the financial statements and information
contained in this report. The auditor's report on the accompanying financial
statements follows.
Page 12 of 40
[LETTERHEAD OF DELOITTE & TOUCHE]
Auditors' Report
To the Shareholders of
Belzberg Technologies Inc.
We have audited the consolidated balance sheets of Belzberg Technologies Inc.
(the "Corporation") as at December 31, 2001 and 2000 and the consolidated
statements of operations and deficit and of cash flows for each of the years in
the three-year period ended December 31, 2001. These financial statements are
the responsibility of the Corporation's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with Canadian generally accepted auditing
standards and United States generally accepted auditing standards. Those
standards require that we plan and perform an audit to obtain reasonable
assurance whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. 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 Corporation 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
Canadian generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
March 1, 2002
Page 13 of 40
BELZBERG TECHNOLOGIES INC.
Consolidated Balance Sheets
December 31, 2001 and 2000
(in Canadian dollars)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
2001 2000
------------ ------------
ASSETS
CURRENT
Cash and cash equivalents $ 6,361,427 $ 5,641,924
Accounts receivable (Note 3) 4,715,206 3,718,582
Government assistance receivable -- 1,149,779
Prepaid expenses and other receivables 970,681 316,708
------------ ------------
12,047,314 10,826,993
RESTRICTED CASH (Note 4) -- 81,000
CAPITAL ASSETS (Note 5) 4,647,962 3,751,182
GOODWILL, net of accumulated amortization
of $142,838 and $47,711, respectively (Note 6) 755,239 800,350
------------ ------------
$ 17,450,515 $ 15,459,525
============ ============
LIABILITIES
CURRENT
Accounts payable and accrued liabilities $ 1,961,393 $ 1,370,967
Consideration payable (Note 6) 362,674 --
Deferred revenue 786,870 1,031,144
Bank loan (Note 8) 633,211 --
Current portion of obligations under capital lease (Note 9) 1,390,296 862,286
------------ ------------
5,134,444 3,264,397
DEFERRED REVENUE 9,224 112,424
OBLIGATIONS UNDER CAPITAL LEASE (Note 9) 1,502,138 1,418,091
------------ ------------
6,645,806 4,794,912
------------ ------------
COMMITMENTS (Note 14)
SHAREHOLDERS' EQUITY
CAPITAL STOCK (Note 10) 22,813,253 17,957,181
WARRANTS (Note 10(d)) 1,782,900 1,782,900
DEFICIT (13,791,444) (9,075,468)
------------ ------------
10,804,709 10,664,613
------------ ------------
$ 17,450,515 $ 15,459,525
============ ============
APPROVED ON BEHALF OF THE BOARD
"Sidney H. Belzberg"
.......................................... Director
"Alicia Belzberg"
.......................................... Director
Page 14 of 40
BELZBERG TECHNOLOGIES INC.
Consolidated Statements of Operations and Deficit
Years ended December 31, 2001, 2000, and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
2001 2000 1999
------------ ------------ ------------
REVENUE $ 24,460,071 $ 11,951,029 $ 5,904,099
COST OF REVENUE 10,512,684 4,529,979 2,172,738
------------ ------------ ------------
GROSS MARGIN 13,947,387 7,421,050 3,731,361
------------ ------------ ------------
OPERATING EXPENSES
Sales and marketing 5,071,933 2,721,046 1,874,096
Research and development
Expenditures 3,061,699 2,010,663 1,794,081
Government assistance -- (1,149,779) --
Administration 6,582,597 2,676,014 2,356,019
------------ ------------ ------------
14,716,229 6,257,944 6,024,196
------------ ------------ ------------
OPERATING EARNINGS (LOSS) FROM CONTINUING
OPERATIONS BEFORE UNDERNOTED ITEMS (768,842) 1,163,106 (2,292,835)
Amortization 1,799,338 841,279 219,591
Write-down of leasehold improvements 153,195 -- 112,500
Interest expense 466,048 166,393 25,123
Stock exchange listing costs -- 525,198 --
Interest income (311,965) (226,993) --
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES (2,875,458) (142,771) (2,650,049)
INCOME TAXES (Note 11) 15,685 5,063 9,019
------------ ------------ ------------
LOSS FROM CONTINUING OPERATIONS (2,891,143) (147,834) (2,659,068)
LOSS FROM DISCONTINUED OPERATIONS (Note 7) (1,193,301) (198,228) --
------------ ------------ ------------
NET LOSS (4,084,444) (346,062) (2,659,068)
DEFICIT, BEGINNING OF YEAR (9,075,468) (8,729,406) (6,070,338)
PREMIUM ON REPURCHASE OF COMMON SHARES (Note 10(a)) (631,532) -- --
------------ ------------ ------------
DEFICIT, END OF YEAR $(13,791,444) $ (9,075,468) $ (8,729,406)
============ ============ ============
LOSS PER SHARE FROM CONTINUING OPERATIONS
Basic and diluted $ (0.26) $ (0.02) $ (0.38)
============ ============ ============
LOSS PER SHARE
Basic and diluted $ (0.37) $ (0.04) $ (0.38)
============ ============ ============
WEIGHTED AVERAGE NUMBER OF
OUTSTANDING COMMON SHARES 10,998,383 9,635,780 7,015,635
============ ============ ============
Page 15 of 40
BELZBERG TECHNOLOGIES INC.
Consolidated Statements of Cash Flows
Years ended December 31, 2001, 2000, and 1999
(in Canadian dollars)
--------------------------------------------------------------------------------
[Enlarge/Download Table]
2001 2000 1999
------------ ------------ ------------
CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES
Loss from continuing operations $ (2,891,143) $ (147,834) $ (2,659,068)
Items not affecting cash
Amortization of capital assets 1,646,540 793,568 219,591
Amortization of goodwill 152,798 47,711 --
Amortization of gain on sale and leaseback of capital assets (104,684) (28,370) --
Write-down of leasehold improvements 153,195 -- 112,500
Services rendered for capital stock consideration (Note 10) -- 200,000 --
Changes in non-cash working capital items (Note 12) 1,055,293 (4,974,393) 898,384
------------ ------------ ------------
11,999 (4,109,318) (1,428,593)
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of capital assets (1,466,424) (1,295,030) (582,592)
Proceeds from disposal of capital assets -- 767,020 --
Acquisitions, net of cash acquired (Note 6) (683,440) (183,050) --
------------ ------------ ------------
(2,149,864) (711,060) (582,592)
------------ ------------ ------------
FINANCING ACTIVITIES
Note payable -- -- 1,154,640
Repayment of note payable -- (1,154,640) --
Repayment of obligations under capital lease (1,122,347) (815,322) (146,213)
Proceeds from bank loan 744,442 -- --
Repayment of bank loan (111,231) -- --
Net proceeds from issuance of common shares 4,698,991 7,588,241 321,775
Proceeds from the exercise of stock options 205,000 3,210,000 775,757
Repurchase of common stock (816,011) -- --
Proceeds on issuance of warrants -- 1,782,900 --
------------ ------------ ------------
3,598,844 10,611,179 2,105,959
------------ ------------ ------------
NET INCREASE IN CASH FROM CONTINUING OPERATIONS 1,460,979 5,790,801 94,774
NET CASH UTILIZED BY DISCONTINUED OPERATIONS (741,476) (131,833) --
------------ ------------ ------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 719,503 5,658,968 94,774
CASH AND CASH EQUIVALENTS (BANK
INDEBTEDNESS), BEGINNING OF YEAR 5,641,924 (17,044) (111,818)
------------ ------------ ------------
CASH AND CASH EQUIVALENTS (BANK
INDEBTEDNESS), END OF YEAR $ 6,361,427 $ 5,641,924 $ (17,044)
============ ============ ============
CASH EQUIVALENTS:
Cash $ 4,705,375 $ 1,962,776 $ --
Short-term investments 1,656,052 3,679,148 --
------------ ------------ ------------
$ 6,361,427 $ 5,641,924 $ --
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Value of share capital issued for acquisitions of subsidiaries $ -- $ 675,000 $ --
Value of share capital issued for services $ -- $ 200,000 $ --
Value of share capital recorded for compensation expense (Note 6) $ 136,560 $ 56,940 $ --
Acquisition of capital assets with debt $ 1,212,681 $ 2,686,533 $ --
Interest paid $ 466,048 $ 166,393 $ 104,365
Income taxes paid $ 7,632 $ -- $ 9,019
Page 16 of 40
BELZBERG TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
(in Canadian dollars)
--------------------------------------------------------------------------------
1. DESCRIPTION OF BUSINESS
Belzberg Technologies Inc. and its wholly-owned subsidiaries (the
"Corporation" or "Belzberg") is a leading provider of trade execution,
order management and routing software for the financial industry. The
Corporation's customers, who include both broker-dealers and their
customers, use Belzberg trading software to buy and sell equities and
stock options on a variety of stock exchanges, electronic markets known
as ECNs, and NASDAQ market makers. Belzberg products enable traders to
execute and manage large volumes of transactions at high speed, with
reliability and security.
The Corporation also operates a floor brokerage that provides the
execution of exchange-traded equity and index options on the Chicago
Board Options Exchange.
The Corporation's name was changed from Belzberg Financial Markets & News
International Inc. to Belzberg Technologies Inc. in July 2000.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These consolidated financial statements have been prepared in accordance
with Canadian generally accepted accounting principles ("GAAP") and
include the following significant accounting policies. A reconciliation
of the differences between Canadian GAAP and GAAP in the United States of
America ("U.S. GAAP") is presented in Note 18.
Consolidation
The consolidated financial statements of the Corporation include the
accounts of Belzberg Technologies Inc. and its wholly-owned subsidiaries,
Belzberg Financial Markets & News Inc., Belzberg Technologies (USA) Inc.,
eContracts, Inc., Electronic Brokerage Systems, Inc., Belzberg
Technologies (Philadelphia) Inc., Belzberg Technologies (UK) Limited and
Robert C. Sheehan & Associates, Inc. All intercompany transactions and
balances have been eliminated upon consolidation.
Cash and cash equivalents
Cash and cash equivalents includes short-term, highly liquid investments
that are readily convertible to known amounts of cash and which are
subject to an insignificant risk of changes in value.
Capital assets
Capital assets are recorded at cost and are amortized over their
estimated useful lives at the following rates:
[Download Table]
Furniture and equipment - 10 year straight-line
Computer equipment - 3 year straight-line
Computer equipment under capital lease - 3 year straight-line
Leasehold improvements - lesser of straight-line over term
of lease and useful life
The gain on sale and lease-back of computer equipment is recorded as
deferred revenue and is amortized on a straight-line basis over the term
of the lease.
Page 17 of 40
BELZBERG TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
(in Canadian dollars)
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Goodwill
Goodwill represents the excess of the purchase price over the fair value
of the identifiable net assets acquired in business combinations
accounted for as purchases. Amortization is recorded on a straight-line
basis over seven years.
The Corporation reviews the carrying value of goodwill for potential
impairment on an ongoing basis. In order to determine if such a permanent
impairment exists, management considers projected future earnings before
income taxes, cash flows and market-related values of the acquired
businesses. A permanent impairment in the value of goodwill is written
off against earnings in the year such impairment occurs.
In 2001, The Canadian Institute of Chartered Accountants (CICA) approved
a new Handbook Section 3062 - Goodwill and Other Intangible Assets.
Intangible assets other than goodwill acquired in a business combination
or other transaction after June 30, 2001 are to be amortized based on the
useful life to an enterprise, unless the life is determined to be
indefinite in which case the intangible asset will not be amortized.
Goodwill acquired in a business combination after June 30, 2001 should
not be amortized. Existing goodwill at June 30, 2001 continued to be
amortized until December 31, 2001. Effective January 1, 2002 all goodwill
will no longer be required to be amortized but will be subject to an
annual impairment test in accordance with the provisions of this Section.
Revenue recognition and deferred revenue
The Corporation's revenues are derived primarily from:
(i) Subscription fees - the provision of the Corporation's routing
software and services, on a flat fee per terminal or per month
basis, used for equity and option trading ;
(ii) Transaction fees - the provision of the Corporation's routing
software and services, on a per share/option or per trade basis
used for equity and option trading;
(iii) Commission income - fees for the execution of exchange traded
equity and index options from the floor brokerage business;
(iv) Software development and installation revenue - the development
and installation of software for equity and options trading
execution; and
(v) Other revenue - the distribution of financial information and
other services.
The Company recognizes revenue from subscription fees and from
transaction fees in accordance with American Institute of Certified
Public Accountants Statement of Position 97-2, Software Revenue
Recognition as amended. Revenue is recognized from subscription fees and
transaction fees on a monthly basis as the services are provided once a
contract has been signed, the software has been delivered and accepted,
and collectibility is assured.
Commission income from the floor brokerage operation is recognized once
the trades have been executed and collectibility is assured.
Page 18 of 40
BELZBERG TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
(in Canadian dollars)
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue recognition and deferred revenue (continued)
Revenue derived from the development and installation of software for
equity and options trading execution is recognized on a percentage of
completion basis.
Revenue from the distribution of financial information and other services
is recognized on a monthly basis as the services are provided once a
contract has been signed and collectibility is assured.
Deferred revenue represents billings in advance of the provision of
services.
Research and development and government assistance
The Corporation expenses research and development costs as incurred
unless they meet the criteria under Canadian generally accepted
accounting principles for deferral and amortization. Government
assistance for research and development is recognized when earned and
when the amount and timing of realization is reasonably determinable.
At December 31, 2000, the Government of Canada completed their assessment
of the Corporation's claims for assistance comprised of scientific
research and experimental development tax credits and agreed to refund
$1,149,779 related to the taxation years 1996 to 1999. Accordingly, this
recoverable amount was recorded in fiscal 2000 and received in fiscal
2001.
Since the Corporation is now a public company as defined in the Income
Tax Act of Canada, future tax credits will reduce income taxes otherwise
payable rather than result in refunds.
Foreign currency translation
The Corporation's foreign operating subsidiaries are considered to be
integrated operations and are translated into Canadian dollars using
current rates of exchange for monetary assets and liabilities, historical
rates of exchange for non-monetary assets and liabilities, and average
rates for revenues and expenses, except amortization which is translated
at the rates of exchange applicable to the related assets. Gains or
losses resulting from these translation adjustments are included in
income.
Current monetary assets and liabilities of the Corporation that are
denominated in foreign currencies are translated into Canadian dollars at
exchange rates in effect at the balance sheet dates. Revenues and
expenses are translated at rates of exchange prevailing on the
transaction dates. Any resulting foreign currency translation gains or
losses are included in the consolidated statements of earnings in the
current period.
Income taxes
The Corporation uses the asset and liability method of accounting for
income taxes. Under this method, future income tax assets and liabilities
are determined based on differences between the financial reporting and
tax bases of assets and liabilities and measured using the substantively
enacted tax rates and laws that will be in effect when the differences
are expected to reverse.
Page 19 of 40
BELZBERG TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
(in Canadian dollars)
--------------------------------------------------------------------------------
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Income taxes (continued)
Valuation allowances are established when necessary to reduce future
income tax assets to the amounts expected to be realized. Income tax
expense consists of the income taxes payable for the period and the
change during the period in future income tax assets and liabilities.
Stock-based compensation
The Corporation has a stock-based compensation plan, as described in Note
10. No compensation expense is recognized when stock options are issued.
Any consideration paid by employees on the exercise of stock options is
credited to share capital.
Fair value, as represented by the most recent stock price at which shares
are exchanged in the market place, is used as the basis for recording
stock issued as compensation.
Warrants are valued at fair value on the date of issuance using the
Black-Scholes pricing model.
The CICA also recently issued new Handbook Section 3870, Stock-based
Compensation and Other Stock-based Payments. This Section establishes
standards for the recognition, measurement and disclosure of stock-based
compensation and other stock-based payments made in exchange for goods
and services and applies to transactions, including non-reciprocal
transactions, in which an enterprise grants shares of common stock, stock
options, or other equity instruments, or incurs liabilities based on the
price of common stock or other equity instruments. This Section sets out
a fair value based method of accounting and is required for certain
stock-based transactions, effective January 1, 2002 and applied to awards
granted on or after that date.
Earnings per share
Effective January 1, 2001 the Corporation adopted the CICA standard for
calculating earnings per share. This standard adopts the treasury stock
method of calculating the dilutive effect of options on earnings per
share instead of the imputed earnings approach. The Corporation has
adopted this method on a retroactive basis. There was no effect on
previous periods reported.
Accounting estimates
The preparation of financial statements in conformity with Canadian
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from such estimates.
3. ACCOUNTS RECEIVABLE
Accounts receivable are net of an allowance for doubtful accounts of
$260,679 at December 31, 2001 (2000 - $52,708).
Page 20 of 40
BELZBERG TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
(in Canadian dollars)
--------------------------------------------------------------------------------
4. RESTRICTED CASH
The Corporation was required to maintain a term deposit of $81,000 with
its bank in order to secure any balance which may have been outstanding
from time to time on credit cards issued to employees. The security
interest was released and discharged by the bank effective August 8,
2001.
5. CAPITAL ASSETS
[Enlarge/Download Table]
2001
---------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
------------------ ----------------------- ------------------
Furniture and equipment $ 534,739 $ 123,562 $ 411,177
Computer equipment 1,203,129 732,762 470,367
Computer equipment under capital lease 4,280,810 1,715,211 2,565,599
Leasehold improvements 1,255,505 54,686 1,200,819
------------------ ----------------------- ------------------
$ 7,274,183 $ 2,626,221 $ 4,647,962
------------------ ----------------------- ------------------
[Enlarge/Download Table]
2000
---------------------------------------------------------------
Accumulated Net Book
Cost Amortization Value
------------------ ----------------------- ------------------
Furniture and equipment $ 343,894 $ 77,671 $ 266,223
Computer equipment 968,520 393,056 575,464
Computer equipment under capital lease 3,160,393 510,935 2,649,458
Leasehold improvements 294,493 34,456 260,037
------------------ ----------------------- ------------------
$ 4,767,300 $ 1,016,118 $ 3,751,182
------------------ ----------------------- ------------------
In 2000, the Corporation sold and leased-back certain computer equipment.
The gain on sale of approximately $259,000 was recorded as deferred
revenue and is amortized on a straight-line basis over the thirty-month
period of the lease. The Corporation recognized $104,684 of the gain in
2001 (2000 - $28,370).
Amortization of computer equipment under capital lease amounted to
$1,204,276 for the year ended December 31, 2001 (2000 - $428,536; 1999 -
$59,356).
6. ACQUISITIONS
2001 Acquisition
On April 1, 2001 the Corporation acquired all of the outstanding common
shares of Robert C. Sheehan & Associates, Inc. for consideration of
$1,687,631 cash. As of December 31, 2001, $362,674 of the cash
consideration remained payable to the vendor, which was subsequently paid
in January 2002. In addition, 153,000 options were granted to certain
employees at the fair market value on the date of grant. These options
are included in Note 10(e).
Page 21 of 40
BELZBERG TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
(in Canadian dollars)
--------------------------------------------------------------------------------
6. ACQUISITIONS (continued)
The acquisition was recorded as follows:
Accounts receivable $ 786,300
Cash 670,063
Office furniture and equipment 18,558
Other assets 11,585
Accounts payable and accrued liabilities (188,302)
Goodwill 417,973
-----------
Cost of acquisition $1,716,177
-----------
Consideration paid
Cash $1,324,957
Due to vendor 362,674
Acquisition costs 28,546
-----------
$1,716,177
-----------
2000 Acquisitions
On July 7, 2000, the Corporation acquired all of the outstanding common
shares of eContracts, Inc. ("eContracts") for consideration of $150,000
cash plus the issuance of up to 46,500 common shares at $9 per share. Of
the share consideration, 25,000 shares were issued to December 31, 2000,
and the issuance of the remaining shares were contingent upon the vendor
remaining employed by the Corporation as follows:
Common Shares
-----------------------
December 31, 2001 12,500
July 31, 2002 9,000
--------
Total 21,500
--------
The Corporation was recording the compensation expense relating to these
shares over the period of the employment agreement. On September 30, 2001
the Corporation ceased the operations of eContracts and issued the 21,500
shares to the vendor resulting in compensation expense of $136,560 being
recorded in the current fiscal year (December 31, 2000 - $56,940). This
compensation expense is included in the loss from discontinued operations
(Note 7) and in share capital (Note 10).
Page 22 of 40
BELZBERG TECHNOLOGIES INC.
Notes to the Consolidated Financial Statements
December 31, 2001 and 2000
(in Canadian dollars)
--------------------------------------------------------------------------------
6. ACQUISITIONS (continued)
The acquisition was recorded as follows:
Office furniture and equipment $ 9,989
Goodwill 367,957
----------
Cost of acquisition $ 377,946
----------
Consideration paid
Cash $ 150,000
25,000 common shares 225,000
Acquisition costs 2,946
----------
$ 377,946
----------
On July 17, 2000, the Corporation acquired the remaining 25% minority
interest in Electronic Brokerage Systems, Inc. from an individual, who
holds options in Belzberg Technologies Inc., in return for the issuance
of 50,000 common shares having a market value of $9 per share. The
exchange amount represents the value agreed to by the Corporation and the
shareholder. Allocation of the purchase price based on the fair values of
the net assets acquired resulted in the recording of goodwill of $480,104
including acquisition costs of $30,104.
7. DISCONTINUED OPERATIONS
On September 30, 2001 the Corporation ceased operations of its
wholly-owned subsidiary, eContracts, Inc., a developer and supplier of
on-line procurement and supply chain integration solutions. Accordingly,
the Corporation's consolidated financial statements for all periods
presented have been reclassified to reflect eContracts as a discontinued
business segment in accordance with CICA Section 3475.
Summarized fina