-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DnMLp6T2EQGtz2eeLmschKZx6DJdjkEVua4FY5lQJ9Yq1Jhyz7QoyRdNK9C+2NF7 Sfl3qYwKkyyHsnqmgcW/lg== 0000950130-99-002213.txt : 19990416 0000950130-99-002213.hdr.sgml : 19990416 ACCESSION NUMBER: 0000950130-99-002213 CONFORMED SUBMISSION TYPE: 20FR12B/A PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BID COM INTERNATIONAL INC CENTRAL INDEX KEY: 0001079171 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 000000000 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 20FR12B/A SEC ACT: SEC FILE NUMBER: 001-14835 FILM NUMBER: 99594511 BUSINESS ADDRESS: STREET 1: 6725 AIRPORT RD STE 201 STREET 2: MISSISSAUGA ONTARIO CITY: CANADA L4V 1V2 BUSINESS PHONE: 9056727469 MAIL ADDRESS: STREET 1: 6725 AIRPORT RD STE 201 STREET 2: MISSISSAUGA ONTARIO CITY: CANADA L4V 1V2 20FR12B/A 1 AMENDMENT NO. 3 TO FORM 20-F SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 20-F/A-3 [ X ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________. Commission File No. 001-14835 BID.COM INTERNATIONAL INC. (Exact name of Registrant as specified in its charter) Not Applicable (Translation of Registrant's name into English) ONTARIO, CANADA (Jurisdiction of incorporation or organization) 6725 Airport Road, Suite 201 Mississauga, Ontario L4V 1V2 (Address of principal executive offices) Securities registered or to be registered pursuant to Section 12(b) of the Act. None Securities registered or to be registered pursuant to Section 12(g) of the Act. Common Shares Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act. None Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report. 48,125,396 Common Shares as of March 23, 1999 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_____ No X ------ Indicate by check mark which financial statement item the registrant has elected to follow. Item 17 X Item 18 ______ ----- TABLE OF CONTENTS
EXCHANGE RATES..................................................................................1 FORWARD LOOKING STATEMENTS......................................................................1 PART I..........................................................................................2 ITEM 1 - DESCRIPTION OF BUSINESS.............................................................2 RISK FACTORS..................................................................17 ITEM 2 - DESCRIPTION OF PROPERTY............................................................28 ITEM 3 - LEGAL PROCEEDINGS..................................................................29 ITEM 4 - CONTROL OF REGISTRANT..............................................................29 ITEM 5 - NATURE OF TRADING MARKET...........................................................30 ITEM 6 - EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS.................31 ITEM 7 - TAXATION...........................................................................32 ITEM 8 - SELECTED FINANCIAL DATA............................................................36 ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................................40 ITEM 9A - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK........................... ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT..............................................48 ITEM 11 - COMPENSATION OF DIRECTORS AND OFFICERS............................................50 ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES....................52 ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS....................................54 PART II........................................................................................56 ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED........................................56 PART III.......................................................................................57 ITEM 15 - DEFAULTS UPON SENIOR SECURITIES...................................................57 ITEM 16 - CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS.............................................57 PART IV........................................................................................57 ITEM 17 - FINANCIAL STATEMENTS..............................................................57 ITEM 18 - FINANCIAL STATEMENTS..............................................................57 ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS.................................................57 AUDITORS' REPORT..............................................................................F-1
i EXCHANGE RATES The following table sets forth, for the period indicated, certain exchange rates based on the noon buying rate in New York City for cable transfers in Canadian dollars, as certified for customs purposes by the Federal Reserve Bank of New York. Such rates are the number of U.S. dollars per one Canadian dollar and are the inverse of the rates quoted by the Federal Reserve Board of New York for Canadian Dollars per U.S. $1.00. On April 9, 1999, the exchange rate was $1.00 (U.S.)= Cdn $1.5023. Certain financial information presented in this Registration Statement has been translated from Canadian dollars to U.S. dollars at an exchange rate of Cdn$1.5375 to US$1.00, the noon buying rate in New York City on December 31, 1998 for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York. Year Ended December 31, ------------------------------------------------ Rate 1994 1995 1996 1997 1998 - ---- ---- ---- ---- ---- ---- Last Day of year $.7128 $.7323 $.7301 $.6999 $.6504 Average(1) during year .7319 .7286 .7332 .7221 .6740 High during year .7632 .7527 .7513 .7487 .7105 Low during year .7103 .7023 .7235 .6945 .6341 (1) The average rate is the average of the exchange rates on the last day of each month during the year. FORWARD LOOKING STATEMENTS This Registration Statement includes forward-looking statements, regarding among other items: . acceptance of BID.COM auction services in the marketplace . the Company's marketing and sales plans . the Company's expectations about the markets for its online auction services . the Company's future capital needs . the acceptance of the Internet and/or online auctions as a viable commercial medium . the success of the Company's patent application and protection of its proprietary technology . Year 2000 compliance efforts and anticipated Year 2000 problems relating to suppliers and service providers . geographic expansion of the Company's business The Company has based these forward-looking statements largely on its expectations. Forward-looking statements are subject to risks and uncertainties, certain of which are beyond the Company's control. Actual results could differ materially from those anticipated as a result of the factors described in the "Risks Factors" section beginning on page 18, including, among others: . uncertainty about the acceptance of the Internet and/or online auctions as a viable commercial medium . uncertainty of market acceptance of the Company's auction services . the timing of future capital needs and inability to raise additional capital when needed . the Company's ability to compete with other online retailing and auction businesses . failure to timely develop or license new technologies . delays in the issuance of, or the failure to obtain, patents for certain proprietary technologies problems with important vendors and business partners on whom the Company relies . inability of the Company, directly and/or through its marketing and advertising alliances, to attract a sufficient number of customers to the Company's Web site . risk of system failure or interruption . implementation and enforcement of government regulations the failure of the Company's suppliers and strategic partners to resolve any Year 2000 issues . problems which may arise in connection with the acquisition or integration of new businesses, products, services, technologies or other strategic relationships 1 The Company does not undertake any obligation to publicly update or revise any forward-looking statements contained in this Registration Statement, whether as a result of new information, future events or otherwise. Because of these risks and uncertainties, the forward-looking events and circumstances discussed in this Registration Statement might not transpire. 2 PART I ITEM 1 - DESCRIPTION OF BUSINESS Unless otherwise indicated, all references in this Registration Statement to "dollars" or "$" are references to U.S. dollars. The Company's financial statements are expressed in Canadian dollars. Certain financial information presented in this Registration Statement has been translated from Canadian dollars to U.S. dollars at an exchange rate of Cdn$1.5375 to US$1.00, the noon buying rate in New York City on December 31, 1998 for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York. Such translations should not be construed as representations that the Canadian dollars represent, or have been or could be converted into, U.S. dollars at that or any other rate. Unless otherwise indicated, all references to the "Company" or "BID.COM" in this Registration Statement are deemed references to the Company and its subsidiaries and predecessor. Overview BID.COM International Inc. ("BID.COM" or the "Company") is a sales and marketing company striving to become the pre-eminent online auction house and a leading electronic retailer ("E-tailer"). The Company conducts business-to-consumer auctions at its Web site, www.BID.COM, and at other uniform resource locators ("URLs"). The Company's Web site has been operating online since April 1996, and has progressed from the developmental stage to revenue generation. The Company launched its BID.COM brand name auctions in March, 1998 and as of April 14, 1999, the Company had approximately 108,000 registered bidders. In December 1998, the Company completed the development of a business-to-business auction service. The Company plans to operate business-to-business auctions in selected vertical industry sectors and to conduct liquidation auctions for bankruptcy trustees and other liquidators. The Company also seeks to license its proprietary online auction technology to support private brand online auctions and interactive auctions in a variety of other electronic media. The Company's business is an entertaining and cost-effective method of selling a wide array of goods and services to retail shoppers and businesses via the Internet. BID.COM offers traditional rising price auctions and declining price, or "Dutch," auctions. The Company's auctions combine the brand name selection of a department store and the value of a discount superstore with the excitement of an auction environment and the convenience and security of in-home online shopping. The Company's auctions run on a proprietary state-of-the-art E-commerce platform with an engaging format, scaleable transactional backbone and efficient delivery system. In March 1999, the Company received a patent from the U.S. Patent and Trademark Office ("PTO") covering the process whereby the Company conducts Dutch auctions over electronic distribution channels. Management believes that its capability within the Dutch auction sector is a key point of differentiation in the online marketplace that will grow in significance as more online shoppers and businesses become familiar with this E-tailing platform. The BID.COM business-to-consumer auctions sell a broad range of products at prices that usually are lower than those charged by traditional retailers for the same or similar items. The Company sells primarily brand name, front-line products under manufacturers warranty, including computer hardware and software, consumer electronics, toys, games, sporting goods, jewelry, memorabilia, collectible sports and entertainment cards and travel and entertainment products and services. The Company believes that manufacturers view the online auction as a new distribution channel that complements existing retail, catalog, telemarketing and other distribution channels. The Company offers products from many brand name manufacturers, including: AST, Canon, Compaq, Creative Labs, Dell, Epson, General Electric, Hewlett Packard, IBM, JVC, Koss, Magnavox, Motorola, Nikon, Nintendo, Panasonic, Pentax, Samsung, Seagate, Sega, Seiko, Sharp, Sony, Toshiba, U.S. Robotics, Western Digital and Zenith. The Company is able to offer a broad range of products at low prices because electronic retailing, or "E-tailing," significantly reduces or eliminates many of the costs typically associated with retail store sales, including costs of sales staff and store management, store rent and maintenance, fixtures and merchandising. Similarly, manufacturers are able to eliminate many of the distribution costs typically incurred in selling through retail stores and, therefore, are able to sell goods to Etailers at lower prices. In addition, retailing online enables the Company to purchase goods from suppliers only after customers have ordered and paid for them, thereby allowing the Company to eliminate significant inventory cost and risk. These cost savings help ensure that the Company's overhead costs of operation remain relatively fixed and allow the Company to pass on savings directly to customers. 3 Industry Background The Internet. The Internet is an increasingly significant global medium for communications, information and commerce. In May 1998, International Data Corporation ("IDC") estimated that the number of Web users worldwide will grow from approximately 69.0 million in 1997 to approximately 320.0 million by the end of 2002. The Company believes that Internet growth will result from a number of factors, including the large and growing use of personal computers ("PCs") in the workplace and home, increasing reliance on the Internet by the business-to-business sector, advances in the performance and speed of PCs and modems, improvements in network infrastructure, easier and cheaper access to the Internet and increased awareness of the Internet among businesses and consumers. Jupiter Communications LLC ("Jupiter") estimates that the number of online households (households using e-mail, the Internet or a consumer online service) in the United States will grow from an estimated 15.2 million household in 1996 to 57.0 million households, representing over 50% of U.S. households, by the year 2002. It is anticipated that online users will continue to grow as communications, cable and computer related companies begin to offer access to the Internet through home television sets via Web TV or cable. Several large communications companies have announced plans to acquire or invest in cable television providers with the goal of selling high speed online access and Internet phone service over existing broadband cable lines. Cable modems have the advantage of delivering data faster than telephone modems. In addition, a cable modem is always connected, thereby eliminating the need for a user to dial up access to the Internet. Forrester Research Inc. ("Forrester") estimates that the number of homes in North America accessing the Internet with cable modems will grow from about 700,000 by the end of 1999 to approximately 13.6 million by the end of 2002. The Company believes that a significant opportunity exists for online business-to-consumer and business-to-business trade. In May 1998, IDC estimated that the total value of goods and services purchased worldwide on the Internet grew from approximately $296.0 million in 1995 to approximately $32.0 billion in 1998 and that worldwide sales of goods and services on the Internet will grow to approximately $426.0 billion by 2002. Industry analysts predict that the business-to-business sector will account for much of the growth of E-commerce over the Internet. Forester projects that in the United States, intercompany trade of hard goods over the Internet will hit $31.3 billion in 1998 and will reach $983.0 billion by 2003 (in each case excluding trade in utilities and petrochemicals). The Internet has evolved into a unique marketing channel. By directly operating their own Web sites, Internet retailers can interact with customers in real-time by frequently adjusting their product mix, pricing and visual presentation. In addition, the global reach of the Internet allows E-tailers to build large, geographically-dispersed customer bases more quickly than traditional retailers and catalog marketers. Unlike traditional marketing channels, Internet retailers do not have the burdensome costs of a significant retail store infrastructure, the continuous printing and mailing costs of a catalog marketer or the store personnel or call center costs incurred by traditional retailers and catalog marketers. The Internet offers many data management and multimedia features which enable consumers to search for products by category or brand. In addition, the Internet allows consumers to access a wealth of information, including reviews and competitive pricing and audio and video presentations which enhance static catalog formats. Internet retailers can more easily obtain demographic and behavioral data about their customers, providing them with greater direct marketing opportunities and the ability to offer a more personalized shopping experience. Internet retailers also offer consumers the convenience of home shopping and 24-hour-a-day, seven-days-a-week operations, available to any location, foreign or domestic, that has access to the Internet. Many traditional retailers are compelled, because of store size and other factors, to limit the amount of inventory they carry at each store and focus on a smaller selection of faster-selling products. Online retailers are able to offer consumers a broader range of products because they have fewer space constraints and because they are often able to purchase products from suppliers only after products have been sold to the consumer. Online retailers can also both test market new products and re merchandise existing products for sale, with greater speed and for relatively nominal cost. Internet Auctions. The Company believes that a number of characteristics of online auctions make the sale of consumer goods via the Internet particularly attractive relative to traditional retail stores or to static priced online stores 4 and catalogs. The primary advantage is that customers are empowered to set their own price for a purchase. Online auctions represent a dynamically changing sales format that leverages the unique characteristics of the Internet, such as interactivity and the sense of community built by customers competitively bidding in an exciting auction environment. Online auctions also provide immediate feedback to E-tailers regarding price-points that are attractive to consumers. This constitutes an efficient market model that enables supply and demand functions to move to equilibrium in real-time, and provides online auctioneers the opportunity to respond to market conditions quickly. Jupiter predicts that online business-to-consumer auctions will result in sales of $3.2 billion worth of merchandise each year by 2002 and that online auction purchasers in the United States will grow from 1.2 million in 1998 to 6.5 million in 2002. Due to the rapidly growing business-to-business sector, the Company believes that online auctions servicing the business-to-business sector will grow contemporaneously. Business Strategy The Company's business strategy is comprised of the following key components: Diversifying Revenue Sources. The Company seeks to leverage its proprietary auction technology to generate revenue opportunities in several distinct online auction categories and selected other interactive auction media. While the Company currently derives most of its revenues from business-to-consumer auctions, the Company believes that by diversifying its revenue sources, it will be able to expand its customer base and reduce reliance on any one source of customer or auction category. o Online Business-to-Consumer Auctions. The Company conducts business-to-consumer auctions at its www.BID.COM Web site and at other URLs. BID.COM offers rising price and declining price "Dutch" auctions. The Company's Web site has been online since April 1996 and the Company has offered a wide variety of business-to-consumer online auctions since May, 1997. The Company launched its BID.COM brand name auctions in March 1998. As of April 14, 1999, the Company had approximately 108,000 registered bidders. The Company currently derives most of its revenues from business-to-consumer auctions. o Online Business-to-Business Auctions. In December 1998, the Company completed the development of a business-to-business auction service. The Company plans to operate business-to-business auctions in selected vertical industry sectors and plans to conduct liquidation auctions for bankruptcy trustees, banks and other liquidators. The Company has been designated a preferred vendor by The ASCII Group (Canada), a 340-member network of independent computer value-added resellers ("VAR") and plans t conduct online auctions of products directed to members of the VAR market. The Company also plans to seek licensing or co-branding opportunities with distribution partners within a number of additional business-to-business vertical markets. Management believes that its Dutch auction proprietary technology will have wide application in the business-to-business sector because it enables organizations to efficiently conduct high volume transactions. o Licensing Online Platform for Private Brand Auctions. The Company seeks to license its online proprietary auction platform for private brand auctions in local and regional markets that will not compete directly with the national focus of the BID.COM auction site. The Company has licensed its auction platform to, and contracted its operational services to support, a private brand online auction for, Toronto Star Newspapers Limited ("Toronto Star") in Ontario. Toronto Star has not yet launched its online auction. The Toronto Star is the largest circulation newspaper in Canada. The Company plans to enter into similar private brand auction arrangements with other local and regional newspapers, retailers, charities, community based organizations and national affinity groups. The Company believes that this licensing model will have particular appeal in European and Pacific Rim countries. In June 1999, the Company plans to open its first European office in Dublin, Ireland, to license the Company's auction technologies and provide related support services to European-based companies. See "--Licensing Proprietary Online Platform For Private Brand Auctions." o Licensing Technology and Co-branding BID.COM to Achieve Multi-Media Distribution. The Company also seeks to license its technology and co-venture with strategic partners to conduct interactive auctions in other electronic communications media. In December 1998, the Company and American Interactive Media, Inc. ("AIM") entered into a joint venture to develop auction opportunities for broadband, set-top box/Web TV and network television, and to develop technological improvements to enhance the consumer auction experience offered through the narrowband Internet medium. The Company has licensed its auction technology to AIM and will provide operational services for auctions to be conducted on AIM's online and cable networks. See "--Licensing Technology and Co-branding BID.COM to Achieve Multi-Media Distribution." o Sales of Advertising on BID.COM Web Site. The Company seeks to promote its Web site as an advertising medium for the products and services of other companies and organizations. In December 1998, the Company entered 5 into an agreement with 24/7 Media Inc. ("24/7"), a global online advertising and direct marketing company, under which 24/7 sells advertising space on BID.COM's Web site. Initially, the Company plans to offer banner advertisement placement on various sections of its Web sites. The Company believes that the shopping demographics of its registered bidder base creates a desirable target audience for companies and advertising agencies. Expanding the Company's Customer Base through Diverse Marketing Strategy. The Company believes that the use of multiple marketing channels will increase the number of people visiting the Company's Web sites and auction sites, maximize brand awareness and reduce its reliance on any one source of customers. The Company implements its marketing strategy by: o Forming Strategic and Marketing Alliances with Internet Service and Content Providers. The Company has initiated strategic and marketing alliances with large Internet service and content providers that it believes will maximize traffic to the Company's Web sites and enhance the awareness and credibility of the Company's BID.COM brand. The Company believes that these relationships will allow BID.COM to broadly expand its customer base as well as capitalize on new advertising opportunities by leveraging the strong brand names and subscriber bases of its alliance partners. These alliances also help attract a broad supply of products and services from high quality vendors for sale in the Company's auctions. In July 1998, the Company entered into a strategic alliance with Rogers Media Inc. ("Rogers Media"), a leading Canadian media company. Under this arrangement, BID.COM granted Rogers Media the exclusive right to co-brand the Canadian BID.COM auction and Rogers Media has agreed that the Canadian BID.COM auction will be the only online auction displayed on the home page of Rogers Media's new E-commerce portal. Rogers Media has also agreed to generate specified levels of site traffic an advertising revenues for the Canadian BID.COM Web site, and has committed to minimum levels of annual advertising. Rogers Media national media properties include some of Canada's most widely read publications, Canada's only television shopping network, a number of Canadian radio stations and several leading Internet properties in Canada. Rogers Media's parent company owns the largest cable network in Canada. In addition, Rogers Media publishes a number of trade magazines which the Company may use to support the development of its business-to-business online auctions. See "Marketing--Strategic and Marketing Alliances with Major Content and Service Providers." In November, 1997, the Company entered into a non-exclusive marketing alliance with America Online, Inc. ("AOL" or "America Online") pursuant to which the Company operates BID.COM, The Online Auction(R), for AOL subscribers and has purchased or been granted advertising space on a number of AOL's current high traffic pages and a variety of AOL's new Web pages. The terms of the alliance were amended in March 1999. AOL is the world's largest online service provider, with a subscriber base of more than 15.0 million people. See "--Marketing - Strategic and Marketing Alliances With Major Content and Service Providers" and "Risk Factors - Continuance of Existing Strategic and Marketing Alliances." o Referral and Database Marketing; Key Word Advertising. The Company has also adopted several cost effective marketing approaches to attract targeted traffic to its Web sites. The Company pursues referral-based marketing arrangements under which the Company pays referral sources in cash or kind for the generation of registered bidders at BID.COM. In addition, the Company has recently begun to access its own database of registered bidders to directly market both auction and non-auction products to purchasers with demonstrated purchasing histories. To reach audiences that have a propensity to buy goods and services online, the Company has entered into, and continues to seek, key word agreements with Internet service providers that promote BID.COM when a user searches key words, such as "auction." The Company has an arrangement with go2net, Inc. ("go2net") pursuant to which a banner advertisement and hyperlink for clicking through to the BID.COM auction site is prominently positioned on the pag when a user of the MetaCrawler search engine searches certain key words, such as "auction" or "auctions." MetaCrawler is go2net's specialized search engine that aggregates the results of other systems such as Yahoo!, Inc. ("Yahoo!") and Excite, Inc. ("Excite"). See "--Marketing--Referral and Database Marketing and Key Word Advertising." o Cause Marketing. The Company attempts to stimulate additional E-commerce activity by operating online auctions for, and/or licensing its auction platform to, charities and special causes. BID.COM has hosted the Digital City All Charities Online Auction and Hootie and the Blowfish Monday After the Masters Charity Auction. The Company has also built the international Web site for RADD (Recording Artists Against Drunk Driving) and hosts the Canadian BACCHUS Web site. 6 Offering a Broad Range of Front Line Brand Name Products at Low Prices and Under Manufacturers Warranty. The Company believes that Internet consumers are price sensitive and seek to purchase brand name goods at discounts from prices charged by retail stores and catalog companies. The Company offers a broad range of brand name consumer goods from nationally recognized manufacturers at low prices and under manufacturers warranty. Product offerings within categories are rotated daily to enhance consumer interest. By operating online and purchasing products from suppliers only after they have been ordered and paid for by the customer, the Company is able to substantially reduce overhead costs typically associated with retail stores and catalogs and is able to pass on the savings directly to its customers. Historically, the Company has offered lower margin categories of products, such as computers, computer accessories and computer upgrades. While the Company plans to continue offering these product categories, it has begun to shift its product mix and increase the number and variety of goods in higher margin product categories, such as consumer electronics, toys, games, sporting goods, memorabilia, jewelry, collectible sports and entertainment cards and travel and entertainment products and services. Seeking Exclusive Distribution of Unique Products. The Company seeks to obtain electronic media distribution rights for select groups of unique products that it can offer in its auctions as well as through database marketing and fixed price merchandising. In December 1998, the Company entered into an exclusive, worldwide Internet distribution agreement with Micra SoundCards Inc. ("Micra SoundCards"), the inventor and producer of a patented collectible "talking" trading card. The Company markets the cards, which play the actual sound of the sports or entertainment event that is featured on the card, along with a card player. The debut series of the talking cards distributed by the Company in Canada include Paul Henderson's "Goal of the Century" commemorating the winning goal in the 1972 Russia-Canada hockey series, and, in the United States, Michael Jordan's winning basket in the 1998 NBA championship. See "--Products." Providing a Proprietary State-of-the-Art Auction Platform that Is Entertaining, Secure and Easy to Operate. The Company believes that to sustain consumer interest in online auctions, it must provide an entertaining, secure and easy-to-use E-commerce environment. The Company's proprietary auction platform incorporates state-of-the-art interactive technology, including enhanced, customized user interfaces designed to bring participants into the online equivalent of a live auction room. The Company's technology provides product descriptions with catalog quality pictures and graphical representations. The design allows the Company to change and upgrade the auction site with ease, and quickly respond to requests by marketing partners and advertising sponsors to change the look of products offered. On-screen real-time data provides customer information about the current bid status of all bidders in order to facilitate an interactive auction process. The Company has received a notice of allowance from the PTO for a patent application it filed in the United States seeking patent protection for the process of conducting its Dutch auctions over electronic distribution channels. The Company has a patent application pending in Canada covering the same technology. BID.COM uses leading security and encryption systems to maintain the security of online purchases and customer data. See "--Auction Operations" and "-Technology Platform." Acquisitions and Strategic Investments. The Company plans to continue to expand by seeking technologies, products, services and transaction formats that compliment its existing business. If appropriate opportunities are available, BID.COM may acquire businesses, technologies or products or enter into strategic relationships that may further diversify revenue sources and product offerings, expand the Company's customer base or enhance the Company's auction platform. Auction Operations The Company currently operates two national business-to consumer auction sites, one in the United States and one in Canada, and operates other private brand local or regional stand-alone auctions. Customers who access the online auction through the Company's Web site or the Web sites or search engines of the Company's strategic or advertising partners, are all channeled to one of the two national auction sites, depending on the geographic location of the customer. In this manner the Company is able to maximize the number of participants in each auction and minimize the number of auctions which are operated concurrently. The United States auction is conducted in U.S. dollars and the Canadian auction is conducted in Canadian dollars. Customers participating in private brand auctions operated by the Company access only the stand-alone auction site of the Company's private brand customer. The Company has generated most of its revenues to date from online auction sales in the United States and limited revenues from online auction sales in Canada. During 1998, revenues from online auction sales in Canada were approximately Cdn$270,000. 7 The Company's proprietary auction platform can support a large number of concurrent and sequential participants, capturing the excitement of a live event in an online environment. Customers can interact at their convenience and have access to a variety of merchandise at constantly changing prices. The Company generates transactional revenues using the conventional rising price auction format and the declining bid, or "Dutch," auction format. Management believes that its capability within the Dutch auction sector is a key point of differentiation in the online marketplace that will grow in significance as more online shoppers and businesses become familiar with this E-tailing platform. Rising Price Auctions. In the conventional rising price auction format, the highest bids win the items auctioned. The rising price auction allows participants to competitively bid on available merchandise by incrementally adjusting their bid positions. The BID.COM user interface allows users to easily identify current leading bidders, minimum new bids and initial bid pricing. Participants are informed of their bid status, stating whether they have won, been outbid, approved or declined via electronic mail. Participants can also use the Company's Bid Buddy(TM) tool, launched in October 1998, to place absentee bids up to a pre-determined limit. This "intelligent" bidding agent will check bid activity at regular intervals and increase a customer's bid by the minimum required increment to ensure that products are purchased at the best possible price. If outbid, the customer receives an e-mail alert and is permitted to increase his bid via the Company's Web site. The interactive nature of the bid update system encourages continued customer participation throughout the auction lifecycle. Customers can also use the Company's Search Buddy(TM), a search tool introduced in October 1998, which may be pre-programmed, up to a maximum seven days in duration, to find product offerings customized to a customer's specific areas of interest. If Search Buddy finds a match for a customer's search, the customer receives immediate notification by e-mail, with a direct link to the desired product. Customers may also use "BID.COM Recommends," an affinity engine introduced in November 1998, which recommends items targeted to a customer's product preferences, based on a customer's viewing and bidding history. The recommendations are provided in real time. The rising price auction initially was conducted over a seven day period, but, with the growth of the Company's customer base, auction cycles have been shortened to one day. The Company normally re-merchandises its United States and Canadian Web sites daily and stages 24 hour auctions every day of the week. Dutch Auctions. The Company also offers declining price, or "Dutch," auctions, an effective method of high volume merchandising. A starting price is set and a limited time period is allocated for a fixed quantity of the product to be auctioned (three to five minutes for most BID.COM items). As time advances, the price drops in small increments. The longer one waits, the lower the price. However, if a shopper waits too long the limited quantity of the product being auctioned may be sold out. The declining bid auction allows participants to bid in a real-time format utilizing on-screen data which provides the time and quantity remaining as well as the falling price of the items for sale. The bidders remain online and actively participate throughout the auction process. The BID.COM declining price auction was initially introduced in April 1996 and was re-introduced over BID.COM's updated platform in July 1998. In March 1999, the Company received a patent from the PTO covering the process of conducting its Dutch auctions over electronic distribution channels. The Company has a patent application pending in Canada covering the same technology. This unique format lends itself to a multitude of consumer products and services and special event auctions, particularly in the emerging vertical markets of travel, entertainment and memorabilia. The Company believes that the Dutch Auction format also will have wide application in the business- to-business sector because it facilitates the efficient conduct of high volume transactions. BID.COM has secured the URL www.dutchauction.com. which the Company plans to use in the future in connection with certain online declining auction offerings. Introduction of Business-to-Business Platform. BID.COM completed the development of a business-to-business auction service in December 1998. The Company plans to introduce a series of online business-to-business auctions tailored to selected vertical business markets that may benefit from expanding the traditional physical auction audience to online participants. The Company believes its proprietary Dutch auction technology will be particularly well suited to this sector. In December 1998, th Company was designated a preferred vendor by The ASCII Group (Canada), a network of 340 independent computer VARs, and plans to conduct online auctions of products suited to the VAR market for members of the ASCII Group. In addition, the Company plans to license or co- brand business auctions with distribution partners within a number of additional business-to-business vertical markets. This business niche creates potential for new revenue streams without the costs associated with business-to-consumer auctions, such as advertising, customer service, logistics and credit card processing. The Company will also seek to 8 introduce pure liquidation auctions on behalf of banks, bankruptcy trustees and other liquidators. The Company believes that over time, the business-to-business marketplace for online auctions (and consequently this segment of BID.COM's transactional volume) will become larger than business-to-consumer auction activity. User-Friendly Design. The Company's Web site has been designed with the goal of bringing participants into the online equivalent of a live auction. Customers view detailed product descriptions with catalog quality pictures and graphical representations. Winning bidders can complete the purchase transaction quickly, usually within minutes for repeat customers. In addition, the system design allows the Company to change and upgrade the auction site with ease and quickly respond to requests by marketing partners and advertising sponsors to change the look of the products offered. The front-end user interfaces can undergo continual enhancements without requiring changes to the transactional back-end of the system. The system provides full delivered cost disclosure prior to the consumer completing the purchase by adjusting the cost charged to purchasers for all added taxes and delivery charges to the customers' door, anywhere in North America. Bidder Registration. Customers may view BID.COM without cost or registration. However, they must provide certain registration information before participating in the online auction, including verifiable location and billing information and a commercial credit card. The Company uses the registration information for processing successful bids into customer orders. Using this information, the Company's data systems determine shipping and handling charges and applicable taxes, charge customer credit cards, print order information, transmit order information to the Company's contract warehouses and vendors and provide transaction information for the Company's accounting system. Customers are generally required to pay for purchased goods by commercial credit card, thereby significantly reducing the Company's credit risk. See "Risk Factors--Internet Commerce Security." Limited Inventory. The Company normally obtains products for sale in its auctions from suppliers under arrangements that allow the Company to purchase merchandise only after the Company's customer has purchased and paid for the product. These arrangements typically provide that the supplier will reserve for sale by the Company specified quantities of products for a fixed period of time without obligating the Company to purchase those products until sales are made to the Company's customers. As a result, the Company does not usually stock inventory and consequently has no liability for unsold merchandise. In certain circumstances, the Company may place purchase orders in advance for unique products. As part of its customer satisfaction policy, the Company may allow its customers to return merchandise upon payment of a re-stocking fee, in which case, the merchandise is returned to the supplier for credit or resold by the Company. Transactional revenues from the sale of products create gross margin for BID.COM either in the form of a negotiated commission based on the final selling price of goods, or the difference between the actual selling price and the reserve price negotiated by the Company with its suppliers. Sold products are usually shipped directly from the supplier to the customer. Shipping, handling and applicable taxes are added to the auction price and are paid by the customer. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Licensing Proprietary Online Platform for Private Branded Auctions. The Company seeks to license its online auction platform in local and regional markets that will not compete directly with the national focus of the BID.COM auction. The Company has licensed its auction platform and contracted its operational services to support a private brand online auction for Toronto Star Newspapers Limited and plans to enter into similar private brand auction arrangements with other local and regional newspapers, retailers, charities and community-based organizations. The Company believes that community-based content is a fundamental trend in Internet programming and views local and regional newspapers such as Toronto Star as ideal candidates for private brand auctions. Newspapers in many major urban centers face potential loss of conventional paper advertising revenue as advertisers allocate larger portions of their advertising budgets to electronic advertising. By creating a credible Internet presence, newspapers may be able to recapture advertising revenue that is being shifted from paper to electronic advertising. In addition, by offering online auction and cybermall services, newspapers may provide their advertising clients with an opportunity to establish a Web presence without the need to develop their own Web sites. Newspapers may also be able to generate commissions or other revenues from sales and other transactions conducted through their private Web sites. The Company believes there will be opportunities to license platforms to local partners in many major urban centers and national affinity groups in the United States as well as through local partners in the European and Pacific Rim markets. In June 1999, the Company plans to open its first European office in Dublin, Ireland, to license the Company's auction technologies and provide related support services to European-based companies. The Company's technology allows it to offer licensees a turnkey custom branded auction platform, as well as a wide range of E-commerce support services. 9 In February 1997, the Company entered into an E-Commerce Services Agreement (the "Torstar Agreement") with Toronto Star Newspapers Limited, Canada's largest circulation newspaper, to provide local auctions and cybermall services in the Province of Ontario. These services provide the capability to extend Toronto Star's City Search initiative to market online content in the Province of Ontario by adding a Toronto Star online auction branded site. Toronto Star has not yet launched its online auction. In addition, pursuant to the Torstar Agreement, the Company granted to Toronto Star a non-exclusive license to use the Company's technology for non-auction related uses, such as games and contests. In return for such services, Toronto Star will share with the Company all net revenues received in connection with the sale of products and services using the Company's platform. The percentage of revenue payable to the Company is a function of a number of factors, including the location of the purchaser and whether the Company or Toronto Star has sourced the products and services sold. In addition, Toronto Star is entitled to receive a percentage of certain other sales made through the Company's platform in the Province of Ontario. The Torstar Agreement expires on January 31, 2000, but will continue, unless earlier terminated by the Company or Toronto Star, for consecutive one year periods, upon terms to be mutually agreed upon by the Company and Toronto Star. In connection with the Torstar Agreement, Toronto Star purchased an aggregate of 1.5 million common shares of the Company ("Common Shares") for an aggregate purchase price of Cdn$1.425 million. The Toronto Star is the largest circulation newspaper in Canada with a daily circulation of approximately one million readers. Licensing Technology and Co-branding BID.COM to Achieve Multi-Media Distribution. The Company seeks to use its auction technology to support interactive auctions in other electronic communications media. In December 1998, the Company and AIM entered into a joint venture to develop auction opportunities outside the Internet in broadband, set-top box/Web TV and network television, and to develop technological improvements to enhance the consumer experience offered through the narrowband Internet medium. The Company has licensed its technology to AIM, which AIM intends to use in creating celebrity-hosted live television auctions using the two-way interactive capabilities of set-top boxes. Initially, AIM intends to introduce live auctions on ComedyNet, its 24 hour Internet comedy network. Thereafter, AIM plans to launch a customized branded version of BID.COM's dutch auction on a shopping network available through set-top boxes, or Web TV. In addition, AIM plans to use the Company's technology to support various E-commerce initiatives on AIM's other in-house internet and cable networks and on AIM's customized affinity group internet portals. The license agreement expires June 30, 2001. In connection with the license agreement, AIM issued stock to the Company. AIM is the creator of a wide range of programming and services incorporating video and audio information through an interactive environment designed specifically for the Internet, digital cable and other electronic media distribution platforms. AIM's first network, ComedyNet, has won various independent awards. The Company believes that a joint venture with AIM will broaden the exposure of the Dutch auction as a means to provide consumers with an entertaining shopping experience in a variety of electronic media platforms. Additional goals of the joint venture include increasing the appeal to others to license BID.COM technology and creating the potential for increased revenue. BID.COM and AIM will share in the gross margin created through their joint venture pursuant to a formula set forth in the license agreement. Sales of Advertising on BID.COM Web Site The Company seeks to promote its Web site as an advertising medium for the products and services of other companies and organizations. In December 1998, the Company entered into an agreement with 24/7 under which 24/7 sells advertising space on BID. COM's Web site. Initially, the Company plans to offer banner advertisement placement on various sections of the U.S. and Canadian BID.COM Web sites. The Company believes that the shopping demographics of its registered bidder base creates a desirable target audience for companies and advertising agencies. Marketing BID.COM's marketing strategy is designed to increase traffic to the Company's auction Web sites and promote awareness of its BID.COM brand. To implement its strategy, the Company: (i) has developed strategic and marketing relationships with Rogers Media and AOL and plans to enter into similar arrangements with other major 10 Internet service and content providers; (ii) is building its own BID.COM brand and channeling potential bidders to its site through referral and database marketing and key word advertising; and (iii) hosts co-branded and private branded Cause Marketing events such as the 1998 Hootie & the Blowfish Monday After the Masters Charity Auction at BID.COM. Strategic and Marketing Alliances with Major Content and Service Providers The Company has developed strategic and marketing alliances with Rogers Media and AOL and is seeking similar relationships with other large Internet service and content providers as well as other large, consumer-oriented companies. The Company believes that these relationships will allow BID.COM to broadly expand its customer base as well as capitalize on new advertising opportunities by leveraging the strong brand names and subscriber bases of its alliance partners. These alliances als increase traffic to the BID.COM sites due to advertising carriage arrangements which usually include a combination of hyperlink banner advertisements and the directing of key words such as "Auction" and "Online Auction" to the BID.COM site. Since the launch of the BID.COM brand name in March 1998, the Company's customer base has increased significantly. As of April 14, 1999, the Company had approximately 108,000 registered bidders, representing a 412.0% increase in registered bidders from January 1, 1998. Steadily increasing distribution of the BID.COM E-commerce offering to a larger audience of Internet users while establishing exclusivity in certain distribution channels is an important component of the Company's marketing strategy. The Company believes that the credibility of its current strategic and marketing partners will strengthen its ability to enter into future business alliances. Rogers Media. In July 1998, the Company and Rogers Media, a subsidiary of Rogers Media Communications Inc., entered into an E-Commerce and Promotion Services Agreement (the "Rogers Media Agreement") pursuant to which BID.COM granted Rogers Media the exclusive right within Canada to co-brand the Canadian BID.COM auction, subject to the rights granted to the Toronto Star. See "--Licensing Proprietary Online Platform for Private Branded Auctions." Rogers Media has agreed that the Canadian BID.COM auction will be the only online auction displayed on the home page of Rogers Media's new E-commerce portal. In addition, Rogers Media has agreed to generate specified levels of site traffic and advertising revenues, and has committed to in excess of Cdn$1.0 million in minimum annual advertising for the Canadian BID.COM auction on the media properties of Rogers Media, its affiliates and certain non-affiliated media. BID.COM and Rogers Media share equally in the revenue from all transaction and advertisin sales generated through the co-branded site in Canada, net of all taxes, costs, transaction fees, duties, and credits for returns or unpaid items. 11 The Company believes that this exclusive national partnership with Rogers Media will enable the Company to leverage Rogers Media numerous media properties to establish the Canadian BID.COM auction as a leading online shopping destination in Canada. In addition, the Company anticipates that trade magazines published by Rogers Media may be used by the Company to support the development of its business-to-business online auctions. Rogers Media's national media properties include some of Canada's most widely read publications including Macleans, Chatelaine, Flare, Canadian Business, Profit and Marketing Magazine; numerous trade and professional magazines covering a broad range of industries; "680 News" and other leading English language radio stations in Canada; CFMT - a multi-lingual television station in Toronto; The Shopping Channel - Canada's only television shopping network, and several Canadian radio stations and some of the leading Canadian Internet properties such as Quicken.ca, Electric Library Canada, Chatelaine Connects and Macleans Online. Rogers Media's parent company, Rogers Media Communications Inc., owns Rogers Media Cablesystems, the largest cable network in Canada, is in partnership with Shaw and Cogeco in @Home Canada, a Canadian leader in offering broadband Internet service through cable networks, and owns Cantel, Canada's largest national digital wireless company. Rogers Media has purchased an aggregate of 1.5 million Common Shares of BID.COM for an aggregate purchase price of Cdn$1.875 million. Rogers Media also holds a warrant to purchase an additional 100,000 Common Shares at Cdn$1.40 per share. A representative of Rogers Media currently serves as a member of the Company's Board of Directors. See "Directors and Officers of Registrant," "Options to Purchase Securities From Registrant and Subsidiaries" and "Interest of Management in Certain Transactions." America Online. In February 1997, the Company entered into an agreement with AOL to provide AOL subscribers with access to the Company's auction sites. AOL is the world's largest online service provider with a subscriber base of over 15.0 million people. BID.COM's Web site initially went live with an AOL branded interface, the "AOL Online Auction." Satisfied with its initial relationship with AOL, the Company entered into a non-exclusive Interactive Marketing Agreement (the "AOL Marketing Agreement") with AOL in November 1997 under which the Company agreed to purchase $1.25 million (Cdn$1.75 million) of advertising and promotion from AOL each quarter through October 1999. The AOL Marketing Agreement provided BID.COM with anchor tenant positioning in a number of AOL's E-commerce offerings, plus various keywords such as "Online Auction." In March 1998, the brand the Company used within AOL was changed from Online Auction to BID.COM The Online Auction, and was supported by substantial online advertising. Pursuant to the AOL Marketing Agreement, the Company provided product procurement, transactional processing and order fulfillment services to AOL in connection with BID.COM The Online Auction. The agreement also provided that after the Company reached certain revenue thresholds or received a specified number of cumulative impressions on AOL Web sites, AOL would be entitled to receive 50% of the Company's excess gross profit earned from such revenues or impressions. The AOL Marketing Agreement was to expire on November 1, 1999. In March 1999, the Company and AOL terminated the AOL Marketing Agreement and entered into a new non-exclusive agreement. Under the new agreement, AOL continues to provide BID.COM with anchor tenant positioning in a number of AOL's E-Commerce offerings, plus various key words such as "Online Auctions," and the Company will continue to provide product procurement, transactional processing and order fulfillment services to AOL in connection with BID.COM The Online Auction. Under the new agreement and related arrangements, the Company's advertising payments to AOL are reduced to $3.0 million for the 13 month period of the agreement from $5.0 million annually under the old agreement. In addition, the new agreement eliminates the revenue sharing arrangement. Prior to the termination of the old agreement, the revenue sharing thresholds had not been reached. The new agreement expires on March 31, 2000. In February 1997 AOL purchased an aggregate of 1.0 million Common Shares for an aggregate purchase price of Cdn$1.0 million, which was paid by AOL extending to the Company advertising credits in the same amount. A representative of AOL currently serves as a member of the Company's Board of Directors. See "Directors and Officers of Registrant" and "Interest of Management in Certain Transactions." Referral and Database Marketing and Key Word Advertising After launching its BID.COM brand in March 1998, the Company initially relied, in part, on broad-based banner advertising arrangements with Internet service providers such as Yahoo! and Excite to promote brand awareness of BID.COM. The Company has recently implemented a more selective marketing approach that blends brand promotion with lower cost customer acquisitions and retention through referral marketing, database marketing and key word advertising. The Company believes that this approach will more effectively and efficiently target potential bidders who have a propensity to buy products online. Referral Marketing. The Company pursues referral based marketing arrangements which reward individuals and companies for referring bidders to the Company's Web site. By utilizing specialized referral software, the Company can track the source of new registrations for its auction sites and reimburse these sources based on the number of new registrations referred to BID.COM. Potential referral services include hyperlinks from other Web sites and the Company's existing registered bidders. Payments may be made in cash, return referral registrations from BID.COM's site traffic, or a combination of cash and in-kind arrangements. Database Marketing. While the Company does not disclose registered bidder data to third parties, the Company has recently begun to access its own database of registered bidders to directly market both auction and non-auction products to purchasers with demonstrated purchasing histories. The Company plans to offer registered bidders by e-mail special promotions of auction and unique non-auction products, such as the "talking" collectible sports and entertainment cards. Key Word Advertising. The Company's experience with AOL and other Internet service providers has demonstrated that key word advertising is another effective method of reaching an audience that has a propensity to buy goods and services online. The Company has entered into, and continues to seek, key word agreements with Internet service providers that promote BID.COM when a user searches key words, such as "auction." The Company has an arrangement with go2net pursuant to which a banner advertisement and hyperlink for clicking through to the BID.COM auction site is prominently positioned on the page when a user of the MetaCrawler search engine searches certain key words, such as "auction" or "auctions." The go2net agreement expires in January 2000. 12 Cause Marketing The Company attempts to stimulate additional E-commerce activity by operating online auctions for, and/or licensing its auction platform to, charities and special causes. These special event auctions provide a positive contribution to communities and offer cross-promotional opportunities with celebrities and other popular figures, and often involve special products that typically are attractive to emerging demographic segments of the Internet user market. The Company believes many auction participants bookmark BID.COM once they participate in an auction, and, therefore, have a high probability of becoming repeat customers. The Company views these promotional events as marketing opportunities especially in the 18 to 30 year old consumer sector which is Internet user friendly and is likely to gain increasing purchasing power in the near future. In April 1998, BID.COM hosted the Hootie & the Blowfish Monday After The Masters Charity Auction. In June 1997, BID.COM hosted the Digital City All Charities Online Auction in partnership with Digital Cities Inc., a community-based Internet content subsidiary of AOL, as well as over 50 community groups and six media partners in the Dallas/Ft. Worth area. BID.COM also built the international Web site for RADD, an organization chaired by David Niven Jr., with approximately 300 tier one recording artist members including Paul McCartney, Elton John, Rod Stewart, KISS and Melissa Etheridge. BID.COM also hosts the Canadian BACCHUS Web site, which is part of an international charity promoting responsible use of alcoholic beverages, with over 100 Canadian and 750 U.S. affiliated organizations. Fixed Price Sales The Company's technology also allows for online fixed price retail shopping and provides online customers static-priced storefront merchandising. The Company offers Micra SoundCards collectible sports and entertainment cards and other products through this platform. The Company believes that this diversified technology platform provides it with a broader range of turnkey E-commerce licensing opportunities, as well as database marketing opportunities. Products The Company's BID.COM auctions offer a broad range of nationally recognized brand name goods at low prices and under manufacturers warranty. Historically, a substantial amount of E-commerce activity has focused on competitive and low gross margin categories of products such as refurbished computers. The Company believes that with the growing use of the Internet by a larger segment of the population, Internet consumers will seek higher quality and a broader mix of products than in the past. The Company has offered and will continue to offer lower margin computers, computer accessories and computer upgrades at its auction sites. However, the Company has begun to shift its product mix and increase the number and variety of goods in other product categories, many of which generate higher margins, including consumer electronics, toys, games, sporting goods, memorabilia, jewelry and travel and entertainment products and services. From time to time, the Company intends to introduce other product categories on a selected basis. The Company will also seek to obtain electronic media distribution rights to select groups of unique products. The Company believes that the successful marketing of such products will accelerate the growth of its registered bidder base as well as stimulate both its database marketing and auction activities. In December 1998, the Company entered into an exclusive, worldwide Internet distribution agreement with Micra SoundCards, the inventor and producer of a patented collectible "talking" tradin cards which play the actual sound of the sports or entertainment event featured on the card. The Company markets the sound cards along with a card player. The debut series of the talking cards distributed by the Company in Canada includes Paul Henderson's "Goal of the Century," commemorating the winning goal in the 1972 Russia-Canada hockey series, and in the United States, Michael Jordan's winning basket in the 1998 NBA championship. The agreement with Micra SoundCards expires December 31, 2001, and i automatically renewable thereafter for consecutive two year terms, subject to either party's notice not to renew. 13 Approximately 70% of the Company's products are front-line goods and typically 30% are clearance or other end-of-the-line items. The Company offers products from many brand name manufacturers, including AST, Canon, Compaq, Creative Labs, Dell, Epson, General Electric, Hewlett Packard, IBM, JVC, Koss, Magnavox, Motorola, Nikon, Nintendo, Panasonic, Pentax, Samsung, Seagate, Sega, Seiko, Sharp, Sony, Toshiba, U.S. Robotics, Western Digital and Zenith. The Company also offers travel packages, gold and precious gem jewelry and authentic sports collectibles, from multiples sources. Within its broad product categories, the Company rotates the products it offers to consumers on a daily basis. The products supplied to the Company for sale through the Company's Web sites are usually backed by a manufacturer's warranty. Front-line goods typically carry a full manufacturer's warranty, while clearance and other end of the line items are accompanied by limited warranties. The Company itself provides no warranties on the products or services sold through its Web sites. The Company believes that Internet consumers are price sensitive and seek to purchase brand name goods at significant discounts from prices charged by retail stores and catalog companies. The Company's products are generally priced lower than the prices typically charged by retail stores or catalog companies for the same or similar items. The Company is able to offer products at lower prices because many of the costs typically associated with retail stores and catalog companies, including the cost of sales staff and management, store rent and maintenance, fixtures and merchandising, can be significantly reduced or eliminated. Manufacturers are also able to offer more competitive prices to the Company because many of their distribution costs, such as co-op advertising, training and restocking of unsold merchandise, are substantially reduced or eliminated. In addition, by operating online and purchasing products from suppliers only after they have been ordered and paid for by the customer, the Company is able to substantially reduce overhead costs typically associated with retail stores and catalog companies. In order to lower the costs of goods sold in its auctions, the Company seeks to obtain volume discounts by purchasing large quantities of products from selected suppliers. Accordingly, during 1998, DAAC Computers & Notebooks, Inc. ("DAAC"), a computer products supplier, provided over 30% of the Company's products and four unrelated suppliers of computer and other products, including DAAC, Bostek, Inc., Micro-Exchange Corporation and Advantage Company, accounted for up to 90% of the Company's total supply base at various times. The Company believes that, while it will likely continue to be reliant on one supplier, or a small group of suppliers, for its computer products, the percentage of the Company's supply base attributable to these suppliers will decrease as the Company continues to change its product mix from computer related goods to higher margin products. For 1999, the Company anticipates that, at any given time, four unrelated suppliers may each be supplying up to 20-30% of the Company's product offerings. The Company typically enters into non-exclusive agreements with its primary suppliers, which are terminable at the Company's option. The products purchased from the Company's primary suppliers generally are readily available from other sources. See "Risk Factors--Reliance on Merchandise Vendors." The products sold at BID.COM auctions are typically shipped directly by the Company's suppliers to the winning bidders. >From time to time, the Company may offer its own fulfillment capability to new suppliers that are not initially equipped to ship directly to customers. The Company currently uses Purolator Courier, Federal Express and United Parcel Service to distribute purchased goods and is in the process of adding other courier services. The Company does not maintain its own warehouse, bu relies on third party contract warehouses. See "Risk Factors--Reliance on Merchandise Vendors." Customer Support and Service The Company believes that its ability to establish and maintain long-term relationships with its customers and encourage repeat visits and purchases is dependent, in part, on the strength of its customer service support and staff. The Company currently employs a staff of five full-time and three part-time customer support and service personnel who are responsible for handling customer inquiries from 9:00 a.m. to 5:00 p.m. (Eastern Standard Time) seven days a week. The customer service staff answer customer questions about the bidding process, track shipments, investigate problems with merchandise and act as liaisons between customers and the Company's vendors. The Company is actively working to enhance its customer service support operations through a variety of measures, including improved customer reporting systems and automation. The Company accepts returns from its customers but charges customers a re-stocking fee. 14 Technology Platform The Company's proprietary, state-of-the-art interactive auction technology enables the Company to offer its customers an entertaining, easy to use and secure E-commerce environment. BID.COM's technology allows the Company to operate a large number of simultaneous rising and falling price auctions and fixed price merchandising, each with many customers, across multiple technical platforms. The Company has devoted significant resources to developing its proprietary software technology. The Company believes that its success depends, in part, on its internally developed proprietary E-commerce management software, which implements a variety of customized auction and fixed price sales formats. The technology platform is constructed using distributed software technologies which allow rapid redevelopment and deployment of new software technology in order to take advantage of emerging business opportunities. The Company licenses commercially available technology whenever possible, rather than seek a custom-made or internally-developed solution. The Company believes that this strategy lowers its operating costs and increases its ability to respond to changing demands resulting from growth and technological shifts. This approach also allows the Company to focus its development efforts on creating and enhancing the specialized proprietary software that is unique to the Company's business. BID.COM works with its strategic partners, such as Rogers Media, to develop applications and content. The technology platform is based on Microsoft core applications, including the Windows NT operating system and an SQL server relational database, all residing on scaleable hardware. The Company uses Intel-based Hewlett Packard Netservers and DEC Alpha enterprise servers, which employ symmetrical multiprocessing as the basis of the Company's hardware systems. BID.COM was the first company to process a secure Canadian online Visa credit card transaction. BID.COM uses leading security and encryption systems to maintain the security of online purchases and customer data. Each customer who pre-registers or makes a purchase selects a unique user ID and a password. Repeat purchases are transacted using only the user's unique ID and password. Credit card transactions with the banking community are conducted over a separate ISDN line, through a server which maintains customer information behind a number of state-of-the-art firewalls "off line" from the Internet and which employ encryption technology such as SSL (Secure Socket Layer). Consumers not wishing to transmit registration information online may use one of the Company's toll-free telephone lines to register with BID.COM. See "Risk Factors--Internet Commerce Security." The Company has embraced leading edge high performance switching technologies, including Asynchronous Transfer Mode (ATM), to provide end users with what BID.COM believes is the fastest access possible to its Web site. BID.COM's access to telecommunications infrastructure is scaleable on demand and has been proven to provide reliable transactional support. In October 1998, the Company launched two technology tools, Bid Buddy and Search Buddy. In November 1998, the Company also implemented an affinity engine "BID.COM Recommends" using technology provided by Net Perceptions Inc. Based on collaborative filtering technology, this affinity engine software allows BID.COM to personalize its product offerings to customers' areas of interest. The first feature was implemented as "BID.COM Recommends." See "--Auction Operations." In November 1998, BID.COM won three Canadian Information Productivity Awards ("CIPA"), for its online auction technology, including an Award of Excellence, Best of Category Award for Small Business, and top honors with the Best of Show Award. BID.COM's development work received distinction within a group of award-winning IT solutions which included such organizations as GE Capital, IBM Canada, Scotiabank, Air Canada, Revenue Canada, ING Canada, Canadian Pacific Railways, National Bank of Canada, Rogers Media Cantel and Royal Bank of Canada. The Company's engineering, production and research and development staff currently consists of 10 software development engineers and three system consultants. 15 Research and Development The Company believes that its proprietary auction management software provides a competitive advantage over other online auction companies and that its future success depends, in part, on its ability to continue developing and enhancing that software. Therefore, the Company has focused its research and development efforts on the continued development of its proprietary auction management software. The Company's ongoing research and development efforts are aimed at enhancing the features and functionality of its existing software components, the development of new software components, and the integration of superior third party technology into its environment. The Company's research and development expenditures were Cdn$889,000 for the year ended December 31, 1998 and Cdn$661,000 for the year ended December 31, 1997, including salaries and related expenses of Company personnel engaged in research and development. Research and development activity during 1998 included the redevelopment and release of the BID.COM technology platform, with Year 2000 compliant architecture and an award winning solution design, the purchase of a new accounting software package and the purchase and implementation of the personalization software engine "BID.COM Recommends." See "--Auction Operations." Competition The online commerce market is new, rapidly evolving and intensely competitive, and the Company expects that online commerce competition in general, and online auction competition in particular, will further intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost. In addition, the broader retail consumer product industry is intensely competitive. The Company's competitors, determined on the basis of type of merchandis and sales format offered by such entities to customers, include: (i) companies providing business-to-consumer online auctions services such as Onsale, Inc. ("Onsale"), First Auction by Internet Shopping Network Inc. ("First Auction"), uBid, Inc. ("uBid") and Egghead.com Inc. ("Egghead"); (ii) consumer-to-consumer online auction services such as eBay Inc. ("eBay"), Yahoo!, Auctions Powered by Onsale, Auction Universe, a Times-Mirror Company ("Auction Universe"), Excite Inc. ("Excite") and a number of small services, including those that serve specialty markets; (iii) companies providing online communities and services that specialize in or otherwise have expertise in developing online commerce and some of whom currently offer a variety of business-to-consumer trading services, including Amazon.com, AOL and Microsoft Corporation; (iv) companies that offer merchandise similar to that of the Company but through physical auctions and with which the Company competes for sources of supply; (v) catalog companies with substantial customer data bases, which may devote greater resources to Internet commerce in the future; and (vi) large retailers and other companies with strong brand recognition and experience in online commerce that are increasingly directing greater resources to Internet commerce and who seek to compete in the online auction market, including Cendant Corporation and QVC, Inc. ("QVC"). In addition, because the barriers to the E-commerce industry are minimal, the Company may i the future face additional competitors who the Company cannot currently identify. The Company also anticipates that one or more of these companies and other companies engaged in the business-to-business sector will offer business-to-business online auctions as this sector continues to grow. The Company believes that the principal competitive factors in its online auction market are brand recognition, product selection, variety of value-added services, ease of use, site content, quality of service, reliability of delivery of products, quality of search tools, system reliability, technical expertise and price. The Company believes that it is competitive in each of these areas. Many of the Company's competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than the Company. Certain of the Company's competitors may also offer auction services in Canada and/or Europe. In addition, other online trading services may be acquired by, receive investments from or enter into other commercial relationships with, larger, well-established and well-financed companies as use of the Internet and other online services increases. Therefore, certain of the Company's competitors with other revenue sources may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to Web site and systems development than the Company or may try to attract traffic by offering services for free. See "Risk Factors - Competition." 16 Intellectual Property The Company's performance and ability to compete are dependent to a significant degree on its proprietary technology. The Company relies on a combination of patent, copyright, trademark and trade secret laws, as well as confidentiality agreements and technical measures, to establish and protect its proprietary rights. In March 1999, the Company received a patent from the PTO covering the process whereby the Company conducts declining price, or Dutch, auctions over electronic distribution channels. The Company has a patent application pending in Canada covering the same technology. The Company's proprietary software is subject to common law copyright protection, but the Company does not have, and does not intend to pursue, any registered copyrights. Common law protection may be narrower than that which the Company could obtain under registered copyrights. As a result, the Company may experience difficulty in enforcing its copyrights against certain third party infringements. The source code for the Company's proprietary software is protected as a trade secret. See "Risk Factors--Protection of Intellectual Property." BID.COM, BID.COM THE ONLINE AUCTION, INTERNET LIQUIDATORS, ILUSA, $BUCK A MONTH CLUB, CLUB.R.A.D.D., ONLINE OUTLET MALL, ONLINE AUCTION, BID BUDDY, SEARCH BUDDY and EXPERIENCE ENGINE are trademarks or tradenames of the Company, all of which are the subject of pending applications for registration in either or both of the United States and Canada, except for INTERNET LIQUIDATORS, which is registered in Canada. The Company's competitive position is also dependent upon its unpatented trade secrets. In an effort to protect its trade secrets, and as part of its confidentiality procedures, the Company generally enters into confidentiality and non-disclosure agreements with its employees and consultants and generally limits access to and distribution of its software, documentation and other proprietary information. Employees As of the date hereof, the Company employs 36 full-time employees, including four in engineering support, four in operations, seven in merchandise acquisition and marketing, five in customer support and service, and 16 in finance, administrative and senior management functions. The Company also employs three part-time employees, all of whom are in customer support and service. The Company also hires independent contractors for software development, technical documentation, artistic design merchandising and administration, as needed. None of the Company's employees are represented by a labor union, and the Company considers its employee relations to be good. The Company's success is substantially dependent on the ability and experience of its senior management and other key personnel. Moreover, to accommodate its current size and manage its anticipated growth, the Company must maintain and expand its employee base. Competition for personnel, particularly persons having software development and other technical expertise, is intense, and there can be no assurance that the Company will be able to retain existing personnel or hire additional, qualified personnel. The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material and adverse effect on the Company. All key employees have been granted stock options. See "Risk Factors--Dependence on Key Personnel; Need for Additional Personnel" and "Management." History The business of the Company was commenced by Internet Liquidators Inc., an Ontario corporation, in September 1995. In May 1996, Internet Liquidators International Inc., an Ontario corporation, acquired all of the shares of Internet Liquidators Inc. In January 1997, the Company was formed, as an Ontario corporation, by amalgamation of Internet Liquidators Inc. and Internet Liquidators International Inc. In June 1998, the Company changed its name from Internet Liquidators International Inc. to BID.COM International Inc. The Company converted its consumer brand URL from www.Internetliquidators.com to www.BID.COM in March 1998. The Company's offices are located at 6725 Airport Road, Suite 201, Mississauga, Ontario L4V 1V2, Canada . The Company's subsidiary, Internet Liquidators USA Inc., provides sales and marketing services and maintains an office at 2701 North Rocky Point Drive, Suite 510, Tampa, Florida 33607-1013. The Company's Web site is www.BID.COM. Information contained on the Company's Web site shall not constitute a part of this Registration Statement. 17 RISK FACTORS An investment in the securities of BID.COM is speculative, involves significant risk and is suitable for investment only by purchasers who can bear the economic risk of a complete loss of their investment. Prior to making an investment decision, prospective purchasers should consider carefully the following risk factors, together with the information and financial statements set forth elsewhere in this Registration Statement. Limited Operating History The Company was founded in September 1995 and began conducting auctions on the Internet in April 1996. Accordingly, there is only a limited operating history upon which to base an evaluation of the Company and its business and prospects. The Company's business and prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies in new and rapidly evolving markets such as E-commerce. Such risks include the evolving and unpredictable nature of the Company's business, the Company's ability to anticipate and adapt to a developing market and technological changes, acceptance by consumers of the Company's Internet auctions and the merchandise sold at such auctions, the ability to identify, attract and retain qualified personnel and the other risks described in this Registration Statement. There can be no assurance that the Company will successfully overcome these risks. See "Management' Discussion and Analysis of Financial Condition and Results of Operations." History Of Operating Losses; Accumulated Deficit and Negative Cash Flow The Company has not earned profits to date and had accumulated losses of Cdn $27.7 million as at December 31, 1998. For the year ended December 31, 1998 and the year ended December 31, 1997, the Company's net loss was Cdn $18.7 million and Cdn $6.7 million, respectively. The Company intends to continue to invest heavily in marketing and promotion, development of its technology, business-to-business auctions and other areas of its business. As a result, the Company believes that it will incur substantial operating losses for the foreseeable future. The Company's operating losses in 1997 and 1998 were attributable, in part, to the Company's promotional pricing strategy under which products were sold below cost or at significantly reduced profit margins. While the Company began to limit this policy during the fourth quarter of 1998, the Company continues to sell a limited number of products at significantly reduced margins and, in the future, may from time to time continue to use promotional pricing programs in connection with the introduction of new products and services, in response to competitive pressures or for other business reasons. The use of such promotional pricing strategies may have a material adverse effect on the Company's profitability. There can be no assurance that the Company will earn profits or generate positive cash flows from operations in the future, or that profitability, if achieved, will be sustained. The success of the Company will ultimately depend on its ability to generate revenues from its auction activities in amounts sufficient to permit the Company's operations and development activities to be financed by revenues instead of external financing. There can be no assurance that future revenues will be sufficient to generate the required funds to operate the business profitably. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Additional Financing Requirements The Company has been funded to date primarily through a series of private placements of equity, sales of equity to and investments from strategic partners, and cash flow from operations. The Company expects its capital requirements to increase significantly due to the proposed expansion of its marketing and business development activity, the introduction of business-to-business auctions, and continued development of its technology. The Company believes that its present capital, anticipated proceeds from the expected exercise of outstanding in-the-money options and warrants expiring at various times during 1999 and revenue from operations will be sufficient to finance its cash requirements for the next 12 months. Thereafter, the Company may need to raise additional funds. The exact amount of the Company's future capital requirements will depend on numerous factors, including, but not limited to, slower growth and adverse changes in the E-commerce environment, delays in the growth of the Company's customer base, government regulations, failure or delays in executing marketing programs, failure or delays in connection with expansion to Europe, growth that is more rapid than anticipated or competitive pressures. The Company may also need to raise additional funds sooner than anticipated in order to acquire businesses, technologies or products or fund investments and other relationships the Company believes are strategic. In addition, while the exercise prices of the outstanding options and warrants may currently be below the trading prices of th Company's Common Shares on the Toronto Stock Exchange, there can be no assurance that the Common Shares will continue to trade at prices that justify the exercise of the warrants, or that the holders will, in fact, exercise them. Accordingly, the Company's actual capital requirements may vary from currently anticipated needs and such variations could be material. 18 There can be no assurance that additional financing will be available on commercially reasonable terms or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to funds its expansion, take advantage of strategic acquisitions, investment or licensing opportunities or respond to competitive pressures. Such inability to obtain additional financing when needed would have a material adverse effect on the Company's business, results of operations, cash flow, financial condition and prospects. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of the shareholders of the Company will be reduced, shareholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of the Company's Common Shares. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Description of Securities." Potential Fluctuations In Results Of Operations The Company's operating results have varied on a quarterly basis in the past and may fluctuate significantly as a result of a variety of factors, many of which are outside the Company's control. Factors that may affect the Company's quarterly operating results include: (i) the Company's ability to increase its customer base; (ii) the availability and pricing of merchandise from vendors; (iii) the announcement or introduction of new sites, services and products by the Company or its competitors; (iv) the success of the Company's brand building and marketing campaigns; (v) introduction and success of the Company's business-to-business auction; (vi) the success of any future acquisition by the Company of businesses, technologies or products or any strategic investments or relationships into which the Company may enter; (vii) price competition; (viii) the level of use of the Internet and online services; (ix) increasing consumer confidence in and acceptance of the Internet and other online services for commerce and, in particular, products such as those offered by the Company; (x) consumer confidence in the security of transactions over the Internet and other online services; (xi) the Company's ability to upgrade and develop its systems and infrastructure to accommodate growth; (xii) the Company's ability to attract new personnel in a timely and effective manner; (xiii) the timing, cost and availability of advertising in traditional media and on other Web sites and online services; (xiv) technical difficulties or service interruptions; (xv) the amount and timing of operating costs and capital expenditures relating to expansion of the Company's business, operations and infrastructure; (xvi) consumer trends and popularity of certain categories of collectible items; (xvii) governmental regulation by Federal or local governments; and (xviii) general economic conditions as well as economic conditions specific to the Internet and online commerce industries. As a result of the Company's limited operating history, the emerging nature of the markets in which it competes and the inherent degree of variability in auctions, it is difficult for the Company to accurately forecast its revenues or earnings from auction activities. In addition, the Company has no backlog and a significant portion of the Company's net revenues for a particular quarter are derived from auctions that are conducted during that quarter. The Company's current and future expense levels are based largely on its investment plans and estimates of future revenues and are, to a large extent, fixed. The Company may be unable to adjust spending in a timely manner to compensate for any unexpected revenue shortfall. Accordingly, any significant shortfall in revenues relative to the Company's planned expenditures would have an immediate adverse effect on the Company's business, results of operations, cash flow and financial condition. Further, as a strategic response to changes in the competitive environment, the Company may from time to time make certain pricing, service or marketing decisions that could have a material adverse effect on its business, results of operations, financial condition and prospects. Due to the foregoing factors, the Company's quarterly revenues and operating results are difficult to forecast. The Company believes that period-to-period comparisons of its operating results may not be meaningful and should not be relied upon as an indication of future performance. In addition, it is likely that in one or more future quarters the Company's operating results will fall below the expectations of securities analysts and investors. In such event, the trading price of the Common Share would almost certainly be materially adversely affected. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Developing Online Commerce Markets The Company's long-term viability is substantially dependent upon the widespread acceptance and use by consumers and businesses of the Internet as a medium of commerce. Use of the Internet as a means of effecting 19 retail and wholesale transactions is at an early stage of development, and demand and market acceptance for recently introduced products and services over the Internet is uncertain. The Company cannot predict the extent to which consumers and businesses will be willing to shift their purchasing habits from traditional retailers and distributors to online retailers and distributors. See "--Uncertain Acceptance of the BID.COM Brand; Evolving and Unpredictable Business Model." The Internet may not be commercially viable for a number of reasons, including potentially inadequate development of the necessary network infrastructure, delayed development of enabling technologies and inadequate performance improvements. In addition, the Internet's viability as a commercial marketplace could be adversely affected by delays in the development of services or due to increased government regulation. Changes in or insufficient availability of telecommunications services to suppor the Internet also could result in slower response times and adversely affect usage of the Internet generally and the Company in particular. Moreover, adverse publicity and consumer concern about the security of transactions conducted on the Internet and the privacy of users may also inhibit the growth of commerce on the Internet. If the use of the Internet does not continue to grow or grows more slowly than expected, or if the infrastructure for the Internet does not effectively support growth that may occur, the Company would be materially and adversely affected. See "--Dependence on the Web Infrastructure," "--Reliance on Other Third Parties," "--Rapid Technological Change," "--Internet Commerce Security," "--Risk of System Failure; Single Site," and "--Government Regulation and Legal Uncertainties." In addition, even if consumers and businesses accept the use of the Internet as a viable medium of commerce, there can be no assurance that Internet auctions generally, or the Company's online auctions in particular, will develop successfully or achieve widespread acceptance. If the market for Internet-based online auctions fails to develop, or develops more slowly than expected or becomes saturated with competitors, or if the Company's Internet auctions do not achieve market acceptance, the Company's business, financial condition, results of operations, cash flow and prospects would be materially adversely affected. See "Business--Industry Background" and "Business--Competition." Reliance on Merchandise Vendors The Company is dependent upon third party vendors to supply it with merchandise for sale through the Company's Internet auctions and the availability of merchandise from such suppliers is unpredictable. The Company does not have long-term contracts or arrangements with most of its vendors guaranteeing the availability of merchandise for its auctions. There can be no assurance that the Company's current vendors will continue to sell merchandise to the Company or otherwise provide merchandise for sale in the Company's auctions or that the Company will be able to establish new vendor relationships that ensure merchandise will be available for auction on the Company's Web site. The Company also relies on many of its vendors to process and ship merchandise to customers. The Company has limited control over the shipping procedures of its vendors, and shipments by these vendors may be subject to delays. There can be no assurance that the Company will be able to continue to develop and maintain satisfactory relationships with vendors on acceptable commercial terms and obtain sufficient quantities of merchandise and quality of service on a consistent basis. During 1998,one computer products supplier provided over 30% of the merchandise offered in the Company's auctions, and four unrelated suppliers of computers and other products accounted for up to 90% of the Company's supply base at various times. For 1999, the Company anticipates that, at any given time, four unrelated suppliers may each be supplying up to 20-30% of the Company's product offerings. See "Business--Products." Reliance on Other Third Parties In addition to its merchandise vendors, the Company's operations depend on a number of other third parties. The Company has limited control over these third parties and no long-term relationships with any of them. The Company does not own a gateway onto the Internet. Instead, the Company relies on Internet service providers to connect the Company's Web site to the Internet. From time to time, the Company has experienced temporary interruptions in its Web site connection and in its telecommunications access. Continuous or prolonged interruptions in the Company's Web site connection or in its telecommunications access would have a material adverse effect on the Company. There can be no assurance that the Company will be able to maintain satisfactory, or develop new, relationships with such third parties on acceptable commercial terms, or at all. 20 Continuance of Existing Strategic and Marketing Alliances The Company's business strategy is based, to a substantial degree, on seeking out and forming strategic and marketing alliances with Internet service and content providers, Internet aggregators and search engines and other marketing partners which can drive traffic to the Company's online auction sites. Many of the Company's strategic and marketing alliances with its marketing and distribution partners are of limited duration or may be terminated at any time. The Rogers Media Agreement may be terminated by Rogers Media at any time upon 90 days' advance written notice, subject to certain conditions. The Company's agreement with AOL expires on March 31, 2000. Management estimates that in 1997 and 1998 the Company earned a substantial portion of its auction revenues from customers who accessed the Company's auction site through AOL. While the Company has broadened its marketing channels, it expects that a substantial number of bidders will continue to access the Company's Web site through AOL. There can be no assurance that the Rogers Media, the AOL or other marketing and advertising arrangements will not be terminated prior to their expiration, or that upon expiration will be renewed on favorable terms or at all. The discontinuance of these arrangements, and in particuler, the AOL agreement, would have a material adverse effect on the Company's results of operations and financial condition if the Company were unable to procure suitable substitute marketing arrangements. To date, most of the strategic and marketing alliances entered into by the Company in the United States have not been exclusive or restricted as to location or technological environment. The Company has therefore retained the necessary flexibility to broaden its distribution by increasing the number of its strategic and marketing alliances and advertising relationships. There can be no assurance that future alliances with such partners or alliances with any other partners will provide the Company with the same flexibility. See "--Developing Online Commerce Markets," "-- Reliance on Other Third Parties" and "Business--Business Strategy." Competition The online commerce market is new, rapidly evolving and intensely competitive, and the Company expects that online commerce competition in general, and online auction competition in particular, will further intensify in the future. Barriers to entry are minimal, and current and new competitors can launch new sites at a relatively low cost. In addition, the broader retail consumer product industry is intensely competitive. The Company's competitors, determined on the basis of type of merchandis and sales format offered by such entities to customers, include: (i) companies providing business-to-consumer online auctions services such as Onsale, First Auction, uBid, and Egghead; (ii) consumer-to-consumer online auction services such as eBay, Yahoo!, Auctions Powered by Onsale, Auction Universe, Excite and a number of small services, including those that serve specialty markets; (iii) companies providing online communities and services that specialize in or otherwise have expertise in developing online commerce and some of whom currently offer a variety of business-to-consumer trading services, including Amazon.com, AOL and Microsoft Corporation; (iv) companies that offer merchandise similar to that of the Company but through physical auctions and with which the Company competes for sources of supply; (v) catalog companies with substantial customer data bases, which may devote greater resources to Internet commerce in the future; and (vi) large retailers and other companie with strong brand recognition and experience in online commerce that are increasingly directing greater resources to Internet commerce and who seek to compete in the online auction market, including Cendant Corporation and QVC. In addition, because the barriers to the E-commerce industry are minimal, the Company may in the future face additional competitors who the Company cannot currently identify. The Company also anticipates that one or more of these companies and other companies engaged in the business-to-business sector will offer business-to-business online auctions as this sector continues to grow. Competitive pressures created by any one or more of these competitors could have a material adverse effect on the Company's business, results of operations, cash flow, financial condition and prospects. See "Business--Competition." The Company believes that the principal competitive factors in its online auction market are brand recognition, product selection, variety of value-added services, ease of use, site content, quality of service, reliability of delivery of products, quality of search tools, system reliability, technical expertise and price. Many of the Company's competitors have longer operating histories, larger customer bases, greater brand recognition and significantly greater financial, marketing and other resources than the Company. Certain of the Company's competitors may also offer auction services in Canada and/or Europe. In addition, other online trading services may be acquired by, receive investments from or enter into other commercial relationships with larger, well- established and well-financed companies as use of the Internet and other online services increases. Therefore, certain of the Company's competitors with other revenue sources may be able to devote greater resources to marketing and promotional campaigns, adopt more aggressive pricing policies and devote substantially more resources to Web site and systems development than the Company or may try to attract traffic by offering services for free. Further, as a strategic response to changes in the competitive environment, the Company may, from time to time, make certain pricing, service or marketing decisions or acquisitions that could have a material adverse effect 21 on its business, results of operations and financial condition. New technologies and the expansion of existing technologies may increase the competitive pressures on the Company by enabling the Company's competitors to offer a lower- cost service. Certain Web-based application that direct Internet traffic to certain Web sites may channel users to trading services that compete with the Company. The Company is aware that certain of its competitors have and may continue to adopt aggressive pricing or inventory availability policies, establish cooperative relationships among themselves or directly with vendors to obtain exclusive or semi-exclusive sources of merchandise, secure merchandise from vendors on more favorable terms than the Company, and respond more quickly to changes i customer preferences or devote greater resources to the development, promotion and sale of their merchandise than can the Company. Accordingly, the Company believes that new competitors or alliances among competitors and vendors may emerge and rapidly acquire market share. Increased competition may result in reduced operating margins, loss of market share and diminished brand recognition, any one of which would have a material adverse effect on the Company. See " Business--Competition." Uncertain Acceptance of the BID.COM Brand The Company believes that strong brand recognition is critical to achieving widespread acceptance of BID.COM, especially in light of the intensely competitive nature of the online business-to-consumer auction market. The Company's ability to promote and position its brand will depend largely on the success of the Company's marketing efforts and the Company's ability to offer a broad range of products and provide high quality, easy-to-use, secure auction service. If vendors do not perceive BID.COM as an effective marketing and sales channel for their merchandise, or if customers do not perceive BID.COM as offering an entertaining, secure and user-friendly platform to purchase merchandise, the Company will be unsuccessful in promoting and maintaining its brand. Furthermore, to attract and retain customers and to promote and maintain the BID.COM brand in response to competitive pressures, the Company must increase its marketing and advertising budgets and otherwise increase substantially its financial commitment to creating and maintaining brand loyalty among vendors and consumers. There can be no assurance that the Company's brand promotion efforts will result in increased revenues, or that resulting increased revenues would offset the expenses incurred by the Company in promoting its brand. If the Company is unable to promote or maintain its brand, the Company's business, financial condition, results of operations, cash flow and prospects would be materially and adversely affected. See "Business--Business Strategy--Expanding the Company's Customer Base Through Diverse Marketing Strategy" and "Business--Marketing." Risks Associated With Evolving Business Model The Company's business model continues to evolve. The Company seeks to develop and promote new or complimentary opportunities, services, products or transaction formats and expand the breadth and depth of services. These include the use of the Company's Web site as an advertising medium for the products and services of other companies, licensing its technology, initiating under a different brand name its business-to-business auctions, entering into strategic relationships' to co-brand auctions in the business-to-business category and to develop and operate interactive auctions in other electronic media, expanding operations to Europe and elsewhere, and acquiring businesses, technologies, services or products, or funding investments or other relationships that the Company believes are strategic. There can be no assurance that the Company will be able to expand its operations in a cost-effective or timely manner or that any such efforts will maintain or increase overall market acceptance. Furthermore, any new business or service launched b the Company that is not favorably received by customers could damage the Company's reputation and diminish the value of its brand name. Expansion of the Company's operations in this manner would also require significant additional expenses and development, operations and other resources and would strain the Company's management, financial and operational resources. The lack of market acceptance of such services or the Company's inability to generate satisfactory revenues from such expanded services to offset their cost could have a material adverse effect on the Company's business, results of operations, cash flow, financial condition and prospects. Risks Associated With Acquisitions If appropriate opportunities present themselves, the Company intends to acquire businesses, technologies, services or products that the Company believes are strategic or enter into other strategic relationships. The Company currently has no understandings, commitments or agreements with respect to any material acquisition or strategic relationship and no material acquisition or strategic relationship is currently being pursued. There can be 22 no assurance that the Company will be able to identify negotiate or finance future acquisitions or strategic relationships successfully, or to integrate such acquisitions or strategic relationship with its current business. The process of integrating an acquired business, technology, service or product into the Company may result in unforeseen operating difficulties and expenditures and may absorb significant management attention that would otherwise be available for ongoing development of the Company's business. Moreover, there can be no assurance that the anticipated benefits of any acquisition or strategic relationship will be realized. Acquisitions or strategic relationships could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities and/or amortization expenses related to goodwill and other intangible assets, which could materially adversely affect the Company's business, results of operations, cash flow, financial condition and prospects. Any such future acquisitions of other businesses, technologies, services or products or strategic relationship might require the Company to obtain additional equity or debt financing, which might not be available on terms favorable to the Company, or at all, and such financing, if available, might be dilutive. See "--Need For Additional Financing." Dependence On The Web Infrastructure The success of the BID.COM branded auction service and the private brand auction service operated by the Company for certain of its customers will depend to a significant degree upon the development and maintenance of the Web infrastructure and reliable Web access and services. The Web has experienced, and is expected to continue to experience, significant growth in the numbers of users and amount of traffic. There can be no assurance that the Web infrastructure will continue to be able to support the demands placed on it by this continued growth or that such growth will not adversely affect the performance or reliability of the Web. Furthermore, from time to time, the Web has experienced a variety of outages and other delays as a result of damage to portions of its infrastructure, and could face such outages and delays in the future, including outages and delays resulting from the inability of certain computers or software to distinguish dates in the 21st century from dates in the 20th century. See "--Risks Associated with the Year 2000." These outages and delays could adversely affect the level of Web usage and the level of traffic and the processing of on-line auctions. In addition, the Web could lose its viability due to delays in the development or adoption of new standards and protocols to handle increased levels of activity. If the necessary infrastructure, standards, protocols or complementary products, services or facilities are not developed, or if the Web does not become a viable commercial marketplace, the Company's business, results of operations, cash flow and financial condition will be materially and adversely affected. Even if the infrastructure, standards, protocols and complementary products, services or facilities are developed and the Web becomes a viable commercial marketplace in the long term, the Company might be required to incur substantial expenditures in order to adapt its service to changing Web technologies, which could have a material adverse effect on the Company's business, financial condition, results of operations, cash flow and prospects. Internet Commerce Security A significant barrier to E-commerce and Internet communications is the secure transmission of confidential information over public networks. Currently, all bidders are required to authorize the Company to bill their credit card accounts directly for the purchase price and shipping costs of goods purchased at the Company's online auction. The Company relies on encryption and authentication technology licensed from third parties to provide the security and authentication necessary to effect the secure transmission of confidential information, including customer credit card numbers. There can be no assurance that the advances in computer capabilities, new discoveries in the field of cryptography or other events or developments will not result in a compromise or breach of the technology used by the Company to protect customer transaction data. Furthermore, a party who is able to circumvent the Company's security measures could misappropriate proprietary information or cause interruptions in the Company's operations. The Company may be required to expend significant capital and other resources to protect against such security breaches or to alleviate problems caused by such breaches. Concerns over the security of Internet transactions and the privacy of users may also inhibit the growth of the Internet generally, and the World Wide Web in particular, as a means of conducting commercial transactions. To the extent that activities of the Company involve the storage and transmission of proprietar information, such as credit card numbers, security breaches could damage the Company's reputation and expose the Company to a risk of loss or litigation and possible liability. The Company's insurance policies do not reimburse the Company for losses caused by security breaches. There can be no assurance that the Company's security measures will prevent security breaches and protect the Company from any resulting risk of loss. See " Business--Technology Platform." 23 Risk of System Failure; Single Site The Company's operations are largely dependent upon its communications hardware and computer hardware, substantially all of which are located at a leased facility in Mississauga, Ontario in Canada. The Company's systems are vulnerable to damage from earthquake, fire, floods, power loss, telecommunications failure, break-ins and similar events. While the Company has developed preliminary plans for redundant systems and a formal disaster recovery plan, no such system or plans are currently in effect. A substantial interruption in these systems would have a material adverse effect on the Company. The Company's coverage limits on its property and business interruption insurance may not be adequate to compensate the Company for all losses that may be incurred. Despite the implementation of network security measures by the Company, its servers are also vulnerable to computer viruses, physical or electronic break-ins, attempts by third parties to deliberately exceed the capacity of the Company's systems and similar disruptive problems. The Company's insurance policies carry low coverage limits which may not be adequate to reimburse the Company for losses caused by erroneous transmission of computer viruses or other defects. Computer viruses, break-ins or other problems caused by third parties could lead to interruptions, delays, loss of data or cessation in service to users of the Company's services. The occurrence of any of these events could materially and adversely affect the Company's business, financial condition, results of operations, cash flow and prospects. Risk of Capacity Constraints The Company seeks to generate a high volume of traffic and transactions on the BID.COM auction. Accordingly, the satisfactory performance, reliability and availability of the Company's Web site, processing systems and network infrastructure are critical to the Company's reputation and its ability to attract and retain large numbers of users who bid for items on its service while maintaining adequate customer service levels. Any system interruptions that result in the unavailability of the Company's service or reduced customer activity would reduce the volume of transactions completed. Interruptions of service may also diminish the attractiveness of the Company and its services. Any substantial increase in the volume of traffic on the Company's Web site will require the Company to expand its technology, transaction processing systems and network infrastructure. There can be no assurance that the Company will be able to accurately project the rate or timing of increases, if any, in the us of its services or timely expand its systems and infrastructure in a timely manner to accommodate such increases. Any failure to expand its systems could have a material adverse effect on the Company's business, results of operations, cash flow, financial condition and prospects. Rapid Technological Change The Internet and E-commerce industries are characterized by rapid technological change, changes in user and customer requirements, frequent new service or product introductions embodying new technologies and the emergence of new industry standards and practices, any or all of which could render the Company's existing Web site and proprietary technology obsolete. The Company's performance will depend, in part, on its ability to license leading technologies, develop new proprietary technology that address the increasingly sophisticated and varied needs of its existing and prospective customers, respond to technological advances and emerging industry standards and practices on a timely and cost-effective basis and continually improve the performance, features and reliability of its services in response to evolving market demands. In addition, the widespread adoption of new Internet, networking or telecommunications technologies or other technological changes could require substantial expenditures b the Company to modify or adapt its services or infrastructure. There can be no assurance that the Company will be successful in using new technologies effectively or adapting its Web site and proprietary technology and services to customer requirements or emerging industry standards. See "Business--Technology Platform" and "Business--Research and Development." Risks Associated With the Year 2000 The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. As a result, date-sensitive software may recognize a date using "00" as the year 1900 rather than the Year 2000. This could result in system failures or financial miscalculations causing disruptions of operations, including, among others, a temporary inability to process transactions, send invoices or engage in similar normal business activities. 24 The Company does not believe that it has material exposure to Year 2000 complications with respect to its own information systems since its existing systems correctly define the Year 2000. The Company is conducting an analysis to determine the extent to which its major suppliers', service providers' and marketing and advertising partners' systems (insofar as they relate to the Company's business) are subject to the Year 2000 issue. However, the Company is currently unable to predict the extent to which the Year 2000 issue will affect its suppliers, service providers and marketing or advertising partners, or the extent to which it would be vulnerable to such parties' failure to remedy any Year 2000 issues on a timely basis. The failure of a major supplier, service provider or marketing or advertising partner subject to the Year 2000 issue to convert its systems on a timely basis, or the conversion of these systems that is incompatible with the Company's systems, could have a material adverse effect on the Company's business, results of operations, cash flow, financial condition and prospects. The Company has not yet devised a contingency plan covering the possible failure of any of its primary suppliers, service providers or marketing or advertising partners to resolve its Year 2000 problems in a timely manner. If necessary, such contingency plans could require the Company to incur significant expenses. In addition, most of the purchases fro the Company's auctions are paid for using credit cards. If the bank systems used to process credit card transactions for a significant portion of transactions on BID.COM's auction site are not Year 2000 compliant, the Company's operations may be materially and adversely affected to the extent customers are unable to use their credit cards to make purchases. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Dependence on Key Personnel; Need for Additional Personnel The Company's success is substantially dependent on the ability and experience of its senior management and other key personnel. The Company does not have long term employment agreements with any of its key personnel and maintains no "key person" life insurance policies. Moreover, to accommodate its current size and manage its anticipated growth, the Company must maintain and expand its employee base. Competition for personnel, particularly persons having software development and other technica expertise, is intense, and there can be no assurance that the Company will retain existing personnel or hire additional, qualified personnel. The inability of the Company to retain and attract the necessary personnel or the loss of services of any of its key personnel could have a material adverse effect on the Company. See "Business--Employees" and "Management." Management of Growth The Company has recently experienced, and may continue to experience, growth in its operations, financial systems and the number of its employees. Such growth has and will continue to place significant demands on the Company's management, administrative, operating and financial resources. In order to manage its current operations and any future growth effectively, the Company will need to continue to implement and improve its operational, financial and management information systems and to hire train, motivate, manage and retain its employees. There can be no assurance that the Company will be able to manage such growth effectively, that its management, personnel or systems will be adequate to support the Company's operations, or that the Company will be able to achieve levels of revenue commensurate with the increased levels of operating expenses associated with such growth. Protection of Intellectual Property The Company's performance and ability to compete are dependent to a significant degree on its proprietary technology. The Company relies on a combination of patent, copyright, trademark and trade secret laws as well as confidentiality agreements and technical measures, to establish and protect its proprietary rights. In March 1999, the Company received a patent from the PTO covering the process whereby the Company conducts declining price, or Dutch, auctions over electronic distribution channels. The Company has a patent application pending in Canada covering the same technology. There can be no assurance that the patent under application in Canada will be allowed or issued in whole or in part. In addition, the Company cannot guarantee that any patents issued to it will afford meaningful protection for its technology. Competitors may develop similar technologies which do not conflict with the Company's patents, or they could challenge the Company's patents. The Company is not aware of any challenges to its patent rights or any infringement by its technology on the proprietary rights of third parties, but there can be no assurance that current or future technologies developed by the Company do not or, in the future, will not, infringe on the rights of others or that the Company's patents will not be challenged. The cost of any litigation against the Company regarding its patent rights could be significant and any successful litigation could materially and adversely affect the Company's business. The Company's proprietary software is protected by common law copyright laws, as opposed to registration under copyright statutes. Common law protection may be narrower than that which the Company could obtain under registered copyrights. As a result, the Company may experience difficulty in enforcing its copyrights against certain third party infringements. The source code for the Company's proprietary software is protected as a trade secret. As part of its confidentiality-protection procedures, the Company generally enters into agreements with its employees and consultants and limits access to, and distribution of, its software, documentation and other proprietary information. There can be no assurance that the steps taken by the Company will prevent misappropriation of its technology or that agreements entered into for that purpose will be 25 enforceable. The laws of other countries may afford the Company little or no protection of its intellectual property. The Company also relies on a variety of technology that it licenses from third parties, including its database and Internet server software, which is used in the Company's Web site to perform key functions. There can be no assurance that these third party technology licenses will continue to be available to the Company on commercially reasonable terms, if at all. The loss of or inability of the Company to maintain or obtain upgrades to any of these technology licenses could result in delays in completing its proprietary software enhancements and new development until equivalent technology could be identified, licensed or developed and integrated. Any such delays would materially and adversely affect the Company's business, financial condition, results of operations, cash flow and prospects. See "Business--Intellectual Property." Government Regulation and Legal Uncertainties The Company is subject, both directly and indirectly, to various laws and regulations relating to its business, although there are presently few laws or regulations directly applicable to Internet access. However, due to the increasing popularity and use of the Internet, it is possible that laws and regulations will be adopted in the near future. Such laws and regulations may cover issues such as user privacy, pricing, content, copyrights, distribution and characteristics and quality of product and services. Furthermore, the growth and development of the market for online commerce may prompt calls for more stringent consumer protection laws that may impose additional burdens on those companies conducting business online. The enactment of any additional laws or regulations may impede the growth of commerce on the Internet which could, in turn, decrease the demand for the Company's products and services and increase the Company's cost of doing business or otherwise have a material adverse effect on the Company. The applicability of existing laws to the Internet in various jurisdictions governing issues such as property ownership, sales and other taxes, contests and sweepstakes, libel, personal privacy, rights of publicity, language requirements and content restrictions is uncertain and could expose the Company to substantial liability. The application of existing and new laws and regulations to the Internet could have a material adverse effect on the Company. An allegation that the Company was violating U.S, Canadian, or international civil or criminal law could have a material adverse effect on the Company even if the Company successfully defended such claims. In addition, several telecommunications carriers are seeking to have telecommunications over the Internet regulated by the Federal Communications Commission (the "FCC") in the same manner as other telecommunications services. Also, because the growing popularity and use of the Internet has burdened the existing telecommunications infrastructure and many areas with high Internet use have begun to experience interruptions in telephone service, certain local telephone carriers have petitioned the FCC to regulate Internet service providers and online service providers in a manner similar to long distance telephone carriers and to impose access fees on such providers. If any of these petitions are granted, or the relief sought therein is otherwise granted, the costs of communicating on the Internet could increase substantially, potentially slowing the growth in use of the Internet. Any such new legislation or regulation or application or interpretation of existing laws could have a material adverse effect on the Company's business, financial condition and results of operations. U.S. and foreign laws regulate certain uses of customer information and development and sale of mailing lists. The Company believes that it is in material compliance with such laws, but new restrictions may arise in this area that could materially adversely affect the Company. Potential Liability for Sales and Other Taxes. With the exception of sales to bidders in Florida, California and Georgia, the states in which the Company has, or in the past had, a physical presence, the Company does not collect sales or other similar taxes in respect of goods sold through BID.COM hosted auctions. However, one or more states may seek to impose sales tax collection obligations on out-of-state companies such as the Company which engage in or facilitate online commerce, and a number of proposals have been made at the state and local level that would impose additional taxes on the sale of goods and services through the Internet. Such proposals, if adopted, could substantially impair the growth of electronic commerce, and could adversely affect the Company's opportunity to derive financial benefit from such activities. Moreover, a successful assertion by one or more states, Canada or any other foreign country that the Company 26 should collect sales or other taxes on the exchange of merchandise on its system could have a material adverse effect on the Company's business, results of operations, cash flow and financial condition. In the United States, the Internet Tax Freedom Act, limiting the ability of the states to impose certain taxes on Internet-based transactions, was enacted in October, 1998. Pursuant to such legislation, a general three-year moratorium expiring in October 2001 was implemented banning the imposition of state and local taxes on Internet access (unless such taxes were generally imposed and actually enforced prior to October 1, 1998) and discriminatory or multiple taxes on E-commerce. Additionally, the legislation provides for the establishment of an Advisory Committee on Electronic Commerce whose responsibility is to conduct a thorough study of federal, state and local, and international taxation and tariff treatment of transactions using the Internet and Internet access and other comparable intrastate, interstate or international sales activities and present legislative recommendations to the U.S. Congress. It is possible that the moratorium could not be renewed when it terminates in October 2001 Failure to renew the moratorium could allow state and local government to impose taxes on Internet based sales, and such taxes could have a material adverse effect on the Company's business, financial condition, results of operation, cash flow and prospects. Risks Associated with Global Expansion The Company currently operates in the United States and Canada. However, it intends to open an office in Ireland in June 1999, and may expand to other countries thereafter. Expansion will require management attention and resources. The Company has limited experience in localizing its service, and the Company believes that many of its competitors are also undertaking expansion into foreign markets. There can be no assurance that the Company will be successful in expanding into global markets. In addition to the uncertainty regarding the Company's ability to generate revenues from foreign operations and establish a global presence, there are certain risks inherent in doing business on a global level, including, among others, regulatory requirements, legal uncertainty regarding liability, tariffs, and other trade barriers, difficulties in staffing and managing foreign operations, difficulties in protecting intellectual property rights, longer payment cycles, different accounting practices, political instability, the impact of recession and other economic conditions in local markets, seasonal reductions in business activity during the summer months in Europe and elsewhere, inability to predict foreign consumer demand and potentially adverse tax consequences, any of which could adversely affect the success of the Company's global operations. If the Company expands its foreign operations and has additional portions of its revenues denominated in foreign currencies, the Company could become subject to increased risks relating to foreign currency exchange rate fluctuations. In addition, the export of certain software from the United States and Canada is subject to export restrictions as a result of the encryption technology in such software and may give rise to liability to the extent the Company violates such restrictions. There can be no assurance that one for more of the factors discussed above will not have a material adverse effect on the Company's future global operations and, consequently, on the Company's business, results of operations, cash flow, financial condition and prospects. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." Exchange Rate Fluctuations The Company transacts substantially all of its purchases and sales in U.S. dollars while the majority of the Company's operating expenses are in Canadian dollars. The Company does not have any hedging programs in place to manage the potential exposure to fluctuations in the U.S./Canadian dollar exchange rate. Fluctuations in the U.S./Canadian dollar exchange rate could have a material adverse effect on the Company's earnings and cash flows. See "Exchange Rates" at the forepart of this Registration Statement and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Foreign Currency Fluctuations." Forward-Looking Statements In addition to historic information, this Registration Statement includes forward-looking statements within the meaning of the United States Private Securities Litigation Reform Act of 1995 that involve risks and uncertainties. Such statements are indicated by words or phrases such as "anticipate," "estimate," "project," "plans," "intends," "management believes," "the Company believes" and similar words or phrases. Such statements are based on current expectations and are subject to risks, uncertainties and assumptions. Certain of these risks are described in the section of this Registration Statement entitled "Risk Factors." Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its business and operations, actual results may differ materially from expectations that may be expressed or implied from any forward-looking statements contained in this Registration Statement. Factors that could cause actual results to differ from expectations include, and are not limited to, the failure of the Internet and/or online auctions to become widely accepted as a viable medium of commerce, inability of the Company directly and/or through its marketing and advertising alliances to attract a sufficient number of customers to the Company's site, the failure or delay of market acceptance of the Company's auction services, the Company's future need for additional capital and the uncertainty of the availability of funding, the ability of the Company to compete with other E-tailing and online auction businesses, failure to timely license or develop new technologies, delays in the issuance of, or the failure to obtain, patents for certain proprietary technologies, problems with important vendors and business partners on whom the Company relies, risk of system failure or interruption, implementation and enforcement of government regulations, the failure of the Company's suppliers and strategic partners to resolve any Year 2000 issues and other risks or uncertainties described in this Registration Statement. Possible Issuance of Preference Shares The Company's Preference Shares may be issued by the Board of Directors without shareholder approval on such terms and conditions, and having such rights, privileges and preferences, as the Board of Directors may determine. The rights of the holders of Common Shares will be subject to, and may be adversely affected by, the rights of the holders of any series of Preference Shares that may be issued in the future. The issuance of a series of Preference Shares could have the effect of delaying, deterring or preventing a change in control of the Company. See "Description of Securities To Be Registered." 27 Possible Volatility of Stock Price Following the effective date of this Registration Statement, the Company's Common Shares will be quoted on The Nasdaq National Market under the symbol BIDS. The trading price of the Common Shares on The Nasdaq National Market is likely to be highly volatile and could be subject to wide fluctuations in response to factors such as actual or anticipated variations in the Company's quarterly operating results, announcements of technological innovations or new services by the Company or its competitors, changes in financial estimates by securities analysts, conditions or trends in the Internet and online commerce industries, changes in the market valuations of other Internet or online service companies, announcements by the Company or its competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments, additions or departures of key personnel, sales of Common Shares or othe securities of the Company in the open market and other events or factors, many of which are beyond the Company's control. Further, the stock markets in general, and The Nasdaq Market and the market for Internet-related and technology companies in particular, have experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of such companies. The trading prices of many technology companies' stocks are at or near historical highs and reflect valuations substantially above historical levels. There can be no assurance that these trading prices and valuations will be sustained. These broad market and industry factors may materially and adversely affect the market price of the Common Shares, regardless of the Company's operating performance. Market fluctuations, as well as general political and economic conditions such as recession or interest rate or currency rate fluctuations or economic turmoil in Southeast Asia, South America or elsewhere in the world, may have a negative effect on market prices of stocks generally, which could adversely affect the market price of the Common Shares even though the Company may have no customers or operations in those regions. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted against the subject company. Such litigation, if instituted against the Company, could result in substantial costs and a diversion of management's attention and resources, which would have a material adverse effect on the Company's business, results of operations, cash flow, financial condition and prospects. No Prior Market for Common Shares in United States; Risk of Low Priced Stock Prior to the effective date of this Registration Statement, there has been no public market for the Company's Common Shares in the United States, and there can be no assurance that an active public market will develop in the United States or be sustained after the effective date of this Registration Statement or that investors will be able to sell the Common Shares should they desire to do so. In addition, historically the Company's Common Shares have frequently traded on the TSE at prices below $5.00. Should a similar trading range continue on Nasdaq after the effective date of this Registration Statement, the Common Shares could become characterized as "penny stocks" which could severely affect market liquidity. The Securities Enforcement and Penny Stock Reform Act of 1990 requires additional disclosure relating to the market for penny stocks in connection with trades in any stock defined as a penny stock. Securities and Exchange Commission regulations generally define a penny stock to be an equity security that has a market price of less than $5.00 per share, subject to certain exceptions. Such exceptions include any equity security listed on Nasdaq or a national securities exchange and any equity security issued by an issuer that has (i) net tangible assets of at least $2,000,000, if such issuer has been in continuous operation for three years, (ii) net tangible assets of at least $5,000,000, if such issuer has been in continuous operation for less than three years, or (iii) average annual revenue of at least $6,000,000, if such issuer has been in continuous operation for less than three years. Unless an exception is available, the regulations require the delivery, prior to any transaction involving a penny stock, of a disclosure schedule explaining the penny stock market and the risks associated therewith. The penny stock regulations would adversely affect the market liquidity of the Common Shares by limiting the ability of broker/dealers to trade the stock and the ability of purchasers of the Common Stock to sell in the secondary market. Shares Eligible For Future Sale This Registration Statement registers the Company's class of Common Shares pursuant to the Exchange Act. It does not register the sale of any Common Shares by the Company or any shareholder pursuant to the Securities Act of 1933, as amended (the "Securities Act"). The Common Shares may be sold in the United States as set forth below. As of April 14, 1999, there are 49,594,468 Common Shares outstanding. Of these shares, approximately 46,437,622 Common shares will be freely tradable immediately upon the effective date of this Registration Statement, excluding those shares held by "affiliates," as defined in rule 144 ("Rule 144") under the Securities Act. Shares held by affiliates and the remaining outstanding Common Shares may be sold from time to time in accordance with Rule 144 (such shares being referred to herein as "Restricted Shares") or, if applicable, may be sold in accordance with Rule 701 (as defined below). In addition, as of April 14, 1999, there were outstanding options and warrants to purchase an aggregate of 1,396,896 Common Shares. Sales of substantial amounts of the Company's Common Shares (including shares issued upon the exercise of outstanding options and warrants) in the public market could have a materially dilutive effect on the prevailing market price of the Common Shares and the ability of the Company to raise equity capital in the future. In general, under Rule 144 as currently in effect, beginning 90 days after the date of this Registration Statement, a person (or persons whose shares are required to be aggregated) who has beneficially owned Restricted Shares for at least one year (including the holding period of any prior owner except an affiliate) would be entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the number of Common Shares then outstanding (which will equal approximately 481,250 shares immediately upon the effective date) or (ii) the average weekly trading volume of the Common Shares during the four calendar weeks preceding the filing of a Form 144 with respect to such sale. Sales under Rule 144 are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about the Company. Under Rule 144(k), a person who is not deemed to have been an affiliate of the Company at any time during the three months preceding a sale, and who has beneficially owned the shares proposed to be sold for at least two years (including the holding period of any prior owner except an affiliate), is entitled to sell such shares without complying with the manner of sale, public information, volume limitation or notice provisions of Rule 144. Rule 701 under the Securities Act ("Rule 701") permits resales of shares in reliance upon Rule 144 but without compliance with certain restrictions of Rule 144, including the holding period requirement. Any employee, officer or director of or consultant to the Company who, prior to the effective date of this Registration Statement, purchased his or her shares or received options to purchase Common Shares, pursuant to a written compensatory plan or contract may be entitled to rely on the resale provisions of Rule 701 with respect to options or shares issued in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell such shares in reliance on Rule 144 without having to comply with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this Registration Statement before selling such shares. In addition, Rule 701 shares and shares issued upon exercise of options granted after the effective date of this Registration Statement pursuant to written compensatory plans or contracts may be sold pursuant to a short form registration statement on Form S-8 filed by the Company. This type of registration statement is automatically effective upon filing with the Securities and Exchange Commission. Certain restrictions under Rule 144 may apply to sales of shares registered on an S-8 registration statement. The Company has not entered into any commitments to file any registration statements on Form S-8, but may from time to time register shares under such registration statements as long as it is eligible to use this form under applicable rules. Enforceability of Civil Liabilities The Company is incorporated under the laws of the Province of Ontario, Canada, certain of the Company's directors and officers are residents of Canada and a substantial part of the assets of the Company and all or a substantial portion of the assets of such persons are located outside the United States. 28 As a result, it may be difficult for holders of Common Shares to effect service of legal process within the United States upon those directors and officers who are not residents of the United States or to realize in the United States upon judgments of courts of the United States predicated upon civil liability under the Securities Act of 1933, as amended, or the Exchange Act or the rules and regulations promulgated under such statutes. The Company believes, based on advice of its Canadian counsel, that a judgment of a United States court predicated solely upon civil liability under such U.S. federal securities laws would probably be enforceable in Canada if the United States court in which the judgment was obtained had a basis for jurisdiction in the matter that was recognized by a Canadian court for such purposes. However, the Company believes, based on such counsel's advice, that there is substantial doubt whether an action could be brought successfully in Canada in the first instance on the basis of liability predicated solely upon such U.S. federal securities laws. No Dividends The Company has paid no cash dividends on any of its shares of capital stock and has no plans to pay dividends in the foreseeable future. The Company currently intends to retain all other earnings, if any, for working capital and general corporate purposes. ITEM 2 - DESCRIPTION OF PROPERTY The Company's principal administrative, engineering, merchandising and marketing facilities total approximately 10,165 square feet and are located on one floor of an office building in Mississauga, Ontario, Canada, under a lease that commenced on November 1, 1998 for a three year term. The Company also leases premises in Tampa, Florida where four employees are located. The Company believes that it has adequate space for its current needs. As the Company expands, it expects that suitable additional space will be available on commercially reasonable terms. The Company does not own any real estate nor does it currently own or lease warehouse space. The Company relies, instead, on direct shipments from vendors or contract warehouses for its fulfillment and logistics requirements. In June 1999, the Company plans to open an office in Dublin, Ireland. The Company is in the process of locating suitable premises. ITEM 3 - LEGAL PROCEEDINGS Neither the Company nor any of its subsidiaries, is a party to or the subject of any material legal proceedings nor are any such proceedings known by the Company to be contemplated against the Company or any of its subsidiaries. ITEM 4 - CONTROL OF REGISTRANT To the knowledge of the Company, no person beneficially owns, directly or indirectly, or exercises control or direction over more than 10% of the issued and outstanding Common Shares of the Company. The following table shows certain information as of April 14, 1999 with respect to the beneficial ownership of Common Shares by the Company's executive officers and directors as a group (12 persons). Amount of Shares Beneficially Owned Percent of Class ------------------------------------------------ All Directors and Executive Officers as a Group (12 persons) 3,511,850 (1)(2) 7.0% - ----------------- (1) Includes an aggregate of 940,000 Common Shares subject to options and warrants exercisable within 60 days from the effective date of this Registration Agreement held by certain directors and executive officers. (2) Does not include: (i) any Common Shares held by HDL Capital Corporation ("HDL"); Mr. Bulger is an officer and principal of HDL; (ii) 1.0 million Common Shares purchased by AOL; Mr. Singer is senior vice president of AOL Studios, a division of AOL; (iii) 1.5 million Common Shares and a warrant to purchase 100,000 Common Shares purchased by Rogers Media; Mr. Abramsky is an officer of Rogers Media; (iv) 25,000 Common Shares held by Terri Pamenter, David Pamenter's wife; (v) options granted to Paul Hart to purchase 50,000 Common Shares which options have not yet vested (vi) options granted to James I. Moskos to purchase 25,000 Common Shares which options have not yet vested; and (vii) options granted to Robert Joynt to purchase 5,000 Common Shares which options have not yet vested. See "Directors and Officers of Registrant" and "Interest of Management in Certain Transactions." BID.COM knows of no arrangements, the operation of which may at a subsequent date result in a change in control of the Company. 29 ITEM 5 - NATURE OF TRADING MARKET The Common Shares of the Company commenced trading on The Toronto Stock Exchange (the "TSE") on February 9, 1998. The Common Shares have been traded under the symbol "BII" since July 18, 1998, and prior to that traded on the TSE under the symbol "ILI." From June 6, 1996 to February 9, 1998, the Common Shares were quoted for trading on the Canadian Dealing Network ("CDN") under the symbol "ILII." Prior to the effective date of this Registration Statement, the Common Shares were not listed or quoted for trading on any securities markets within the United States. The Company's Common Shares will be quoted on The Nasdaq National Market under the symbol BIDS following the effectiveness of this Registration Statement. The following table sets forth the range of high and low sales prices (rounded to the nearest hundredth) as reported by CDN and the TSE during the calendar quarters set forth therein: 1997 High Low ---- ---- --- (Cdn $) (Cdn $) 1st Quarter 1.45 0.80 2nd Quarter 1.25 0.73 3rd Quarter 4.05 0.85 4th Quarter 5.00 2.25 1998 High Low ---- ---- --- (Cdn $) (Cdn $) 1st Quarter 3.90 1.95 2nd Quarter 3.80 1.12 3rd Quarter 2.08 0.65 4th Quarter 6.00 0.56 1999 High Low ---- ---- --- (Cdn$) (Cdn$) 1st Quarter (through 32.25 3.65 April 14, 1999) As of March 23, 1999, the Company had 1,095 shareholders of record holding 48,125,396 Common Shares, of which 64 shareholders holding 4,946,002 Common Shares had an address of record in the United States. Common Shares held by the principal depositary in the United States on such date amounted to 4,740,316 or 10.0% of the issued Common Shares of BID.COM, which shares are held for participants' accounts. 30 After the effective date of this Registration Statement, BID.COM will be subject to periodic reporting obligations under Sections 13 and 15(d) of the Exchange Act and the rules and regulations promulgated thereunder. Pursuant to such statues and regulations, the Company intends to file with the Securities and Exchange Commission annual reports on Form 20-F and periodic reports on Form 6-K. BID.COM is a foreign private issuer as defined under Rule 3b-4 of the Exchange Act, and, as such, will not be subject to the proxy rules promulgated under Section 14 of the Exchange Act or the insider short-swing profit reporting rules promulgated under Section 16 of the Exchange Act for as long as it maintains its foreign private issuer status. ITEM 6 - EXCHANGE CONTROLS AND OTHER LIMITATIONS AFFECTING SECURITY HOLDERS There is no law, government decree or regulation in Canada restricting the export or import of capital or affecting the remittance of dividends, interest or other payments to a non-resident holder of Common Shares, other than withholding tax requirements. See "Taxation-Canadian Federal Income Tax Considerations." There is no limitation imposed by Canadian law or by the articles or other charter documents of the Company on the right of a non-resident to hold or vote Common Shares or Preference Shares with voting rights (collectively, "Voting Shares"), other than as provided in the Investment Canada Act (the "Investment Act"), as amended by the World Trade Organization Agreement Implementation Act (the "WTOA Act"). The Investment Act generally prohibits implementation of a reviewable investment by an individual, government or agency thereof, corporation, partnership, trust or joint venture that is not a "Canadian," as defined in the Investment Act (a "non-Canadian"), unless, after review, the minister responsible for the Investment Act is satisfied that the investment is likely to be a net benefit to Canada. An investment in Voting Shares of the Company by a non-Canadian (other than a "WTO Investor," as defined below) would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the value of the assets of the Company were Cdn$5.0 million or more. An investment in Voting Shares of the Company by a WTO Investor would be reviewable under the Investment Act if it were an investment to acquire direct control of the Company, and the value of the assets of the Company equaled or exceeded Cdn$184.0 million. A non-Canadian, whether a WTO Investor or otherwise, would acquire control of the Company for purposes of the Investment Act if he or she acquired a majority of the Voting Shares of the Company. The acquisition of less than a majority, but at least one-third of the Voting Shares of the Company, would be presumed to be an acquisition of control of the Company, unless it could be established that the Company was not controlled in fact by the acquirer through the ownership of Voting Shares. In general, an individual is a WTO Investor if he or she is a "national" of a country (other than Canada) thaT is a member of the World Trade Organization ("WTO Member") or has a right of permanent residence in a WTO Member. A corporation or other entity will be a WTO investor if it is a "WTO investor-controlled entity" pursuant to detailed rules set out in the Investment Act. The United States is a WTO Member. Certain transactions involving Voting Shares of the Company would be exempt from the Investment Act, including: (a) an acquisition of Voting Shares of the Company if the acquisition were made in connection with the person's business as a trader or dealer in securities; (b) an acquisition of control of the Company in connection with the realization of a security interest granted for a loan or other financial assistance and not for any purpose related to the provisions of the Investment Act; and (c) an acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization, following which the ultimate direct or indirect control in fact of the Company, through the ownership of voting interests, remains unchanged. ITEM 7 - TAXATION Canadian Federal Income Tax Considerations The following summary describes material Canadian federal income tax consequences generally applicable to a holder of Common Shares who is not a resident of Canada, and who, for purposes of the Income Tax Act (Canada) (the "ITA"), (i) holds such shares as capital property and (ii) deals at arm's length with the Company. Generally, Common Shares will be considered capital property to a holder provided that such holder does not hold such securities in the course of carrying on a business anD has not acquired such securities in a transaction or transactions considered to be an adventure or concern in the nature of trade which includes a transaction or transactions of the same kind and carried on in the same manner as a transaction or transactions of an ordinary trade or dealer in property of the same kind. This summary is based upon the current provisions of the ITA and the regulations thereunder and on an understanding of the published administrative practices of Revenue Canada. This summary does not take into account or anticipate any possible changes in law, or the administration thereof, whether by legislative, governmental or judicial action, except proposals for specific amendment thereto which have been publicly announced by the Canadian Minister of Finance prior to the date hereof. This summary does not address all aspects of Canadian federal income tax law that may be relevant to shareholders based upon their particular circumstances, and does not deal with provincial, territorial or foreign income tax consequences, which might differ significantly from the consequences under Canadian federal income tax law. Shareholders are advised to consult their tax advisors regarding the application of the Canadian federal income tax law to their particular circumstances, as well as any Canadian provincial, territorial or other tax consequences or any U.S. federal, state or local tax consequences or other foreign income tax consequences of the acquisition, ownership and disposition of Common Shares of the Company. Taxation of Dividends. A holder of a Common Share who is not resident in Canada for purposes of the ITA (a "Non-Resident") will be subject to Canadian withholding tax on dividends paid or credited, or deemed under the ITA to be paid or credited, to the holder of the Common Share. The rate of withholding tax under the ITA on dividends is 25% of the amount of the dividend. Such rate may be reduced under the provisions of an applicable international tax treaty to which Canada is a party. Pursuant to the tax treaty that Canada has entered into with the United States (the "Canada-U.S. Treaty"), the rate of Canadian withholding tax applicable in respect of dividends paid or credited by a Canadian corporation to a shareholder resident in the United States, is generally reduced to 15%, or 5% in the case of a corporate holder which owns 10% or more of the voting stock. A foreign tax credit for the tax withheld may be available to a holder resident in the United States against U.S. federal income taxes. (See "U.S. Federal Income Tax Considerations - Treatment of Dividend Distributions"). Moreover, pursuant to Article XXI of the Canada-U.S. Treaty, an exemption from Canadian withholding tax generally is available in respect of dividends received by certain trusts, companies and other organisations whose income is exempt from tax under the laws of the United States. Disposition of Common Shares. A Non-Resident holder of a Common Share will not be subject to tax under the ITA in respect of a capital gain realized on the disposition of a Common Share unless the Common Share constitutes or is deemed to constitute "taxable Canadian property" (as defined in the ITA). Shares of a corporation 31 that are listed on a prescribed stock exchange (which includes shares traded on a U.S. stock exchange and the National Association of Securities Dealers Automated Quotation System) are generally not considered to be taxable Canadian property. However, shares that are traded on a prescribed Canadian or prescribed foreign exchange (including those noted above in the United States) can be taxable Canadian property since the definition of taxable Canadian property also includes any Common Share held by a Non-Resident if, at any time during the five-year period immediately preceding its disposition, not less than 25% of the issued shares of any class or series of shares of the Company belong to the NonResident, to persons with whom the Non-Resident did not deal at arm's length or to any combination thereof. For the purposes of determining whether a property is a taxable Canadian property, a person holding an option to acquire Common Shares or other securities convertible into or exchangeable for Common Shares, or otherwise having an interest in Common Shares, will be considered to own the Common Shares that could be acquired upon the exercise of the option, the conversion or exchange rights or in which there is such interest. Taxable Canadian property also includes any Common Share held by a NonResident if the Non-Resident used the Common Share in carrying on a business (other than an insurance business) in Canada, or, if the Non-Resident is a Non-Resident insurer, any Common Share that is its "designated insurance property" for the year. A Common Share will also constitute taxable Canadian property of a former Canadian resident who made an election under section 128.1 of the ITA in respect of such shares on ceasing to be resident in Canada. The aforementioned rules can apply to any class of shares. A Non-Resident whose Common Shares constitute or are deemed to constitute taxable Canadian property will realize upon the disposition or deemed disposition of a Common Share, a capital gain (or a capital loss) to the extent that the proceeds of disposition are greater than (or less than) the aggregate of the adjusted cost base to the holder of a Common Share and any reasonable costs of disposition. Three-quarters of any capital gain realized by a holder (a taxable capital gain) will be included in computing the holder's income. Three-quarters of any capital loss realized by a holder may, subject to certain restrictions applicable to holders that are corporations, normally be deducted from the holder's taxable capital gains realized in the year of disposition, the three preceding taxation years or any subsequent taxation years, subject to detailed rules contained in the ITA. A purchase of Common Shares by the Company (other than a purchase of Common Shares by the Company on the open market in a manner in which shares would normally be purchased by any member of the public in the open market) will give rise to a deemed dividend under the ITA equal to the difference between the amount paid by the Company on the purchase and the paid-up capital of such shares determined in accordance with the ITA. The paid-up capital of such shares may be less than the cost of such shares to the holder. The amount of any such deemed dividend will reduce the proceeds of disposition of the Common Shares to the holders for the purpose of computing the amount of the capital gain or loss under the ITA of the holder. Any such dividend deemed to have been received by a Non-Resident holder will be subject to non-resident withholding tax as described above. The amount of any such deemed dividend will reduce the proceeds of disposition of the Common Share to the Non-Resident holder for the purpose of computing the amount of the Non-Resident holder's capital gain or loss under the ITA. Even if the Common Shares constitute or are deemed to constitute taxable Canadian property to a Non-Resident holder and their disposition would give rise to a capital gain, an exemption from tax under the ITA may be available under the terms of an applicable international tax treaty to which Canada is a party. A holder resident in the United States for purposes of the Canada-U.S. Treaty will generally be exempt from Canadian tax in respect of a gain on the disposition of Common Shares provided that the value of the Common Shares is not derived principally from real property situated in Canada. Article XIII paragraph 5 of the Canada-U.S. Treaty provides that the treaty provision which normally exempts U.S. residents from Canadian tax on the sale of property (paragraph 4) such as shares does not apply where the U.S. resident was a Canadian resident for 120 months during any period of 20 consecutive years preceding the time of the sale and the individual was resident in Canada at any time during the ten years immediately preceding the sale. If the exemption from such Canadian tax in respect of such gain is not available under the Canada-U.S. Treaty, a foreign tax credit may be available for U.S. federal income tax purposes. Non-Residents are advised to consult their tax advisers with regard to the availability of a treaty exemption. 32 U.S. Federal Income Tax Considerations The following summary describes material United States federal income tax consequences arising from the purchase, ownership and sale of Common Shares. This summary is based on the provisions of the Internal Revenue Code of 1986, as amended (the "Code"), final, temporary and proposed United States Treasury Regulations promulgated thereunder, and the administrative and judicial interpretations thereof, all as in effect as of the date of this Registration Statement. The consequences to any particular investor may differ from those described below by reason of that investor's particular circumstances. This summary does not address the considerations that may be applicable to particular classes of taxpayers, including financial institutions, broker-dealers, tax-exempt organizations, investors who own (directly, indirectly or through attribution) 10% or more of the Company's outstanding voting stock, persons who are not citizens or residents of the United States, or persons which are foreign corporations, foreign partnerships or foreign estates or trusts as to the United States. This summary is addressed only to a holder of Common Shares who is (i) a citizen or resident of the United States who owns less than 10% of the Company's outstanding voting stock, (ii) a corporation organized in the United States or under the laws of the United States or any state thereof, or (iii) an estate or trust, the income of which is includable in gross income for United States federal income tax purposes regardless of source (a "U.S. Holder"). Each shareholder should consult with his own tax advisor as to the particular tax consequences to him of the purchase, ownership and sale of Common Shares including the effects of applicable state, local, foreign or other tax laws and possible changes in the tax laws. Treatment of Dividend Distributions Subject to the discussion below under "Tax Status of the Company -- Passive Foreign Investment Company," a distribution by the Company to a U.S. Holder in respect of the Common Shares (including the amount of any Canadian taxes withheld thereon) will generally be treated for United States federal income tax purposes as a dividend to the extent of the Company's current and accumulated earnings and profits, as determined under United States federal income tax principles. To the extent, if any, that the amount of any such distribution exceeds the Company's current and accumulated earnings and profits, as so computed, it will first reduce the U.S. Holder's tax basis in the Common Shares owned by him, and to the extent it exceeds such tax basis, it will be treated as capital gain from the sale of Common Shares. While it is not anticipated that the Company will pay dividends in the foreseeable future (see "Risk Factors -- No Dividends"), the gross amount of any distribution from the Company received by a U.S. Holder which is treated as a dividend for United States federal income tax purposes (before reduction for any Canadian tax withheld at source) will be included in such U.S. Holder's gross income, will be subject to tax at the rates applicable to ordinary income and generally will not qualify for the dividends received deduction applicable in certain cases to United States corporations. For United States federal income tax purposes, the amount of any dividend paid in Canadian dollars by the Company to a U.S. Holder will equal the U.S. dollar value of the amount of the dividend paid in Canadian dollars, at the exchange rate in effect on the date the dividend is considered to be received by the U.S. Holder, regardless of whether the Canadian dollars are actually converted into United States dollars at that time. Canadian dollars received by a U.S. Holder will have a tax basis equal to the U.S. dollar value thereof determined at the exchange rate on the date of receipt. Currency exchange gain or loss, if any, recognized by a U.S. Holder on the conversion of Canadian dollars into U.S. dollars will generally be treated as U.S. source ordinary income or loss to such holder. U.S. Holders should consult their own tax advisors concerning the treatment of foreign currency gain or loss, if any, on any Canadian dollars received which are converted into dollars subsequent to receipt. A U.S. Holder generally will be entitled to deduct any Canadian taxes withheld from dividends in computing United States taxable income, or to credit such withheld taxes against the United States federal income tax imposed on such U.S. Holder's dividend income. No deduction for Canadian taxes may be claimed, however, by a noncorporate U.S. Holder that does not itemize deductions. The amount of foreign taxes for which a U.S. Holder may claim a credit in any year is subject to complex limitations and restrictions, which must be determined on an individual basis by each shareholder. Distributions with respect to Common Shares that are taxable as dividends will generally constitute foreign source income for purposes of the foreign tax credit limitation. The limitation on foreign taxes eligible for credit is calculated separately with respect to specific classes of income. For this purpose, dividends distributed by the Company with respect to the Common Shares will generally constitute "passive income." Sale or Exchange of a Common Share Subject to the discussion below under "Tax Status of the Company -- Passive Foreign Investment Company," the sale or exchange by a U.S. Holder of a Common Share will result in the recognition of gain or loss by the U.S. Holder in an amount equal to the difference between the amount realized and the U.S. Holder's basis in the Common Share sold. Such gain or loss will be capital gain or loss provided that the Common Share is a capital asset in the hands of the holder. The gain or loss realized by noncorporate U.S. Holder on the sale or exchange of a Common Share will be long-term capital gain or loss subject to tax at a maximum tax rate of 20% if the Common Share had been held for more than one year. If the Common Share had been held by such noncorporate U.S. Holder for not more than one year, such gain will be short-term capital gain subject to tax at a maximum rate of 39.6%. Finally, gain realized by a noncorporate U.S. Holder with respect to Common Shares acquired after December 31, 2000 and held for more than five years, shall be taxed at a maximum rate of 18%. Gain realized by a corporate U.S. Holder will be subject to tax at a maximum rate of 35%. U.S. Holders should consult their own tax advisors regarding treatment of any foreign currency gain or loss on any Canadian dollars received in respect of the sale, exchange or other disposition of Common Shares. See discussion under "Taxation -- Canadian Federal Income Tax Considerations -- Disposition of Common Shares" for a discussion of taxation by Canada of capital gains realized on sales of capital assets. Tax Status of the Company Personal Holding Companies. A non-U.S. corporation may be classified as a personal holding company (a "PHC") for United States federal income tax purposes if both of the following two tests are satisfied: (i) if at any time during the last half of the Company's taxable year, five or fewer individuals (without regard to their citizenship or residency) own or are deemed to own (under certain attribution rules) more than 50% of the stock of the corporation by value (the "PHC Ownership Test") and (ii) such non-U.S. corporation receives 60% or more of its U.S. related gross income, as specifically adjusted, from certain passive sources such as dividends and royalty payments (the "PHC Income Test"). Such a corporation is taxed (currently at a rate of which are effectively connected with the conduct of a U.S. trade or business) to the extent amounts at least equal to such income are not distributed to shareholders. The Company believes that it is not currently a PHC. However, no assurance can be given that either test will not be satisfied in the future. Foreign Personal Holding Companies. A non-U.S. corporation will be classified as a foreign personal holding company (an "FPHC") for United States federal income tax purposes if both of the two following tests are satisfied: (i) five or fewer individuals who are United States citizens or residents own or are deemed to own (under certain attribution rules) more than 50% of all classes of the corporation's stock measured by voting power or value and (ii) the corporation receives at least 60% (50% in later years) of its gross income (regardless of source), as specifically adjusted, from certain passive sources. If such a corporation is classified as a FPHC, a portion of its "undistributed foreign personal holding company income" (as defined for United States federal income tax purposes) would be imputed to all of its shareholders who are U.S. Holders on the last taxable day of the corporation's taxable year, or, if earlier, the last day on which it is classifiable as a FPHC. Such income would be taxable as a dividend, even if no cash dividend is actually paid. U.S. Holders who dispose of their shares prior to such date would not be subject to tax under these rules. The Company believes that it is not currently a FPHC. However, no assurance can be given that it will not qualify as a FPHC in the future. Passive Foreign Investment Company. The Company will be a passive foreign investment company ("PFIC") if 75% or more of its gross income (including the pro rata share of the gross income of any company (United States or foreign) in which the Company is considered to own 25% or more of the shares (determined by market value)) in a taxable year is passive income. Alternatively, the Company will be considered to be a PFIC if at least 50% of the value of the Company's assets (averaged over the year) (including the pro rata share of the value of the assets of any company in which the Company is considered to own 25% or more of the shares (determined by market value)) in a taxable year are held for the production of, or produce, passive income. Passive income includes interest, dividends, royalties, rents and annuities. The Company does not believe it was a PFIC during 1998. However, there can be no assurance that the Company will not be classified as a PFIC in 1999 or thereafter. If the Company is a PFIC for any taxable year, U.S. Holders would, upon certain distributions by the Company and upon disposition of the Common Shares at a gain, be liable to pay tax at the then prevailing income tax rates on ordinary income plus interest on the tax, as if the distribution or gain had been recognized ratably over the taxpayer's holding period for the Common Shares. If the Company is treated as a PFIC for any taxable year, holders should consider whether to elect to treat the Company as a "qualified electing fund" ("QEF Election") for United States federal income tax purposes. If a holder has a QEF Election in effect for all taxable years that such holder has held the Common Shares and the Company was a PFIC, distribution and gain will not be recognized ratably over the holder's holding period or subject to an interest charge, and gain on the sale of Common Shares will be characterized as capital gain. Instead, each such holder is required for each taxable year that the Company is a PFIC to include in income a pro rata share of the undistributed ordinary earnings of the Company as ordinary income and a pro rata share of the undistributed net capital gain of the Company as long-term capital gain. As an alternative to making a QEF Election, a U.S. Holder may elect to make a mark-to- market election (the "Mark-to-Market Election") with respect to the Common Shares owned by him. Under such election, a U.S. Holder includes in income each year an amount equal to fair market value of the Common Shares owned by him as of the close of the taxable year over the shareholder's adjusted basis in such shares. The U.S. Holder would be entitled to a deduction for the excess, if any, of such holder's adjusted basis in his Common Shares over the fair market value of such shares as of the close of the taxable year; provided however, that such deduction would be limited to the extent of any net mark-to-market gains with respect to the Common Shares included by the U.S. Holder for prior taxable years. The U.S. Holder's basis in his Common Shares is adjusted to reflect the amounts included or deducted pursuant to this election. Amounts included in income pursuant to the Mark-to-Market Election, as well as gain on the sale or exchange of the Common Shares, will be treated as ordinary income. Ordinary loss treatment applies to the deductible portion of any mark-to-market loss, as well as to any loss realized on the actual sale or exchange of the Common Shares to the extent that the amount of such loss does not exceed the net mark-to-market gains previously included with respect to such shares. The Mark-to-Market election applies to the tax year for which the election is made and all later tax years, unless the Common Shares cease to be marketable or the Internal Revenue Service ("IRS") consents to the revocation of the election. U.S. Holders are urged to consult with their own tax advisors about making a QEF Election or Mark-to-Market Election and other aspects of the PFIC rules. Back-Up Withholding and Information Reporting Under the Code, a U.S. Holder of Common Shares may be subject, under certain circumstances, to "backup withholding" at a 31% rate on cash payments in the United States of dividends on, and the proceeds of disposition of, a Common Share. Backup withholding will apply if a U.S. Holder (i) fails to furnish its social security or other taxpayer identification number ("TIN") within a reasonable time after the request therefor, (ii) furnishes an incorrect TIN, (iii) is notified by the IRS tha it has failed to properly report receipts of interest and dividends or (iv) under certain circumstances, fails to certify, under penalty of perjury, that it has furnished a correct TIN and has not been notified by the IRS that it is subject to backup withholding for failure to report interest and dividend payments. U.S. Holders should consult their tax advisors regarding their qualification for exemption from backup withholding and the procedure for obtaining such an exemption, if applicable. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against such holder's federal income tax liability and may entitle such holder to a refund, provided that the required information is furnished to the IRS. ITEM 8 - SELECTED FINANCIAL DATA The selected financial data set forth below should be read in conjunction with, and are qualified by reference to, the consolidated financial statements of the Company, and notes thereto, and Management's Discussion and Analysis of Financial Condition and Results of Operations included elsewhere in this Registration Statement. The selected financial data as at, and for the years ended, December 31, 1996, 1997 and 1998, and as at, and for the four months ended, December 31, 1995 are derived from the consolidated audited financial statements of the Company, including the notes thereto, included elsewhere in this Registration Statement. The Company has prepared its audited financial statements in accordance with accounting principles generally accepted in Canada ("Canadian GAAP"), which differ in certain respects from generally accepted accounting principles in the United States ("U.S. GAAP"). However, as applied to the Company, for all fiscal periods for which financial data are presented in this Registration Statement, Canadian GAAP and U.S. GAAP were substantially identical in all material respects, except as disclosed in Note 12 to the Company's consolidated financial statements and as described below. The Company's financial statements and the selected financial data set forth below are presented in Canadian dollars. Where applicable, financial data presented in this table for the year ended December 31, 1998 has been translated from Canadian dollars into U.S. dollars for convenience purposes at the representative exchange rates of Cdn$1.5375 to US$1.00, the noon buying rate in New York City on December 31, 1998 for cable transfers in Canadian dollars as certified for customs purposes by the Federal Reserve Bank of New York. Such translation should not be construed as a representation that the Canadian dollar amount represents, or has been converted into, U.S. dollars at this or any other rate. 33 Selected Financial Data Statement of Operations Data:
Year Ended Four Months December 31 Ended Dec 31 ------------------------------------------------------------------------- 1998 1998 1997 1996 1995(1) ---- ---- ---- ---- ------ (Cdn$) (U.S.$) (Cdn$) (Cdn$) (Cdn$) (in thousands except for per share data) Revenues.................. 20,089 13,066 2,671 51 - Expenses Direct expenses......... 19,361 12,593 2,916 12 - Advertising and promotion.......... 12,594 8,191 2,521 403 12 General & administrative 5,751 3,740 3,176 1,453 112 Software development and technology......... 889 578 541 194 10 Depreciation and amortization........... 201 131 122 100 1 Total expenses........ 38,796 25,233 9,396 2,162 135 Loss from operations...... (18,707) (12,167) (6,725) (2,111) (135) Canadian GAAP Net (loss)................ (18,707) (12,167) (6,725) (2,111) (135) Loss per common share..... (0.79) (0.51) (0.55) (0.21) (0.01) Weighted average number of common shares....... 23,819 23,819 12,297 9,598 3,375 U.S. GAAP Pro forma (loss).......... (19,941) (12,970) (8,134) (2,281) (135) Pro forma loss per common share............. (0.84) (0.55) (0.66) (0.23) (0.01) Weighted average number of common shares......... 23,819 23,819 12,297 9,598 3,375
Balance Sheet Data:(2)
As at December 31 ----------------------------------------------------------------------------------- 1998 1998 1997 1996 1995 ------- ------- ------ ------ ------ (Cdn$) (U.S.$) (Cdn$) (Cdn$) (Cdn$) (in thousands) Working capital....... 17,929 11,661 5,088 (559) 62 Total assets.......... 21,047 13,690 6,886 471 145 Total long-term debt.. - - - - - Shareholders equity... 18,622 12,112 5,563 (209) 116
- ------------------------ (1) The Company commenced its present business in September 1995. (2) The Company has not paid dividends since its formation. 34 ITEM 9 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview BID.COM is a sales and marketing company striving to become the pre-eminent online auction house and a leading E-tailer. The Company operates business-to-consumer online auctions at its BID.COM Web site and at other URLs. The Company recently completed the development of a business-to-business auction service and intends to operate business-to-business auctions in selected vertical industry sectors and to conduct liquidation auctions for bankruptcy trustees and other liquidators. The Company also seeks to license its proprietary online auction technology to support private brand online auctions and interactive auctions in a variety of other communication media. The business of the Company was commenced by Internet Liquidators Inc., an Ontario corporation, in September 1995. In May 1996, Internet Liquidators USA Inc., a wholly owned subsidiary of Internet Liquidator Inc. was incorporated under the laws of Florida, and Internet Liquidators International Inc., an Ontario corporation, acquired all of the shares of Internet Liquidators Inc. In January 1997, the Company was formed, as an Ontario corporation, by amalgamation of Internet Liquidators Inc. and Internet Liquidators International Inc. In June 1998, the Company changed its name from Internet Liquidators International Inc. to BID.COM International Inc. From incorporation through April 1996, the Company had no revenues. During this period, the Company focused on development of its proprietary technology and computer infrastructure and the initial planning and development of its Web site and operations. The Company launched its auction Web site in April 1996 under the URL www.internetliquidators.com, but did not begin to actively promote or advertise its Web site until May 1997. From April 1996 until May 1997, the Company focused on securing its initial relationships with AOL and the Toronto Star, which were concluded in February 1997, and developing an advertising and promotion plan for its business, while continuing to develop its technology and Web site and build its business infrastructure. The Company generated only minimal revenues during this period. In May 1997, the Company initiated its marketing and advertising campaign and, as a result, began generating more significant commercial revenues for auctions conducted at its Web site. In March 1998, the Company changed its Web site address to www.BID.COM. Since launching its BID.COM brand name, the Company's customer base has increased significantly. As of April 14, 1999, the Company had approximately 108,000 registered bidders, representing a 432.0% increase in registered bidders from January 1, 1998. The Company has not earned profits to date and at December 31, 1998 had an accumulated deficit of Cdn$27.7 million. The Company intends to continue to invest heavily in marketing and promotion, development of its technology, business-to-business auctions, multi-media auction platforms, the distribution of specialty products and other areas of its business, including the acquisition of, or strategic investments in, complimentary products, businesses or technologies. As a result, the Company expects to continue to incur losses for the foreseeable future and there can be no assurance that the Company will ever achieve profitability. Operating results have varied on a quarterly basis in the past and may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of the Company's control. The Company's policy is, generally, not to purchase inventory from merchandise vendors for resale in BID.COM auctions. Rather, the Company usually acquires the right to sell the merchandise under arrangements with its vendors. These arrangements typically provide that the supplier will reserve for sale by the Company specified quantities of products for a fixed period of time without obligating the Company to purchase these products until sales are made to the Company's customers. Prior to sale, the Company negotiates to receive either an agreed upon commission based upon the final selling price of the goods, or the difference between the actual selling price and a reserve price negotiated by the Company with a particular vendor. When an auction is completed, the Company charges the successful bidder's credit card. The Company typically purchases merchandise from suppliers only after a customer has purchased and paid for the product. The Company typically does not take actual possession of goods sold because goods are shipped directly from the supplier to the customer. The Company records the gross amount as revenue upon verification of the credit card authorization and shipment of the merchandise to the customer. Inventory on the Company's balance sheets reflects sales returns in transit which are valued at the lower of cost and net realizable value and at the option of the Company are held for resale or returned to suppliers for credit. Historically, the Company has offered lower margin categories of products, such as computers, computer accessories and computer upgrades. While the Company plans to continue offering these product categories, it has begun to shift its product mix and increase the number and variety of goods in higher margin product categories, 35 such as consumer electronics, toys, games, sporting goods, memorabilia, jewelry, collectible sports and entertainment cards and travel and entertainment products and services. In addition, as part of its strategy to diversify revenue sources, the Company is seeking to increase revenue opportunities that yield higher gross margins than sales of products in online auctions, such as licensing its auction platform, marketing the Micra SoundCard collectible trading cards and other unique products and selling advertising space on its Web site. In connection with the introduction of the Company's marketing program in the third and fourth quarters of 1997, the Company initiated a promotional pricing strategy under which products were sold below cost or at significantly reduced profit margins. The Company continued that approach through most of 1998. As a result, the Company's earnings were significantly impacted. The Company recorded advertising and promotional expenses of Cdn$698,000 for the year ended December 31, 1997 and Cdn$3.52 million for the year ended December 31, 1998 to reflect the cost to the Company of its promotional pricing program during those periods. During the fourth quarter of 1998, the Company began to limit its promotional pricing practices and has continued this trend during the first quarter of 1999. However, the Company continues to sell a limited number of products at significantly reduced margins and, in the future, may from time to time use promotional pricing programs in connection with the introduction of new products and services, in response to competitive pressures or for other business reasons. In such cases, the Company anticipates that earnings will be reduced and such reductions may be significant. The following analysis of the financial condition and results of operations of the Company should be read in conjunction with the "Selected Financial Data" and the Company's financial statements (including the notes thereto) appearing elsewhere in this Registration Statement. The financial statements appearing in the Registration Statement have been prepared in Canadian dollars and in accordance with Canadian GAAP and the results of operations discussed below are in Canadian dollars. At December 31, 1998 the exchange rate was US$1.00 to Cdn$1.5375. See "Exchange Rates." For a discussion of the differences between Canadian GAAP and U.S. GAAP as they apply to the financial statements of the Company, see Note 12 to the financial statements of the Company included elsewhere in this Registration Statement. Results of Operations Comparison of Year Ended December 31, 1998 and December 31, 1997 Revenues. Revenues are comprised of transactional revenues from the sale of merchandise plus commissions, shipping and handling costs. Revenues increased to Cdn$20.089 million for the year ended December 31, 1998 from Cdn$2.671 million for the year ended December 31, 1997, an increase of 652.1%. The increase reflects commercial sales for the full year ending December 31, 1998 as compared to only eight months (May to December) during the period ended December 31, 1997. In addition, the increase is attributable to the introduction of the BID.COM brand name in March 1998, and a significant increase in marketing and advertising expenditures and marketing relationships during the year ending December 31, 1998 as compared to the same period in 1997. From January 1, 1998 to December 31, 1998, the Company's customer base grew substantially as reflected by a 335.0% increase in registered bidders from approximately 20,000 to over 87,000. Direct Expenses. Direct expenses reflect negotiated reserve prices with vendors for the supply of goods sold by the Company. Direct expenses were Cdn$19.361 million (96.4% of revenues) for the year ended December 31, 1998 resulting in a gross margin of Cdn$728,000 or 3.6%, as compared to Cdn$2.916 million (109.2% of revenues) for the year ended December 31, 1997, resulting in a negative gross margin of Cdn$(245,000) or (9.2)%. The increase in cost of revenues reflects the significant growth of revenues during the year ended December 31, 1998 as compared to the year ended December 31, 1997. Improvement in the gross margin for the year ended December 31 1998 reflects the commencement of the Company's efforts to change its product mix to include sales of higher margin goods. During 1998, gross margins were 2.0% in the first quarter, (0.9%) in the second quarter, 3.2% in the third quarter and 6.9% in the fourth quarter. The Company anticipates that its direct expenses will vary, and may increase, as a percentage of revenues in future quarters. Advertising and Promotion Expenses. Advertising and promotion expenses consist primarily of advertising and marketing fees, loss leader promotions and expenses paid to strategic and marketing partners and other third parties from which the Company purchases advertising space, but does not include salaries and related expenses of the Company's sales and marketing personnel which are included in general and administrative expenses. Advertising and promotion 36 expenses were Cdn$12.594 million for the year ended December 31, 1998, as compared to Cdn$2.521 million for the year ended December 31, 1997, an increase of 399.6%. As a percentage of revenues, advertising and promotion expenses fell to 62.7% of revenues for the year ended December 31, 1998 from 94.4% during the year ended December 31, 1997. Advertising and promotion expenses for the year ended December 31, 1998 include Cdn$3.52 million (18% of revenue) attributable to loss leader promotions and Cdn$7.0 million (34.8% of revenue) paid to AOL pursuant to the AOL Marketing Agreement. Advertising and promotion expenses for the year ended December 31, 1997 included Cdn$698,000 (26.0% of revenue for the year ended December 31, 1997) for loss leader promotions and Cdn$442,000 (17.0% of revenue) for payments to AOL pursuant to the AOL Marketing Agreement. The increase in advertising and promotion expenses reflects the substantial increase in advertising and marketing which the Company undertook in order to promote the BID.COM brand name, attract track traffic to its Web site and enlarge its customer base. Reduction of advertising and promotion expenses as a percentage of revenue reflects the significant growth in revenues from 1997 to 1998 and a reduced amount of promotional pricing activity. Under the new agreement and related arrangements with AOL, payments to AOL during the period March 1, 1999 to March 31, 2000 will decrease to $3.0 million from an anticipated $5.0 million under the old agreement. General and Administrative Expenses. General and administrative expenses include, primarily: all salaries and related expenses (including benefits and payroll taxes) of the Company other than fees to independent contractors on the research and development and technology staff which are included in software and development expenses; facility costs; foreign exchange expenses; professional fees; insurance costs; investor relations; computing and communications expenses; regulatory filing fees and travel and related costs. General and administrative expenses increased to Cdn$5.734 million during the year ended December 31, 1998 from Cdn$3.176 million in year ended December 31, 1997, an increase of 81.6%. As a percentage of revenues, general and administrative expenses decreased to 28.5% of revenues in 1998 from 118.2% of revenues in 1997. The increase in general and administrative expenses is attributable t an increase in salary and related expenses resulting from staff hired to accommodate the growth in business during 1998, and an increase in office supplies, rent, communication and other ancillary costs due primarily to the Company's growth during 1998 and losses due to foreign currency exchange expenses. The reduction in general and administrative expenses as a percentage of sales reflects economies of scales achieved as a result of a significant growth of revenues during the year ended December 31, 1998. See "-Foreign Currency Fluctuations." Software Development and Technology Expenses. Software development and technology expenses consist of costs associated with acquired and internally developed software, license agreements and research and development expenses, including fees to independent contractors and salaries and related expenses of Company personnel engaged in these activities. Software development and technology expenses increased to Cdn$889,000 for the year ended December 31, 1998 from Cdn$541,000 for the year ended December 31, 1997, a 34.5% increase. As a percentage of revenues, software development and technology expenses decreased to 4.4% of revenues during the year ended December 31, 1998 from 24.7% during the year ended December 31, 1997. The increase in software development and technology expenses is attributable primarily to the increased expenses incurred in connection with the redevelopment of the Company's auction platform, the purchase of a new accounting software package and the purchase and implementation of the personalization software engine. The reduction in software development and technology expense as a percentage of revenues is attributable to the significant growth in revenues during the period, and resulting economies of scale. Depreciation and Amortization. Depreciation and amortization expense was Cdn$201,000 for the year ended December 31, 1998 as compared to Cdn$122,000 for the year ended December 31, 1997, an increase of 64.8%. This increase was a result of a significant increase in equipment, computers, furniture and fixtures acquired by the Company during 1997 as the result of the growth of the Company. Comparison of Years Ended December 31, 1996 and 1997 and Four Month Period Ended December 31, 1995 Revenues. The Company did not commence actively marketing and promoting its Web site auctions until May 1997, and therefore generated only minimal revenues until May 1997. During the four month period ended December 31, 1995, the Company had no revenues as it was in the early stage of development of its technology platform and retail concept. Revenues for the year ended December 31, 1996 were Cdn$51,000. Revenues for the year ended December 31, 1997 were Cdn$2.671 million as a result of the commencement of more significant transactional business on the Web site in May 1997 and the growth of the Company's customer base due to alliances with the Company's strategic and marketing partners and the significant increase in Company's advertising. 37 Direct Expenses. Direct Expenses for the four months ended December 31, 1995 and for the year ended December 31, 1996 were nil and Cdn$12,000, respectively, because the Company did not generate any significant revenues during these periods. Direct expenses were Cdn$2.916 million for the year ended December 31, 1997, resulting in a negative gross margin of Cdn$(245,000). The significant increase in direct expenses during 1997 and the resulting negative gross margin is attributable to a substantial increase in revenues. In addition, 1997 gross margins were affected by higher shipping and handling costs incurred by the Company to minimize shipping delays during a UPS strike. The Company elected not to pass these costs on to its customers. Advertising and Promotion Expenses. Advertising and promotion expenses were Cdn$2.521 million in the year ended December 31, 1997, including Cdn$698,000 for loss leader promotions. Advertising and promotion expenses were Cdn$403,000 in the year ended December 31, 1996 and Cdn$12,000 in the four months ended December 31, 1995. The Company conducted preliminary marketing during 1996, but substantially increased its efforts in 1997 with the execution of alliances with AOL and the Toronto Star. General and Administrative Expenses. General and administrative expenses for the years ended December 31, 1997 and 1996 were Cdn$3.157 million and Cdn$1.453 million, respectively. General and administrative expenses were Cdn$112,000 for the four month period ended December 31, 1995. The increase from period to period reflects the growth of the Company's infrastructure and staff as the Company progressed from the development to revenue generation stage. Software Development and Technology Expenses. Software development and technology expense was Cdn$10,000 for the four months ended December 31, 1995, Cdn$194,000 for the year ended December 31, 1996 and Cdn$661,000 for the year ended December 31, 1997. Software development and technology expenses for the four months ended December 31, 1995 and the year ended December 31, 1996 were attributable primarily to the engagement of a software consultant. Software development and technology expenses increased in 1997 due to the addition of a second software consultant and increased expenses incurred in connection with the redevelopment of the Company's auction platform launched in early 1998. Depreciation and Amortization. Depreciation and amortization expense for the four months ended December 31, 1995 and the years ended December 31, 1996 and 1997, were, respectively, Cdn$1,000, Cdn$100,000 and Cdn$122,000. Liquidity and Capital Resources The Company has been funded to date primarily through a series of private placements of equity and, in one instance a convertible debenture, sales of equity to and investments from strategic partners and cash flow from operations. The Company has received aggregate proceeds of Cdn$57.363 million through its private offerings, including, as of April 14, 1999, an aggregate of Cdn$22.172 million from the subsequent exercise of options and Common Share purchase warrants sold in such offerings, and an aggregate of Cdn$4.21 million (including Cdn$1.0 million in the form of advertising credits) from sales to and investments from Rogers Media, Toronto Star and AOL. As of March 31 1999, the Company had cash on hand and marketable securities of approximately Cdn$22.10 million. In addition, as of April 14, 1999, the Company had outstanding 1,396,896 exercisable options and warrants which expire at various times from 1999 and to 2002 ("Exercisable Warrants"). The exercise price of the Exercisable Warrants range from Cdn$1.00 to Cdn$5.05, and on April 14, 1999, the closing sales price of the Company's Common Shares on the TSE was Cdn$28.00. See "Trading History." If all of the Exercisable Warrants are exercised prior to their expiration, the Company will receive aggregate proceeds of Cdn$3.19 million, of which Cdn$579,493 represents proceeds from the exercise of Exercisable Warrants expiring in 1999. At December 31, 1998, the Company had cash on hand and marketable securities of approximately Cdn$16.6 million. See "Risk Factors-Need For Additional Financing." The Company believes that its present capital, anticipated proceeds from the expected exercise of the Exercisable Warrants and revenue from operations will be sufficient to finance its cash requirements for the next 12 months. Thereafter, the Company may need to raise additional funds. The exact amount of the Company's future 38 capital requirements will depend on numerous factors, including, but not limited to, slower growth and adverse changes in the E-commerce environment, delays in the growth of the Company's customer base, government regulations, failure or delays in executing marketing programs, failure or delays in connection with expansion to Europe, growth that is more rapid than anticipated or competitive pressures. The Company may also need to raise additional funds sooner than anticipated in order to acquire businesses, technologies or products or fund investments and other relationships the Company believes are strategic. In addition, while the exercise prices of the Exercisable Warrants may currently be below the trading prices of the Company's Common Shares on the TSE, there can be no assurance that the Common Shares will continue to trade at prices that justify the exercise of the Exercisable Warrants, or that the holders of such warrants will, in fact, exercise them. Accordingly, the Company's actual capital requirements may vary from currently anticipated needs and such variations could be material. There can be no assurance that additional financing will be available when needed on commercially reasonable terms or at all. If adequate funds are not available or are not available on acceptable terms, the Company may not be able to funds its expansion, take advantage of strategic acquisitions, investment or licensing opportunities or respond to competitive pressures. Such inability to obtain additional financing when needed would have a material adverse effect on the Company's business, results of operations, financial condition and prospects. If additional funds are raised through the issuance of equity or convertible debt securities, the percentage ownership of the shareholders of the Company will be reduced, shareholders may experience additional dilution and such securities may have rights, preferences and privileges senior to those of the Company's Common Shares. In the four month period ended December 31, 1995, the Company invested Cdn$55,000 in fixed assets for computer hardware, equipment, furniture and fixtures. Additions to fixed assets during 1996 and 1997 were Cdn$396,000 and Cdn$247,000, respectively, primarily for computer hardware. During 1998, the Company invested Cdn$351,000 in fixed assets, primarily for computer hardware, leasehold improvements and furniture and fixtures, and Cdn$68,000 for trademarks. The Company has an agreement with a financial institution that settles credit card transactions for online auction sales. Under this agreement, the Company is required to maintain a cash reserve account in an amount determined based on a percentage of sales for the preceding six months. As of December 31, 1998, the Company was required to maintain Cdn$1.50 million in this account. The Company has available an aggregate of approximately Cdn$27.635 million of net operating losses for tax purposes that may be used to reduce taxable income in future years, of which Cdn$135,000 expires in 2001, Cdn$2.1 million expires in 2002, Cdn$6.7 million expires in 2003 and Cdn$18.7 million expires in 2004. The Company's net operating losses are subject to assessment of the Company's tax returns by taxation authorities. Since its inception, the Company raised a significant portion of its funding from the following strategic investments and financings: Strategic Investments. In February 1997, Toronto Star purchased from the Company 1.0 million Common Shares and a warrant to purchase an additional 500,000 Common Shares which it subsequently exercised, resulting in aggregate proceeds to the Company of Cdn$1.425 million. In addition, in February 1997, AOL purchased 1.0 million Common Shares for an aggregate purchase price of Cdn$1.0 million, which AOL paid by extending to the Company advertising credits in the same amount in lieu of cash. In July 1998, the Company issued to Rogers Media a Series B special warrant and a Common Share warrant for an aggregate purchase price of Cdn$1.875 million. The Series B special warrant was deemed exercised on October 7, 1998, and the Company issued to Rogers Media 1,500,000 Common Shares for no additional consideration. The Common Share purchase warrant entitles Rogers Media to acquire up to 100,000 Common Shares of the Company at a price of Cdn$1.40 per Common Share. This Common Share purchase warrant is exercisable on the date which is the earlier of: (i) the 10th business day following the date on which the Company delivers a notice to the holder of such common share warrant confirming it has filed a registration statement or preliminary prospectus for an initial public offering of shares of the Company in the United States for proceeds of at least Cdn$7.0 million; and (ii) July 31, 1999. 39 October 1997 Special Warrants. On October 3, 1997, the Company sold in a private placement a total of 6,335,000 special warrants at a price of Cdn$1.50 per special warrant for aggregate gross proceeds of Cdn$9.503 million. Each special warrant entitled the holder to acquire, for no additional consideration, one unit consisting of one Common Share and one-half of one share purchase warrant. The special warrants were exercised on February 2, 1998, for 6,335,000 Common Shares and 3,167,500 Common Share purchase warrants, each exercisable to purchase one Common Share at Cdn$1.65 per share. The 3,167,500 Common Share purchase warrants were exercised on January 3, 1999 resulting in additional proceeds to the Company of Cdn$5.226 million. The Company also granted to Yorkton Securities Inc. ("Yorkton") and First Marathon Securities Limited ("First Marathon"), placement agents for the offering, compensation warrants entitling them to receive, without the payment of any further consideration, up to 633,500 units (each unit consisting of one Common Share and one-half of one share purchase warrant) at a price of Cdn$1.50 per unit at any time until January 3, 1999. Both the compensation warrants and the underlying warrants were exercised at $1.65 per share resulting in aggregate proceeds to the Company of Cdn$1.473 million. August 1998 Special Warrants. On August 4, 1998, the Company sold in a private placement a total of 8,100,000 special warrants at a price of Cdn$1.40 per special warrant for aggregate gross proceeds of Cdn$11.340 million. Each special warrant entitled the holder to acquire, for no additional consideration, one unit consisting of one Common Share and one-half of one share purchase warrant. The special warrants were exercised on September 30, 1998, for 8,100,000 Common Shares and 4,050,000 share purchase warrants, each exercisable to purchase one Common Share at Cdn$1.65 per share. The 4,050,000 share purchase warrants were exercised, resulting in proceeds to the Company of Cdn$6.68 million. The Company also granted to Yorkton, placement agent for the offering, compensation warrants entitling Yorkton to receive, without payment of any further consideration, options to purchase up to 860,000 units (each unit consisting of one Common Share and one-half of one share purchase warrant) at a price of Cdn$1.40 per unit at any time until November 4, 1999. The options were exercised for 860,000 Common Shares and 430,000 share purchase warrants resulting in proceeds to the Company of Cdn$1.204 million. The 430,000 share purchase warrants were exercised, resulting in proceeds to the Company of Cdn$709,500. November 1998 Special Warrants. On November 30, 1998, the Company sold in a private placement 5,714,984 special warrants at a price of Cdn$1.75 per special warrant. The Company received proceeds of Cdn$10.001 million. Each special warrant entitles the holder thereof to acquire, for no additional consideration, one unit consisting of one Common Share and one-quarter of one share purchase warrant. The special warrants issued by the Company were exercised on January 28, 1999 for 5,714,984 Common Shares and 1,428,746 share purchase warrants, each exercisable to purchase one Common Share at Cdn$1.75 per share. Of these share purchase warrants, as of April 14, 1999, 2,189,123 were exercised, resulting in proceeds to the Company of Cdn$3.831 million. The remaining 3,996 warrants are exercisable until 5:00 p.m. (Toronto time) on the date which is the earlier of (i) 10 business days following the date upon which the Company delivers a notice to all holders of share purchase warrants confirming that it has filed a preliminary prospectus or registration statement in connection with a public offering in the United States of America of at least Cdn$7.0 million, and (ii) December 31, 1999. The Company also granted to Yorkton, placement agent for the offering, compensation warrants which entitle Yorkton to receive, without payment of additional consideration, options to purchase up to 611,498 units (each unit consisting of one Common Share and one-quarter of one share purchase warrant) at a price of Cdn$1.75 per unit at any time prior to December 31, 1999. In January 1999, Yorkton exercised the options for units consisting of 611,498 Common Shares and 152,875 Common Share purchas warrants, each exercisable to purchase one Common Share at Cdn$1.75 per share, resulting in proceeds to the Company of Cdn$1,070,122. Yorkton exercised the 152,875 Common Share purchase warrants resulting in proceeds to the Company of Cdn$267,531. 40 Year 2000 As the Year 2000 approaches, an issue exists for companies that rely on computers as a result of the computer industry's past practice of using two digits rather than four digits to identify the applicable year. Consequently, many software applications and programs may not properly recognize calendar dates beginning in the Year 2000. If not corrected, these applications and programs could fail or create erroneous results. To correctly identify the Year 2000, a four-digit year code field will be required to be what is commonly termed "Year 2000 compliant." The Company has conducted a comprehensive examination of its information technology systems and software applications to determine Year 2000 compliance. Based on its examination, the Company believes that these systems and software applications are Year 2000 compliant. The Company has hired a Year 2000 consultant to review the Company's examination and anticipates the consultant's review to be completed within the second quarter of 1999. The Company's auction site at www.bid.com has been developed to be fully Year 2000 compliant. The Company is reviewing its communications systems and other non-information technology systems to ascertain whether they are Year 2000 compliant. The Company expects to complete this review by the end of April 1999. The Year 2000 consultant will also review the Company's examination of these systems. The Company contacted significant suppliers and third-party service providers to identify Year 2000 problems and provide solutions to prevent the disruption of BID.COM business activities. The Company and its consultant are in the process of reviewing reponses from suppliers and third party providers. Material areas of potential exposure include electronic data exchange systems operated by third parties with whom the Company transacts business, credit card processing companies and banks on whom the Company relies for purchase transactions and other Internet providers and services such as AOL and Rogers Media, on whom the Company relies for advertising and promotion. The Company expects to complete its review of the compliance efforts by these parties in April 1999. Until the Company gains a better understanding of the readiness and plans of its third-party suppliers and service providers, it does not have a basis for determining, or developing a response to, or contingency plans for, a worst case scenario which might result from their failure to be Year 2000 compliant. At present, management anticipates that a likely worst case scenario would involve disruption of credit card transactions for purchases of products on the Web site auctions. This would likely lead to material interruption in product sales. When the Company completes its review of significant third party suppliers, it will assess worst case scenarios and, if necessary, develop one or more contingency plans. Management estimates that total costs attributable to Year 2000 compliance efforts, both for past efforts and present and anticipated future efforts, will be approximately Cdn$270,000, of which the Company has incurred approximately Cdn$200,000 to date. Management's estimate includes the expense the Company will incur in reviewing whether its significant suppliers and third-party service providers have resolved their own Year 2000 problems, including the costs of the Year 2000 consultant. The Company may incur additional expenses in connection with the development and implementation of a contingency plan, should the Company learn that any of its significant suppliers or third-party service providers may fail to achieve Year 2000 compliance on a timely basis. These expenses cannot be quantified at this time. Readers are cautioned that forward-looking statements contained in this subsection "Year 2000" should be read in conjunction with the Company's disclosure under the heading "Forward Looking Statements" in the forepart of this Registration Statement. Euro Conversion In June 1999, the Company plans to open an office in Dublin, Ireland, to license the Company's auction technologies and provide related support services to European-based companies. Effective January 1, 1999, 11 of the 15 member countries of the European Union adopted the euro as their common legal currency and each participant established fixed conversion rates between their sovereign, or legacy, currencies and the common euro currency. The legacy currencies of the individual countries are scheduled to remain legal tender as denominations of the euro until January 1, 2002 (the "transition period"), when euro- denominated bills and coins will be introduced. During the transition period, public and private parties may choose to pay for goods and services using either the euro or the participating country's legacy currency. However, conversion rates no longer will be computed directly from one legacy currency to another. Instead, a "triangular" calculation must be utilized whereby an amount denominated in one legacy currency is first converted into a euro amount, and then the euro amount is converted into the second legacy currency. By July 1, 2002, the legacy currencies will be phased out entirely as legal tender. The Company currently conducts business operations in U.S. and Canadian dollars. Since the Company's information systems and processes generally accommodate multiple currencies, the Company anticipates that any necessary modifications to its information systems, equipment and processes to accommodate euro transactions will be made on a timely basis and does not expect any failures that would have a material adverse effect on the Company's financial position or results of operations, or that the costs of such modifications will have a material adverse effect on the Company's financial position or results of operations. The Company expects to spend approximately Cdn$1.0 million during 1999 to open and operate the Dublin office, including salaries, office rent and other expenses, including computers and telephones. These expenses include purchasing or modifying appropriate business software and arranging for banking relationships to allow the Company to invoice and accept payments, and pay its own suppliers, in legacy currencies and in euro. The auction software that the Company intends to license in Europe is designed to be multi-currency capable. The software is capable of performing multiple currency conversions, including triangular conversions. During the euro transition period, the Company anticipates that partners to whom it will license its auction technology will initially designate the currency zones in which they operate, and the Company can supplementally add zones to the auction software platform as these partners expand or move operations into other European countries. The cost of including the initial currency zones and of adding zones will be included within the licensing fees. Licensees will therefore be able to price auction products in legacy currencies and euro denominations. In order to accept credit card payments in euro and legacy currencies, licensees will be required to enter into arrangements with local banking vendors that can support their auction operations with respect to euro transactions on a timely basis. The Company does not have in place any hedging programs to manage the potential exposure to fluctuations in the euro/Canadian dollar exchange rate. As European operations expand, the Company may need to evaluate its currency exchange costs and rate exposure with respect to the euro during and after the transition period. Foreign Currency Fluctuations The Company purchases substantially all of its products from suppliers, and sells substantially all of its products to customers, in U.S. dollars. The Company also incurs a significant amount of advertising and marketing expenses in U.S. dollars. However, the majority of the Company's other operating expenses are in Canadian dollars. Fluctuations in the U.S./Canadian dollar exchange rate with respect to the Company's operations are a function, primarily, of: (i) the relative value of the Canadian dollar to the U.S. dollar at any given time; and (ii) the relationship between the amount of revenues and financing received by the Company in U.S. dollars and the amount of Company expenditures being paid in Canadian dollars, on the one hand, and the amount of revenues and financing received by the Company in Canadian dollars and the amount of Company expenditures being paid in U.S. dollars, on the other hand. The Company does not have any hedging programs in place to manage the potential exposure to fluctuations in the U.S./Canadian dollar exchange rate. The Company incurred net losses from foreign currency exchange fluctuations of Cdn$724,000 in 1998 and Cdn$34,949 in 1997. The increase in the losses resulted from the devaluation of the Canadian dollar in 1998 as compared to 1997, the significant overall increase in Company revenue and expenditures in 1998 as compared to 1997 and, in particular, the significant increase in Company advertising and marketing expenses in 1998 as compared to 1997 See "Exchange Rates" at the forepart of this Registration and "-Results of Operation" above. 41 ITEM 9A- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK (a) Quantitative Information about Market Risk Not applicable. (b) Qualitative Information about Market Risk Not applicable. 42 ITEM 10 - DIRECTORS AND OFFICERS OF REGISTRANT The following table sets forth the name, age and position of each of the directors and executive officers of the Company.
Name Age Position - ---- --- -------- Paul Godin(2),(4) 45 Chairman of the Board of Directors and Chief Executive Officer Jeffrey Lymburner(2),(4) 42 Director, President, Secretary and Treasurer T. Christopher Bulger(1),(2),(3),(4) 41 Director, Executive Vice President and Assistant Secretary Michael Abramsky 40 Director Dr. Duncan Copeland(1),(3) 42 Director David Pamenter 51 Director and Assistant Secretary Fred Singer 35 Director Charles S. Walker 62 Director Paul Hart 43 Chief Financial Officer Brent Bowes 40 Vice President, Corporate Controller and Assistant Secretary Robert W.A. Joynt 51 Vice President--General Merchandising Manager James I. Moskos 36 Vice President--Technology
- ------------------------ (1) Member of Audit Committee (2) Member of Executive Committee (3) Member of the Compensation Committee (4) Member of the Stock Option Committee The business experience of each of the directors and executive officers of the Company for at least the last five years is as follows: Paul Godin is a founding shareholder of the Company and has served as Chairman of the Board of Directors and Chief Executive Officer since September 1995. Mr. Godin served as President of the Company from September 1995 until June 1998. Mr. Godin has 20 years of marketing experience in the retail and wholesale electronics and computer industries. From 1994 to 1995, Mr. Godin was Senior Vice President--Corporate Sales and Marketing for Completely Mobile Inc., a Canadian company which designs and implements wireless data systems. From 1993 to 1994, he was Vice President and General Manager of Casio Canada Inc., makers of calculators and household electronic goods. From 1990 to 1993 Mr. Godin was Vice President--Sales and Marketing, for Alpine Electronics of Canada Inc. and, prior to that, he privately consulted to Canadian Airlines, H.J. Heinz, and Clarion Canada. Jeffrey Lymburner is a founding shareholder of the Company and has served as President of the Company since August 1998, Executive Vice President from September 1995 until August 1998 and as a Director, Secretary and Treasurer since September 1995. Mr. Lymburner is also President of the Company's subsidiary, Internet Liquidators USA Inc. From 1990 to 1995, Mr. Lymburner was President of Completely Mobile Inc., and prior to that, he served in various management positions with Multitech Warehouse Direct, Canadian consumer electronics retail chain. T. Christopher Bulger has served as Executive Vice President of the Company since September 1998, and as a Director since June 1996 and as Assistant Secretary since September 1996. Mr. Bulger served as Chief Financial Officer of the Company from April 1996 to September 1998. Since 1994, Mr. Bulger has been an officer and a partner with HDL Capital Corporation, a Toronto-based merchant bank. Mr. Bulger devotes substantially all of his business time to Company affairs. Michael Abramsky has served as a Director of the Company since August 1998. Mr. Abramsky joined Rogers New Media, in March 1997 and since January 1998 has been its President. From March 1996 to March 1997, Mr. 43 Abramsky was Vice President-Marketing for InSystems, a software development company. From February 1993 to March 1996, Mr. Abramsky was Vice President- Marketing for Delrina Corp. (now part of the Symantec Group), a software company. Prior to joining Delrina, Mr. Abramsky was the Marketing Director for Interleaf Canada. Dr. Duncan Copeland has served as a Director of the Company since September 1995. Dr. Copeland is the President of Copeland & Company, a Washington D.C.- based international consultancy firm, and is a Visiting Professor of business at Georgetown University. From July 1989 to June 1996, Dr. Copeland served on the faculty of the Richard Ivey School of Business at the University of Western Ontario as a professor of Information Management and as Chief Information Officer of the institution. David Pamenter has served as a Director of the Company since June 1997 and as an Assistant Secretary since January 1997. Since July 1995, Mr. Pamenter has been a partner in the Toronto, Ontario law firm of Gowling, Strathy & Henderson, Barristers & Solicitors, and from 1977 to 1995, Mr. Pamenter was a partner in the Toronto law firm of Lang Michener, Barristers & Solicitors. Fred Singer has served as a Director of the Company since June 1997. Mr. Singer has been the Senior Vice President of AOL Studios, a division of AOL, since November 1997. Mr. Singer also serves as an advisor and board member on several AOL Studios companies. From April 1996 to November 1996, Mr. Singer was Vice President--Corporate Development of AOL, and from November 1996 to November 1997 he was Vice President of AOL Studios. From 1992 to March 1996, Mr. Singer was founder and Vice President of Digital Inc., the Washington Post electronic subsidiary, and from August 1992 to July 1993, he served as a director of corporate development for the Washington Post Company. Mr. Singer also previously worked as an international consultant at Bain and Company and in various brand management positions with Proctor and Gamble. Charles S. Walker has served as a Director of the Company since February 1999. Since January 1968, Mr. Walker haS served as the President and Chief Executive Officer of the Walker Group, Inc., a privately owned company involved in manufacturing, administration, fulfillment services and marketing to the automotive and consumer goods industries. Paul Hart has served as Chief Financial Officer of the Company since October 1998 and Senior Vice President - Finance from August 1998 to September 1998. From March 1995 to July 1998, Mr. Hart was Vice President-Finance of Canadian Automatic Data Processing Services, Limited, and from June 1990 to February 1995, Mr. Hart served as Vice President and Treasurer of Simcoe Erie Investor Limited, an insurance company and part of the GAN Group. Brent Bowes has served as Vice President of the Company since October 1998, as its Corporate Controller since May 1996 and as an Assistant Secretary since January 1997. From February 1991 to April 1996, Mr. Bowes was a Senior Accountant in the Corporate Finance Group of Deloitte & Touche, Chartered Accountants. Prior to that, Mr. Bowes served in various management positions within the manufacturing, financial and retail sectors. Robert W.A. Joynt has served as the Vice President--General Merchandising Manager of the Company since January 1996. From July 1994 to December 1995, Mr. Joynt was Vice President--Sales and Marketing of Logitech Electronics Inc., a consumer electronics company and from September 1984 to June 1994, he served as President of Koss Limited and Vice President of Koss Corporation, a consumer electronics company. James I. Moskos has served as the Vice President--Technology of the Company since September 1997. From September 1994 to August 1997, Mr. Moskos was Senior Technology Manager for the Canadian Department of Indian Affairs and Northern Development (the "Department") responsible for setting the technical direction for all aspects of application development. From 1992 to 1994, Mr. Moskos was Client Services Manager for the Department. Under Canadian law, a majority of the Board of Directors must be residents of Canada. Each director of the Company holds office until the next annual meeting of shareholders or until his successor has been elected and qualified. The executive officers of the Company are appointed by the Board of Directors of the Company and serve at the discretion of the Board of Directors. 44 ITEM 11 - COMPENSATION OF DIRECTORS AND OFFICERS Summary Compensation Table The following table provides a summary of compensation earned during the fiscal year ended December 31, 1998 by the Executive Officers of the Company.(1)
Other Annual Compensation Annual All Other ------------------- Compen- Options Compen- Name And Principal Position Salary Bonus sation Granted Sation --------------------------- ------ ----- ------ ------- ------ (Cdn.$) (Cdn $) (Cdn $) (#) (Cdn $) Paul Godin.................... 178,300 Nil 12,000/(2)/ 50,000 Nil Chairman & CEO Jeffrey Lymburner............. 170,500 Nil Nil 100,000 Nil President T. Christopher Bulger......... 132,000 100,000 12,000/(2)/ 125,000 Nil Executive Vice-President Paul Hart..................... 46,875 Nil 4,500/(2)/ 100,000 Nil Chief Financial Officer Brent Bowes................... 80,800 Nil 6,000/(2)/ 50,000 Nil Vice-President, Corporate Controller Robert W.A. Joynt............ 154,300 8,500 6,000/(2)/ 35,000 21,000/(3)/ Vice-President James I. Moskos................ 102,200 Nil 4,500/(2)/ 100,000 Nil Vice-President, Technology
- ---------- (1) For the purposes of disclosure of Compensation of Directors and Executive Officers in Item 11, "Executive Officer" means the Chairman, President, Chief Executive Officer, Chief Financial Officer, Vice-President, and any other officer of the Corporation or person who performed a policy making function and whose total compensation earned during the fiscal year was greater than Cdn $100,000. (2) Received on account of car reimbursement expenses and other expenses. (3) Net proceeds on the exercise of stock options. During 1998, the Company did not provide any pension, retirement or similar benefits to its directors and officers. Each of Paul Godin and Jeffrey Lymburner has entered into a non-competition and salary protection agreement with the Company dated February 21, 1997, which provides, among other things, that he (i) will not compete with the Company for a period of 12 months, which may be extended by the Company to 24 months, following the termination of his employment with the Company, in consideration of which the Company will pay his full annual salary during such period; and (ii) if his employment with the Company is terminated other than by reason of death, disability or cause (as such terms are defined in such agreements), the Company will continue to pay his full annual salary for 12 months (or 24 months if the Company exercises its option to extend the non-competition restrictions for 24 months) following the date of termination. Stock Option Plan The Company has adopted a Stock Option Plan pursuant to which it grants options to purchase Common Shares. The purpose of the Stock Option Plan is to afford directors, executive officers and key employees of the 45 Company and its subsidiaries (such persons, collectively, "Insiders") who are responsible for the continued growth of the Company an opportunity to acquire an ownership interest in the Company, and thus create in such persons an increased interest in, and a greater concern for, the welfare of the Company and its subsidiaries. The Stock Option Plan is administered by the Board of Directors. The Board of Directors determines those individuals who will receive options, the time period during which the options may be partially or fully exercised and the number of Common Shares that may be purchased under each option. Options may be granted for a term not to exceed ten years. The Board of Directors may determine the exercise price of options granted under the Stock Option Plan, provided that the options may not have an exercise price of an amount less than the closing market price of the Common Shares on the trading day prior to date of the grant. There are 2,100,000 Common Shares available for option grants under the plan. The granting of options under the Stock Option Plan is subject to the following conditions: (i) not more than 10% of the number of Common Shares issued and outstanding from time to time (the "Outstanding Issue") may be reserved for the granting of options to Insiders within a one-year period; and (ii) not more than 5% of the Outstanding Issue may be issued to any one Insider in a one-year period. Options granted unde the Stock Option Plan are not transferable. Except under certain circumstances such as death, disability or retirement and unless otherwise specified by the Board of Directors, options granted under the Stock Option Plan become null and void upon the termination of an option holder's employment with the Company. Subject to certain limits, the Board of Directors may amend the Stock Option Plan. Options Granted to Executive Officers During Fiscal Year Ended December 31, 1998 The following table sets forth the stock options granted to the Executive Officers pursuant to the Stock Option Plan during the fiscal year ended December 31, 1998.
Market Value Per Share of % of Total Securities Options Underlying Securities Granted to Exercise Price Options on the Underlying Executives Per Share Date of Grant Expiration Name Options Granted in Fiscal Year (Cdn $) (Cdn $) Date - ---------------------- --------------- -------------- --------------- ---------------- ---------- Paul Godin........... 50,000 5.5% 1.40 1.40 6/30/00 Jeffrey Lymburner.... 50,000 5.5% 2.35 2.35 2/2/00 50,000 5.5% 1.40 1.40 6/30/00 T. Christopher Bulger 75,000 8.2% 2.35 2.35 2/2/00 50,000 5.5% 1.40 1.40 6/30/00 Brent Bowes.......... 25,000 2.7% 2.35 2.35 2/2/00 25,000 2.7% 1.40 1.40 6/30/00 Robert W. A. Joynt... 10,000 1.1% 1.40 1.40 6/30/00 25,000 2.7% 2.35 2.35 2/2/00 James I. Moskos...... 50,000 5.5% 2.35 2.35 2/2/00 50,000 5.5% 1.40 1.40 6/30/00
46 Options Exercised By Executive Officers During Fiscal Year Ended December 31, 1998 The following table sets forth certain information regarding stock options exercised by the Executive Officers during the fiscal year ended December 31, 1998.
Number of Value of Number of Unexercised Unexercised Securities Options at 12/31/98 in-the-Money Acquired Value Exercisable/ Options at Name on Exercise Realized Unexercisable 12/31/98 - --------------------- ------------------ ------------------ ------------------- -------- (Cdn$) (Cdn$) Paul Godin............... NIL NIL 150,000/NIL 348,000 Jeffrey Lymburner........ NIL NIL 175,000/NIL 352,250 T. Christopher Bulger.... NIL NIL 300,000/NIL 621,000 Brent Bowes.............. NIL NIL 35,000/15,000 87,250 Robert W. A. Joynt....... 15,000 21,000 42,500/5,000 86,067 James I. Moskos.......... NIL NIL 125,000/25,000 305,500
ITEM 12 - OPTIONS TO PURCHASE SECURITIES FROM REGISTRANT OR SUBSIDIARIES As of April 14, 1999, options and warrants to purchase 1,396,896 Common Shares were outstanding as follows: Issued Under Stock Option Plan
Optionee Number of Shares Date of Grant Exercise Price Expiry Date - -------- ----------------- ------------- ------------- ----------- Executive Officers 10,000 September 2, 1997 1.00 August 31, 1999 (7 persons) 200,000 September 2, 1997 1.25 August 31, 1999 135,000 February 3, 1998 2.35 February 2, 2000 180,000 June 23, 1998 1.40 June 30, 2000 90,000 October 22, 1998 1.00 November 17, 2002 265,000 January 25, 1999 5.05 January 24, 2002 Directors who are not 50,000 September 2, 1997 1.25 August 31, 1999 Executive Officers 65,000 June 23, 1998 1.40 June 30, 2000 (2 persons) 25,000 January 25, 1999 5.05 January 24, 2002 Other 50,000 September 2, 1997 1.00 August 31, 1999 (22 persons) 77,900 February 3, 1998 2.35 February 2, 2000 60,000 June 23, 1998 1.40 June 30, 2000 25,000 January 25, 1999 5.05 January 24, 2002 --------- Total 1,232,900 =========
47 Issued Under Other Securities Exemptions
Optionee Number of Shares Date of Grant Exercise Price Expiry Date - -------- ----------------- ------------- ------------- ----------- Other 60,000 September 2, 1997 1.00 August 31, 1999 100,000 July 29, 1998 1.40 (1) 3,996 January 28, 1999 1.75 (2) --------- Total 163,996 =========
- ------------------ (1) This Common Share purchase warrant held by Rogers Media is exercisable until 5:00p.m. (Toronto time) on the date which is the earlier of: (i) the 10th business day following the date on which the Company delivers a notice to the holder of such common share warrant confirming it has filed a registration statement or preliminary prospectus for an initial public offering of shares of the Company in the United States for proceeds of at least Cdn$7,000,000; and (ii) July 31, 1999. (2) These Common Share purchase warrants, which are the unexercised portion of the 1,428,746 Common Share purchase warrants issued upon exercise of Special Warrants sold in the Company's November 1998 private placement, are exercisable until 5:00 p.m. (Toronto time) on the date which is the earlier of (i) ten (10) business days following the date upon which the Company delivers a notice to all holders of share purchase warrants confirming that it has filed a preliminary prospectus or registration statement in connection with a public offering in the United States of America of at least Cdn$7,000,000, and (ii) December 31, 1999. ITEM 13 - INTEREST OF MANAGEMENT IN CERTAIN TRANSACTIONS Paul Godin and Jeffrey Lymburner, the founders and promoters of the Company, sold all of their shares of Internet Liquidators Inc. to Avonlee Capital Corporation (a predecessor of the Company) for consideration equal to Cdn$0.80 per share payable in previously unissued shares of Avonlee Capital Corporation. This transaction was completed on May 28, 1996 pursuant to a share exchange agreement dated May 15, 1996. The value of the consideration received by Messrs. Godin and Lymburner was based upon an independent valuation of Internet Liquidators Inc. as of March 31, 1996, prepared by SLF Valuation Services Inc. 48 The Company and AOL have entered into marketing and related agreements. AOL purchased 1.0 million Common Shares. The Company has granted to AOL certain registration rights with respect to such Common Shares. Fred Singer, senior vice president of AOL Studios, a division of AOL, is a director of the Company. Mr. Singer was appointed as a director of the Company pursuant to a shareholders agreement between AOL and the Company that had, among other things, granted AOL the right to nominate representatives to the Company's Board of Directors. The shareholders agreement was terminated in February 1998, but Mr. Singer remains a director of the Company. See "Business--Marketing." The Company and Toronto Star have entered into the Torstar Agreement and related agreements. Toronto Star purchased 1.5 million Common Shares. Rocco Rossi, an officer of Toronto Star, was a director of the Company from February 1997 through November 1998. Mr. Rossi was appointed as a director of the Company pursuant to a shareholders agreement between Toronto Star and the Company that had, among other things, granted the Toronto Star the right to nominate representatives to the Company's Board of Directors. The shareholders agreement was terminated in February 1998. The Company and Rogers Media entered into the E-Commerce and Promotion Services Agreement on July 29, 1998. Rogers Media purchased 1.5 million Common Shares and warrants to purchase 100,000 Common Shares at Cdn$1.40 per Common Share. Michael Abramsky, an officer of Rogers Media, is a director of the Company. Mr. Abramsky was appointed as a director of the Company pursuant to the E-Commerce and Promotion Services Agreement. See "Options to Purchase Securities from Registrant and Subsidiaries." During 1996, 1997 and 1998, the Company paid to HDL aggregate fiscal agent fees of Cdn$178,000, Cdn$161,280 and Cdn$96,000, respectively, in connection with investment banking services provided by HDL to the Company. T. Christopher Bulger, a Director, Executive Vice President and Assistant Secretary of the Company, is a principal and officer of HDL. HDL owns options to purchase 200,000 Common Shares. The Company believes that the fees paid to HDL where comparable to fees that the Company would have been charged for similar services by an unaffiliated fiscal agent in an arms length transaction. David Pamenter, a director of the Company, is a partner in the Toronto law firm of Gowling, Strathy & Henderson, which provided legal services to the Company during 1996, 1997 and 1998 and continues to provide legal services to the Company. The Company believes that the legal fees paid to Gowling, Strathy & Henderson were comparable to fees that the Company would have been charged for similar services by an unaffiliated law firm. 49 PART II ITEM 14 - DESCRIPTION OF SECURITIES TO BE REGISTERED The authorized capital of the Company consists of an unlimited number of Common Shares and an unlimited number of preference shares ("Preference Shares"), issuable in series. As of April 14, 1999, 49,594,468 Common Shares and no Preference Shares were issued and outstanding. The issued and outstanding Common Shares are fully paid and non-assessable. Holders of Common Shares are entitled to one vote per share in the election of directors and on all other matters on which shareholders are entitled or permitted to vote. Cumulative voting in the election of directors is not permitted. Holders of Common Shares have no redemption, conversion, preemptive or other subscription rights. The holders of the Common Shares are entitled to receive, on a pro-rata basis, such dividends as may be declared by the Board of Directors of the Company out of funds legally available for such payments. In the event of the liquidation, dissolution or winding-up of the Company, the holders of Common Shares will be entitled, subject to the rights of any holder of Preferred Shares, to share, on a pro rata basis, in all of the assets of the Company remaining after payment of all the Company's liabilities. Under the Company's Articles of Amalgamation, the Board of Directors is authorized, subject to certain limitations prescribed by law, to issue an unlimited number of Preference Shares without shareholder approval in one or more series and to fix the designations, rights, privileges and restrictions thereof, including the dividend rate, conversion or exchange rights and redemption price of any such series. The Company's Articles of Amalgamation currently provide that all series of such Preference Shares are entitled to share ratably in the assets of the Company in the event of liquidation, dissolution, or the winding up of the affairs of the Company. The Company has not issued any Preference Shares to date. Any Preference Shares issued in the future could have conversion rights which may result in the issuance of additional Common Shares which could dilute the interests of the holders of Common Shares. Such shares could also have voting rights and liquidation preferences which are senior to the rights and preferences of the Common Shares. Additionally, such shares could have dividend rates and redemption or other provisions which could adversely affect the Company's ability to pay dividends on the Common Shares or prohibit payment of such dividends. Such shares could also be issued, under certain circumstances, in an attempt to prevent a takeover of the Company, and such issuance could adversely impact holders of Common Shares who might vote in favor of a proposed merger, tender offer or similar transaction. The Company has no current plans to issue any Preference Shares. The Company's transfer agent and registrar for the Common Shares and warrant agent for the Company's warrants is CIBC Mellon Trust Company, 320 Bay Street, Toronto, Ontario, M5H 4A6, Canada. 50 PART III ITEM 15 - DEFAULTS UPON SENIOR SECURITIES Not Applicable. ITEM 16 - CHANGES IN SECURITIES, CHANGES IN SECURITY FOR REGISTERED SECURITIES AND USE OF PROCEEDS Not applicable. PART IV ITEM 17 - FINANCIAL STATEMENTS Attached. See Item 19(a). ITEM 18 - FINANCIAL STATEMENTS Not applicable. ITEM 19 - FINANCIAL STATEMENTS AND EXHIBITS (a) CONSOLIDATED FINANCIAL STATEMENTS FILED AS PART OF THIS REGISTRATION STATEMENT. Auditors' Report for the periods ended December 31, 1998 and 1997..................................... F-1 Consolidated Balance Sheets as at December 31, 1998 and 1997 (audited)................................ F-2 Consolidated Statements of Operations for the periods ended December 31, 1998, 1997 and 1996 (audited) F-3 Consolidated Statements of Deficit for the periods ended December 31, 1998, 1997 and 1996 (audited)... F-4 Consolidated Statements of Cash Flows for the periods ended December 31, 1998, 1997 and 1996 (audited) F-5 Notes to Financial Statements for the periods ended December 31, 1998, 1997 and 1996 (audited)........ F-6 (b) EXHIBITS FILED AS PART OF THIS REGISTRATION STATEMENT. **1.1 Articles of Incorporation of the Company. **1.2 By-laws of the Company.
51 **3.1 Subscription Agreement dated February 12, 1997, between the Company and Toronto Star. (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) *3.2 E-Commerce Services Agreement dated as of February 12, 1997 between The Company and Toronto Star and Clarification letter dated July 22, 1998. (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) **3.3 Intellectual Property Rights and Non-Competition Agreement dated February 12, 1997 between the Company and the Toronto Star. *3.4 Subscription Agreement dated February 18, 1997, between the Company and AOL. (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) **3.5 Intellectual Property Rights and Non-Competition Agreement dated February 21, 1997 between the Company and AOL. **3.6 Interactive Marketing Agreement dated as of November 1, 1997 between the Company and AOL (replacing the Auction Services Agreement dated February 21, 1997, between the Company and AOL). (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) **3.7 Form of Subscription Agreement dated October 3, 1997 between the Company and each of the Investors in the October 3, 1997 private placement. **3.8 Special Warrant Indenture dated October 3, 1997 between the Company and CIBC Mellon Trust Company. **3.9 Share Purchase Warrant Indenture dated October 3, 1997 between the Company and CIBC Mellon Trust Company. **3.10 Underwriting Agreement dated October 3, 1997 between the Company, Yorkton Securities Inc. and First Marathon Securities Limited. **3.11 Form of Subscription Agreement dated August 4, 1998 between the Company and each of the Investors in the August 4, 1998 private placement **3.12 Special Warrant Indenture dated August 4, 1998 among the Company, certain Selling Shareholders and CIBC Mellon Trust Company. **3.13 Share Purchase Warrant Indenture dated August 4, 1998 among the Company, certain Selling Shareholders and CIBC Mellon Trust Company. **3.14 Underwriting Agreement dated August 4, 1998 between the Company and Yorkton Securities Inc. **3.15 Subscription Agreement dated July 29, 1998 between the Company and Rogers Media. **3.16 E-Commerce and Promotional Services Agreement between the Company and Rogers Media dated as of July 29, 1998. (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) **3.17 Form of Subscription Agreement dated November 30, 1998 among the Company and the Investors in the November 30, 1998 private placement. **3.18 Underwriting Agreement dated November 30, 1998 between the Company and Yorkton Securities Inc.
52 **3.19 Special Warrant Indenture dated November 30, 1998 among the Company, certain Selling Shareholders and CIBC Mellon Trust Company. **3.20 Share Purchase Warrant Indenture dated November 30, 1998 among the Company, certain Selling Shareholders and CIBC Mellon Trust Company. **3.21 License Agreement between the Company and American Interactive Media Inc. (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) **3.22 Distribution Agreement between the Company and Micra SoundCards. (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) *3.23 Stock Purchase Agreement between the Company and American Interactive Media Inc. (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) **3.24 Termination Agreement dated as of March 16, 1999 between the Company and AOL (terminating the Interactive Marketing Agreement dated as of November 1, 1997 between the Company and AOL). **3.25 Advertising Insertion Order dated as of March 16, 1999 between the Company and AOL (replacing the Interactive Marketing Agreement dated as of November 1, 1997 between the Company and AOL). (This Agreement is filed in redacted form as it is subject to a request for confidentiality submitted to the SEC.) **3.26 Salary Protection Letter, dated February 21, 1997, between the Company and Paul Godin. **3.27 Salary Protection Letter, dated February 12, 1997, between the Company and Jeffrey Lymburner. **3.28 Salary Protection Letter, dated February 12, 1997, between the Company and Paul Godin.
- ----------------- * Re-filed herewith. ** Previously filed. 53 Auditors' Report To the Directors of Bid.Com International Inc. (formerly known as Internet Liquidators International Inc.) We have audited the consolidated balance sheets of Bid.Com International Inc. as at December 31, 1998 and 1997 and the consolidated statements of operations, deficit and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of the Company as at December 31, 1998 and 1997 and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in accordance with generally accepted accounting principles. DELOITTE & TOUCHE LLP Chartered Accountants Toronto, Ontario March 3, 1999 F-1 BID.COM INTERNATIONAL INC. (formerly Internet Liquidators International Inc.) Consolidated Balance Sheets (expressed in thousands of Canadian Dollars) - ----------------------------------------------------------------------
December 31, -------------------------------------------------- 1998 1998 1997 -------------- -------------------- ------------ Convenience translation into U.S. $ (Note 14) ASSETS CURRENT Cash $ 9,792 $ 6,369 $ 1,019 Marketable securities 6,806 4,427 1,158 Accounts receivable 1,102 717 166 Special warrants receivable (Note 5) 2,311 1,503 2,189 Inventory 169 110 201 Deposits and prepaid expenses 174 113 1,678 - ---------------------------------------------------------------------------------------------------------------- 20,354 13,239 6,411 - ---------------------------------------------------------------------------------------------------------------- CAPITAL ASSETS - AT COST 1,049 682 698 Less accumulated depreciation 404 262 223 - ---------------------------------------------------------------------------------------------------------------- 645 420 475 - ---------------------------------------------------------------------------------------------------------------- TRADEMARKS AND INTELLECTUAL PROPERTY 48 31 - - ---------------------------------------------------------------------------------------------------------------- $ 21,047 $ 13,690 $ 6,886 ================================================================================================================ LIABILITIES CURRENT Accounts payable $ 2,155 $ 1,402 $ 1,216 Accrued liabilities 133 87 107 Deferred revenue 137 89 - - ---------------------------------------------------------------------------------------------------------------- 2,425 1,578 1,323 - ---------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY Share capital (Note 4) 37,217 24,206 6,140 Special warrants (Note 5) 9,083 5,908 8,394 Deficit (27,678) (18,002) (8,971) - ---------------------------------------------------------------------------------------------------------------- 18,622 12,112 5,563 - ---------------------------------------------------------------------------------------------------------------- $ 21,047 $ 13,690 $ 6,886 ================================================================================================================
F-2 BID.COM INTERNATIONAL INC. Consolidated Statements of Operations (expressed in thousands of Canadian Dollars) - -------------------------------------------------------------------------
December 31, ------------------------------------------------------------------- 1998 1998 1997 1996 -------------- --------------------- ------------- ------------- Convenience translation into U.S. $ (Note 14) Revenue $ 20,089 $ 13,066 $ 2,671 $ 51 - -------------------------------------------------------------------------------------------------------------------------- Direct expenses 19,361 12,593 2,916 12 Advertising and promotion (Note 10) 12,594 8,191 2,521 403 General and administrative 5,734 3,729 3,157 1,453 Software development and expense 889 578 661 194 Depreciation and amortization 201 131 122 100 Interest expense 17 11 19 - - -------------------------------------------------------------------------------------------------------------------------- 38,796 25,233 9,396 2,162 - -------------------------------------------------------------------------------------------------------------------------- NET LOSS FOR THE YEAR $(18,707) $(12,167) $(6,725) $(2,111) ========================================================================================================================== LOSS PER SHARE $(0.79) $(0.51) $(0.55) $(0.21) ==========================================================================================================================
F-3 BID.COM INTERNATIONAL INC. Consolidated Statements of Deficit (expressed in thousands of Canadian Dollars) - -------------------------------------------------------------------------
Year ended December 31, ------------------------------------------------------------------- 1998 1998 1997 1996 -------------- --------------------- ------------- ------------- Convenience translation into U.S. $ (Note 14) DEFICIT, BEGINNING OF YEAR $ (8,971) $ (5,835) $(2,246) $ (135) NET LOSS FOR THE YEAR (18,707) (12,167) (6,725) (2,111) - -------------------------------------------------------------------------------------------------------------------------- DEFICIT, END OF YEAR $(27,678) $(18,002) $(8,971) $(2,246) ==========================================================================================================================
F-4 BID.COM INTERNATIONAL INC. Consolidated Statements of Cash Flows (expressed in thousands of Canadian Dollars) - ------------------------------------------------------------------------
December 31, --------------------------------------------------- 1998 1998 1997 1996 -------------- -------------------- ------------- ------------- Convenience translation into U.S. $ (Note 14) NET INFLOW (OUTFLOW) OF CASH RELATED TO THE FOLLOWING ACTIVITIES OPERATING Net loss for the year $(18,707) $(12,167) $(6,725) $(2,111) Item not affecting cash Depreciation and amortization 201 131 122 100 - ----------------------------------------------------------------------------------------------------------------------- (18,506) (12,036) (6,603) (2,011) Changes in non-cash operating working capital items (Note 9) 1,702 1,107 (1,085) 381 - ----------------------------------------------------------------------------------------------------------------------- (16,804) (10,929) (7,688) (1,630) - ----------------------------------------------------------------------------------------------------------------------- INVESTING Purchase of capital assets (351) (228) (247) (396) Acquisition of net assets of subsidiary - - - (27) Purchase of trademarks and intellectual property (68) (44) - - Marketable securities (5,648) (3,674) (1,158) - - ----------------------------------------------------------------------------------------------------------------------- (6,067) (3,946) (1,405) (423) - ----------------------------------------------------------------------------------------------------------------------- FINANCING Issuance of common shares (Note 4) 22,683 14,753 4,103 1,786 Issuance of special warrants (net of expenses) (Note 5) 9,083 5,908 8,394 - Special warrants receivable (122) (80) (2,189) - Loan payable - - (258) 258 - ----------------------------------------------------------------------------------------------------------------------- 31,644 20,581 10,050 2,044 - ----------------------------------------------------------------------------------------------------------------------- NET CASH INFLOW (OUTFLOW) DURING THE YEAR 8,773 5,706 957 (9) CASH, BEGINNING OF YEAR 1,019 663 62 71 - ----------------------------------------------------------------------------------------------------------------------- CASH, END OF YEAR $ 9,792 $ 6,369 $ 1,019 $ 62 =======================================================================================================================
F-5 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 1. DESCRIPTION OF BUSINESS Bid.Com International Inc. ("Bid.Com") is a sales and marketing company striving to become the pre-eminent online auction house and a leading E- tailer. The Company operates business-to-consumer online auctions at its BID.COM Web site and at other URLs. The Company recently completed the development of a business-to-business auction service and intends to operate business-to-business auctions in selected vertical industry sectors and to conduct liquidation auctions for bankruptcy trustees and other liquidators. The Company also seeks to license its proprietary online auction technology to support private brand online auctions and interactive auctions in a variety of other communications media. The business of the Company was commenced by Internet Liquidators Inc., an Ontario corporation, in September 1995. In May 1996, Internet Liquidators USA Inc., a wholly owned subsidiary of Internet Liquidators Inc. was incorporated under the laws of Florida. In January 1997, the Company was formed, as an Ontario corporation, by amalgamation of Internet Liquidators Inc. and Internet Liquidators International Inc. In May 1998, Bid.Com USA Inc and Lapis Group USA Inc., were incorporated as wholly owned subsidiaries. In June 1998, the Company changed its name from Internet Liquidators International Inc. to Bid.Com International Inc. The accompanying consolidated financial statements are issued under the name of "BID.COM International Inc." (formerly "Internet Liquidators International Inc.") but are considered a continuation of the financial statements of Internet Liquidators Inc. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of presentation The accompanying consolidated financial statements are prepared in accordance with accounting principles generally accepted in Canada which are substantially the same as generally accepted accounting principles in the United States (see Note 12). Principals of consolidation The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All material inter-company transactions have been eliminated. Inventory The Company's operating policy is not to purchase inventory for resale but to ship direct from suppliers. Inventory on the balance sheets reflects sales returns in transit which are valued at the lower of cost and net realizable value and at the option of the Company are held for resale or returned to suppliers for credit. Advertising The Company expenses the costs of producing advertisements at the time production occurs, and expenses the costs of communicating advertising in the period in which the advertising space or airtime is used. Internet advertising expenses are recognized based on specifics of the individual agreements, but generally using the greater of (i) the ratio of the number of impressions delivered over the total number of impressions and (ii) the straight-line basis over the term of the contract. This policy complies with the Requirements of Statement of Position No. 93-7, "Reporting on Advertising Costs" issued by the American Institute of Certified Public Accountants. F-6 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 2. SIGNIFICANT ACCOUNTING POLICIES (continued) Capital assets and depreciation Capital assets are carried at cost less accumulated depreciation. Depreciation is calculated on the straight-line basis in amounts sufficient to amortize the cost of capital assets over their estimated useful lives as follows: Equipment 20% per year Furniture and fixtures 20% per year Computer hardware 30% per year Leasehold improvements 3 years Trademarks and intellectual property Trademarks and intellectual property are recorded at cost and amortized on a straight-line basis over two years. Software development costs The costs of acquired software and internally developed software are expensed as incurred. Translation of foreign currencies The accompanying consolidated financial statements are prepared in Canadian dollars. All foreign denominated transactions are translated using the temporal method whereby monetary assets and liabilities are translated at the rates in effect on the balance sheet date, non-monetary items at historical rates and revenues and expenses at the average monthly rate. Gains or losses from exchange translations are included in the statements of loss. Loss per share The basic loss per share calculation is based on the weighted average number of shares outstanding during the period. No fully diluted calculation is included as it would reduce the loss per share. Revenue recognition Revenue from product sales, commissions, shipping and handling are recognized when the goods are shipped to customers. Use of significant accounting estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. Stock based compensation Under Canadian generally accepted accounting principles, stock based compensation is not recorded in the accounts of the Company. Stock based compensation under United States GAAP is accounted for in accordance with the provisions of Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees". Accordingly, under both Canadian and US GAAP no accounting recognition is given to stock options granted at fair market value until they are exercised. Upon exercise, the net proceeds are credited to shareholders' equity. The impact of Statement of Financial Accounting Standards (SFAS) 123, "Accounting for Stock Based Compensation," is disclosed in the notes to these financial statements under Reconciliation of United States GAAP. F-7 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 3. INCOME TAXES The Company's non-capital loss carryforwards as at December 31, 1998, the benefit of which has not been recognized in the financial statements, expire as follows: 2001 $ 135,000 2002 $ 2,100,000 2003 $ 6,700,000 2004 $18,700,000 4. SHARE CAPITAL a) Authorized Unlimited number of common shares Unlimited number of preference share - issuable in series b) Common shares
December 31, -------------------------------------------------------------- 1998 1997 ------------------------------ ------------------------------ Common Common Shares Amount Shares Amount -------------- -------------- -------------- -------------- (in thousands) Opening balance 14,188 $ 6,140 9,598 $2,037 Issued for: Cash 16,375 21,068 1,577 1,531 Exercise of options 615 681 263 318 Exercise of warrants 5,989 9,328 1,750 1,254 Other - - 1,000 1,000 ------------------------------------------------------------------------------------------------------------- Closing balance 37,167 $37,217 14,188 $6,140 =============================================================================================================
c) Stock options The Company has a stock option plan which provides for the issuance to employees of incentive stock options, which may expire as much as 10 years from the date of grant, at prices not less than the fair market value of the common shares on the date of grant. The aggregate purchase price for options outstanding at December 31,1998 was approximately $2.2 million. The Stock Option Committee reserves the right to attach vesting periods to stock options granted. Certain of the stock options outstanding at the end of 1998 have vesting periods attached which range from six months to thirty-two months. The options expire between 1999 and 2002. F-8 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 4. SHARE CAPITAL (continued) c) Stock options (continued) A summary of changes in the stock option plan for the two years ended December 31, 1998 is as follows:
Number of Options Average Price -------------------------------- ------------------------------ 1998 1997 1998 1997 --------------- --------------- -------------- -------------- (in thousands) Options outstanding, beginning of year 651 424 $1.15 $1.19 Options granted 916 450 1.76 1.15 Options exercised (115) (218) 0.98 1.06 Options cancelled (11) (5) 2.35 1.25 -------------------------------------------------------------------------------------------------------------- Options outstanding, end of year 1,441 651 $1.55 $1.15 ============================================================================================================== Options exercisable, end of year 1,251 501 $1.60 $1.20 ============================================================================================================== Shares reserved for issuance under stock option plan 326 632 ==============================================================================================================
The Company also has stock options outstanding to third parties. The aggregate purchase price for third party stock options outstanding at December 31, 1998 was approximately $530,000. The options expire between 1999 and 2001. A summary of changes in the stock options to third parties for the two years ended December 31, 1998 is as follows:
Number of Options Average Price -------------------------------- ------------------------------ 1998 1997 1998 1997 --------------- --------------- -------------- -------------- (in thousands) Options outstanding, beginning of year 640 475 $1.14 $1.25 Options granted 350 210 1.06 0.90 Options exercised (500) (45) 1.14 1.25 -------------------------------------------------------------------------------------------------------------- Options outstanding, end of year 490 640 $1.08 $1.14 ============================================================================================================== Options exercisable, end of year 490 640 $1.08 $1.14 ==============================================================================================================
F-9 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 4. SHARE CAPITAL (continued) d) Compensation and share purchase warrants The Company has issued warrants to investors under private placement equity issues during 1996,1997 and 1998. A summary of changes in the warrants to investors for the two years ended December 31,1998 is as follows
1998 1997 -------------------------------- -------------------------------- Warrants Amounts Warrants Amounts --------------- --------------- --------------- --------------- (in thousands) Opening balance 4,301 $ 6,802 1,750 $ 1,400 Granted 7,797 12,829 4,301 6,802 Exercised (5,989) (9,393) (1,750) (1,400) --------------------------------------------------------------------------------------------------------------- Closing balance 6,109 $10,238 4,301 $ 6,802 ===============================================================================================================
A further 43,000 share purchase warrants exercisable at $1.65 and 152,875 share purchase warrants exercisable at $1.75 are subject to issuance upon the exercise of outstanding compensation warrants and are not included in the above table. 5. SPECIAL WARRANTS On November 30, 1998 the Company closed a private placement of $10,001,222 in equity for net proceeds of $6,863,460 with the remaining $2,311,098 of net proceeds held in trust pending the filing of a final prospectus. The Company issued 5,714,984 special warrants, each special warrant being exercisable to acquire one unit (subject to adjustment in certain circumstances) for no additional consideration, at a price of $1.75 per special warrant. Each unit consisted of one common share of the Company and one quarter of one common share purchase warrant. Each common share purchase warrant entitles the holder to purchase one common share at a price of $1.75 per common share up to December 31, 1999. The Company also issued 611,498 compensation warrants. Each compensation warrant entitles the underwriter to purchase one unit, consisting of one common share and one quarter of one common share purchase warrant at a price of $1.75 per unit up to December 31, 1999. On January 21, 1999, the final prospectus was filed resulting in the conversion of 5,714,984 special warrants into 5,714,984 common shares and the issue of 1,428,746 common share purchase warrants. F-10 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 6. FINANCIAL INSTRUMENTS Foreign exchange risk The Company transacts substantially all of its product sales and purchases in United States dollars and a significant portion of operating expenditures are in United States dollars. The Company does not use derivative instruments to manage exposure to foreign exchange fluctuations. Interest rate risk The Company has limited exposure to any fluctuation in interest rates. The Company does not use derivative instruments to reduce its exposure to interest rate risk. Credit risk Credit risk arises from the potential that a customer will fail to meet its obligations. The collection risk is minimized because the majority of sales are settled before shipping by pre-authorized credit card payments through a significant financial institution. In addition, the diverse customer base minimizes any concentration of credit risk. Fair value Fair value of assets and liabilities approximate amounts at which they could be exchanged between knowledgeable and unrelated persons. The amounts recorded in the financial statements approximate fair value. 7. COMMITMENTS AND CONTINGENCIES (a) As a condition of the agreement with a financial institution to settle sales transactions through pre-authorized credit card payments, the Company must maintain a cash reserve account based on a percentage of sales for the preceding six months. At December 31, 1998, the Company was required to maintain $1,500,000 in this reserve account (December 31, 1997 - $300,000). This arrangement was renegotiated by the Company at a reduced percentage of sales for 1999 and a corresponding reduced reserve account balance. (b) Minimum lease payments during the next five years are as follows: 1999 $211,200 2000 192,300 2001 155,000 (c) The Company is committed under an Interactive Marketing Agreement with AOL to expend $1,250,000 U.S. per quarter for advertising and promotion with AOL to November 1, 1999. In February 1999 the AOL Interactive Marketing Agreement was re-negotiated, resulting in a one-time payment of $1,250,000 U.S. and an insertion order of $1,750,000 U.S. These amounts are being amortized over the life of the agreement beginning February 1, 1999 and expiring March 31, 2000. F-11 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 8. UNCERTAINTY DUE TO THE YEAR 2000 ISSUE The year 2000 Issue arises because many computerized systems use two digits rather than four to identity a year. Date-sensitive systems may recognize the year 2000 as 1900 or some other date, resulting in errors when information using year 2000 dates is processed. In addition, similar problems may arise in some systems that use certain dates in 1999 to represent something other than a date. The effects of the Year 2000 Issue may be experienced before, on, or after January 1, 2000, and, if not addressed, the impact on operations and financial reporting may range from minor errors to significant system failure, which could affect a company's ability to conduct normal business operations. It is not possible to be certain that all aspects of the Year 2000 Issue affecting the Company, including those related to the efforts of customers, suppliers, or third parties, will be fully resolved. 9. CHANGE IN NON-CASH OPERATING WORKING CAPITAL
Years ended December 31, ---------------------------------------------------------------- 1998 1998 1997 1996 ------------- -------------------- -------------- ----------- Convenience translation into U.S. $ (Note 14) (in thousands) Accounts receivable $ (936) $ (609) $ (117) $ 19 Inventory 32 21 (200) - Deposits and prepaid expenses 1,504 978 (1,668) 1 Accounts payable 939 611 819 361 Accrued liabilities 26 17 81 - Deferred revenue 137 89 - - -------------------------------------------------------------------------------------------------------------------- $1,702 $1,107 $(1,085) $ 381 ====================================================================================================================
10. OPERATIONS In June 1997, the Company, as part of its marketing program in conjunction with America Online Inc. ("AOL"), introduced special promotional pricing in order to stimulate new bidder registrations and first time sales. This initiative contributed to annual sales growth in 1997 of over 5,100% and 1998 of 652%. This special promotional pricing cost the Company approximately $3,520,000 in 1998 ($698,000 in 1997) and has been included in advertising and promotion. In November 1997, the Company entered into an interactive marketing agreement with AOL. Under the terms of the agreement the Company will be provided with a specific number of advertising impressions featuring it as the preferred provider of business-to-consumer auction services on AOL's service. In consideration for the impressions, the Company has committed to pay $10.0 million U.S. over the two-year term of the agreement. Of the $10.0 million U.S. total commitment, $5.0 million U.S. was paid during the first year of the contract. In February 1999, the agreement with AOL was re-negotiated, thereby significantly reducing the contractual advertising spent with AOL for 1999 in comparison to AOL advertising expenditures in 1998. The renegotiation also extended the term of the original agreement. In March 1998 the Company launched its new consumer brand "BID.COM". F-12 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 11. SUBSEQUENT EVENTS (a) Issue of Shares and Share Purchase Warrants The Company filed a final prospectus on January 21, 1999 in connection with the special warrants issued on November 30, 1998 and received the remaining $2,311,098 of the special warrants receivable. Upon the exercise of the special warrants on January 21, 1999, the Company issued 5,714,984 common shares and 1,428,746 common share purchase warrants. The Company also issued compensation warrants to the underwriter entitling the underwriter to acquire up to 611,498 units at a price of $1.75 per unit up to December 31, 1999. Each unit consists of one common share and one-quarter of one share purchase warrant. In exercising the compensation options, the underwriter may, at its option, elect to receive a number of common shares based on a formula dependent upon the market value of the common shares as of the day preceding the election (see Note 5). (b) Stock Option Plan The Stock Option Committee of the Board of Directors approved the issue of 328,000 options to directors and employees on January 22, 1999 exercisable at $5.05 per share until January 21, 2002. (c) Nasdaq listing application and filing of Form 20 F with Securities and Exchange Commission On February 16, 1999 the Company filed a listing application with the Nasdaq SmallCap Market ("Nasdaq") as part of the process to qualify for trading on Nasdaq. Concurrently, the Company filed a Registration Statement on Form 20-F with the Securities and Exchange Commission ("SEC") in order to register its shares for trading on Nasdaq. The Nasdaq and SEC review process is expected to last approximately 45 to 60 days (d) Exercise of options During the period from January 1, 1999 to March 3, 1999, the Company issued 390,000 common shares upon the exercise of options at prices ranging from $0.80 to $2.35 per share for aggregate consideration of $514,250 and canceled 2,500 stock options at $2.35 per common share subsequent to termination of employment of an employee. (e) Exercise of compensation warrants During the period from January 1, 1999 to March 3, 1999, the Company issued 86,000 common shares upon the exercise of 86,000 compensation warrants at $1.40 per share and issued 43,000 share purchase warrants exercisable at $1.75 per share. The Company also issued 300,000 common shares upon the exercise of 300,000 compensation warrants at $1.75 per share and issued 75,000 share purchase warrants exercisable at $1.75 per share. (f) Exercise of share purchase warrants During the period from January 1, 1999 to March 3, 1999, the Company issued 1,846,312 common shares upon the exercise of 1,846,312 share purchase warrants at $1.65 per share and issued 521,250 common shares upon the exercise of 521,250 share purchase warrants at $1.75 per share. F-13 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 12. RECONCILIATION OF UNITED STATES GAAP As discussed in Note 2, the Company's accounting for its stock-based awards to employees using the intrinsic value method is in accordance with APB Opinion No. 25, "Accounting for Stock Issued to Employees," and its related interpretations. SFAS No. 123, "Accounting for Stock-Based Compensation," requires the disclosure of pro forma net income (loss) and earnings (loss) per share had the Company adopted the fair value method since the Company's inception. Under SFAS No. 123, the fair value of stock-based awards to employees is calculated through the use of option pricing models, even though such models were developed to estimate the fair value of freely tradeable, fully transferable options without vesting restrictions, which significantly differ from the Company's stock option awards. The Company's calculations for employee grants were made using the Cox Rubinstein Binomial Model with the following weighted average assumptions:
Years ended December 31 ------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Dividend yield - - - Risk free interest rate 4.80% 4.90% 3.68% Expected term, in years 1.18 1.40 2.02
If the computed minimum values of the Company's stock-based awards to employees had been amortized to expense over the vesting period of the awards as specified under SFAS No. 123, the loss attributable to common shareholders and the basic and diluted loss per share on a pro forma basis (as compared to such items as reported) would have been:
Years ended December 31 ------------------------------------------------- 1998 1997 1996 --------------- --------------- --------------- Loss attributable to common shareholders (in thousands) As reported $(18,707) $(6,725) $(2,111) Pro forma $(19,941) $(8,134) $(2,281) Basic and diluted net loss per share: As reported $ (.79) $ (.55) $ (.21) Pro forma $ (.84) $ (.66) $ (.23)
Impact of new accounting pronouncements In March 1998, the American Institute of Certified Public Accountants issued Statement of Position 98-1, "Accounting for the Cost of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). SOP 98-1 provides guidance on accounting for the costs of computer software developed or obtained for internal use. This pronouncement identifies the characteristics of internal use of software and provides guidance on new cost recognition principles. SOP 98-1 is effective for financial statements for fiscal years beginning after December 15, 1998. The Company does not expect the adoption of this pronouncement to have a material impact upon its financial statements. F-14 BID.COM INTERNATIONAL INC. Notes to the Consolidated Financial Statements (expressed in Canadian Dollars) - ------------------------------------------------------------------------------- 13. RECLASSIFICATION OF PRIOR YEARS Certain prior year amounts have been reclassified to conform to the current year's basis of presentation. 14. CONVENIENCE TRANSLATION The financial statements as at December 31, 1998 and for the year then ended have been translated into U.S. dollars using the exchange rate of the U.S. dollar at December 31, 1998 as published by the Federal Reserve Bank of New York (U.S. $1.000 = Cdn. $1.5375). The translation was made solely for the convenience of readers in the United States. The translated U.S. dollar figures should not be construed as a representation that the Canadian currency amounts actually represent or could be converted into U.S. dollars. F-15 SIGNATURES Pursuant to the requirements of Section 12 of the Securities Exchange Act of 1934, the registrant certifies that it meets all of the requirements for filing on Form 20-F and has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized. BID.COM INTERNATIONAL INC. By: /s/ Paul Godin --------------------------- Name: Paul Godin Title: Chief Executive Officer Dated: April 15, 1999 EX-3.2 2 E-COMMERCE SERVICES AGREEMENT Exhibit 3.2 E-Commerce Services Agreement THIS AGREEMENT is made as of the 12th day of February, 1997 (the "Effective Date") by and between INTERNET LIQUIDATORS INTERNATIONAL INC., a corporation having a principal place of business at 5915 Airport Road, Suite 330, Mississauga, Ontario, L4V 1T1 ("IL") and TORONTO STAR NEWSPAPERS LIMITED, a corporation having a place of business at 1 Yonge Street, Toronto, Ontario, M5E 1E6 ("Torstar"). BACKGROUND: 1. IL has developed, and has all applicable rights in, certain electronic auction software, technology and services (collectively, the "IL Technology"), as more particularly described herein. 2. IL uses a portion of the IL Technology in an auction and storefront on-line service over the internet provided at IL's website found at URL "www.internetliquidators.com" (the "E-Commerce Service", as more particularly described herein). 3. Torstar operates an on-line service for subscribers under the name T-O Online and operates the largest circulation newspaper in Canada. 4. As more particularly described in this Agreement, IL wishes to allow Torstar and certain related entities who provide interactive services to, and Torstar has agreed to accept such rights to: (i) use and commercially exploit the E-Commerce Service for T-O Online Users in Ontario on an exclusive basis in a Local Auction and Mall format, as specifically defined herein; and (ii) for the foregoing purposes, use the IL Technology to allow T-O Online Users to interface with the E-Commerce Service. NOW THEREFORE in consideration of the premises, the mutual covenants contained in this Agreement, and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the Parties agree as follows: -2- ARTICLE I INTERPRETATION I.1 Definitions. In this Agreement, unless the context otherwise requires, each capitalized term shall have the meaning attributed thereto in Schedule "A". I.2 Schedules. The following are the schedules attached to and forming part of this Agreement: Schedule "A" - Definitions Schedule "B" - Description of IL Technology Schedule "C" - Response Times Schedule "D" - Source Code Trust Agreement I.3 Headings. Words expressed in the singular include the plural and vice-versa and words in one gender include all genders. I.4 Extended Meanings. Words expressed in the singular include the plural and vice-versa and words in one gender include all genders. I.5 Entire Agreement. This Agreement, and any agreements and other documents to be delivered pursuant to it, constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, oral or written between the Parties. The execution of this Agreement has not been induced by, nor do either of the Parties rely upon or regard as material, any representations, warranties, conditions, other agreements or acknowledgements not expressly made in this Agreement or in the agreements and other documents to be delivered pursuant hereto. -3- I.6 Currency. Unless otherwise indicated, all dollar amounts referred to in this Agreement are in Canadian funds. I.7 Invalidity. If any of the provisions contained in this Agreement is found by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not be in any way affected or impaired thereby. I.8 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and shall be treated, in all respects, as an Ontario contract. The Parties hereby irrevocably submit to the exclusive jurisdiction of the courts of Ontario in respect of the subject matter hereof. I.9 Provision of Services. For the purposes of this Agreement, references to the sale of products through the E-Commerce Service shall be deemed to include the provision of services as well. ARTICLE II USE OF E-COMMERCE SERVICE II.1 Torstar Exclusive E-Commerce Services. Subject to the terms of this Agreement, IL grants to Torstar and Torstar Affiliates the exclusive right to use the E-Commerce Service in a Local Auction and Mall format to sell products from charitable and community organizations and local retailers to purchasers in the Territory ("T-O Online Exclusive E- Commerce"), with the E-Commerce Service functioning at a new URL chosen by Torstar. -4- II.2 Sourcing and Fulfillment for Torstar Exclusive E-Commerce. Torstar will be responsible for sourcing products, operating the content of the Local Auctions and Mall, and arranging for the fulfillment of products to the end consumer. IL will be responsible for ensuring that Local Auctions functionally take place, that credit card transactions for the Local Auctions and Mall are processed, and for providing information to Torstar of approved transactions. II.3 Torstar Sponsored Auctions. Torstar shall be allocated, at no additional cost to Torstar, on a non- cumulative basis, at least sixty minutes per day on the IL's Canadian national auction as a co-branded sponsor with IL ("Torstar Sponsored Auctions"). Torstar will have the right to determine at which times on IL's Canadian national auction the Torstar Sponsored Auctions shall occur, subject to IL's approval which shall not be unreasonably withheld. During the time that IL is conducting the Torstar Sponsored Auctions, IL will not conduct any other auctions through the E-Commerce Service in Canada, nor will it authorize or allow any third party to do so in Canada using the E-Commerce Service, other than Local Auctions. II.4 Sourcing and Fulfillment for Torstar Sponsored Auctions. For Torstar Sponsored Auctions on IL's Canadian national auction, IL will be responsible for sourcing product from manufacturers and arranging for fulfillment to the end consumer, as IL currently does with its national auctions, coordinating with product sourced by Torstar as it may occur from time to time. II.5 Allocation of Product. For Greater Clarity. All products sourced directly from manufacturers or distributors will be offered for sale though the IL national auction, and all products sourced from retailers in the Territory will be offered for sale through the Local Auction and Mall in the Territory. It is further understood that any business-to-business initiative by IL or charitable organizational work for a local chapter of a national account of IL (such as Recording Artists Against Drunk Driving) within the Territory, does not infringe on the exclusive rights of Torstar for its Local Auctions and Mall in the Territory. -5- II.6 Promotion and Avails. (a) Sales of Ad Avails. Torstar will be entitled to sell up to [Confidential Information filed separately with the SEC] of IL's banner advertisements in Canada on the first page of the E-Commerce Service's Canadian website and any page of the E-Commerce Service's website that is directly linked to the first page. All revenue collected by Torstar for sales of these banner advertisements and those of Torstar Exclusive E-Commerce in the Territory shall be allocated net of third party sales commissions and such commissions as are mutually agreed from time to time, [Confidential Information filed separately with the SEC] to IL and [Confidential Information filed separately with the SEC] to Torstar. (b) Marketing and Advertising. IL will purchase advertising from T-O Online, Torstar Exclusive E-Commerce and in The Toronto Star in an aggregate amount equal to [Confidential Information filed separately with the SEC] by January 17, 1998 (the "Required Advertising"). (c) Torstar's charges for such advertising shall not exceed the most favourable rates charged to other advertisers for comparable advertising commitments. II.7 Discounts to Third Parties. [Confidential Information filed separately with the SEC] II.8 General Revenue Splits for E-Commerce Service. (a) All Net Revenue received in connection with the sale of products and services through the E-Commerce Service will be allocated as by a Party as follows:
Torstar IL -------------- -------------- Torstar Local Auctions & Mall Sales in Ontario: (all transactions through the new URL chosen by Torstar) [XXX] [XXX] Torstar Sponsored Auctions - Ontario Residence-Based Sales through the URL www.internetliquidators.com: [XXX] [XXX] IL Auction and Mall - Ontario Residence-Based Sales through the URL www.internetliquidators.com: [XXX] [XXX] (Exclusive of Torstar Sponsored Auctions)
NOTE: [XXX] denotes Confidential Information filed separately with the SEC. (b) The same revenues splits as described above shall apply for Torstar Local Auction and Mall -6- Sales for Ontario and Non-Ontario Residence Based Sales provided that if IL grants a territorial license to an arm's length third party which would prohibit sales from such territory through the new URL chosen by Torstar, Torstar shall on notice, cease accepting sales from such territory. ARTICLE III RIGHT TO USE IL TECHNOLOGY III.1 Scope of Licence re: IL Technology (a) Subject to the terms of this Agreement, IL grants to Torstar, the right to use the IL Technology including applicable Software and Documentation to fully exploit the rights granted under Article Two. (b) IL will on request grant Torstar a non-exclusive license to use the IL Technology for non-auction related uses, including, without limitation, the operation of games and contests on terms to be mutually agreed upon by the Parties. III.2 Acknowledgement of Title. (a) Except as otherwise provided herein, Torstar acknowledges that ownership of the IL Technology shall remain with IL. (b) Torstar shall ensure that to the extent that Torstar Affiliates utilize the licence in this Article Three they do so pursuant to this Agreement. Subject to the terms of this Agreement Torstar shall indemnify, defend and hold harmless IL for any breach of this agreement by Torstar or Torstar Affiliates who have access to the IL Technology. Subject to the terms of this Agreement, IL shall indemnify, defend and hold harmless Torstar and Torstar Affiliates which are authorized by this Agreement to have access to the IL Technology for any breach of this Agreement by IL. (c) Torstar shall take all reasonable precautions to prevent third parties from using the IL Technology in its possession in any way that would constitute a breach of this Agreement including, without limitation, such precautions as it would otherwise take to protect its own proprietary technology. III.3 User Interface Branding. Using the IL Technology and in coordination with IL, Torstar will create Torstar branded user interfaces for use on T-O Online as "The Star Online Auction" or such other brand as Torstar may choose using IL's trademark "Online Auction". These branded versions of the user interfaces for the IL Technology will include the IL brand as a sub-brand (the "Sub-Branded Interfaces"). The -7- branding and look and feel of the Sub-Branded Interfaces shall be determined by Torstar subject to IL's approval which shall not be unreasonably withheld. III.4 Capability of IL Technology (a) In co-operation with IL, Torstar shall be responsible for integrating the IL Technology into T-O Online and for developing sub-branded interfaces. IL will ensure that the Sub-Branded Interfaces will have the right and capability to use all of the functionality that is used on connection with the E-Commerce Service at the same time as such functionality is used on the E-Commerce Service. (b) Any updates or upgrades and corresponding instructional materials to the IL Technology and E-Commerce Service will be provided by IL to Torstar at the same time such updates or upgrades and corresponding instructional materials are provided for the E-Commerce Service or to any third party. (c) IL will continue to update and upgrade the IL Technology and E-Commerce Service to ensure that it contains at least substantially the same functionality as its competitors as reasonably determined by IL. III.5 Support and Maintenance. (a) In cooperation with IL, Torstar will be responsible for integrating and IL will be responsible for maintaining and improving the IL Technology and the E-Commerce Service and for providing all necessary assistance, training, technical support, Software and Documentation in connection with the Torstar Interactive Services, use of the IL Technology and the E-Commerce Service. The foregoing will be provided by IL's senior software engineers at IL's offices. Without limiting the foregoing, IL will provide Torstar with no less than the most favourable support and maintenance terms (e.g., response times and training classes) provided to any third party. IL will also provide initial assistance using its marketing personnel for Torstar's sourcing of product, at no cost, as may be reasonable but without adversely affecting IL's own operations. (b) If Torstar requests the inclusion in the IL Technology or the E-Commerce Service of functionality or customization changes for a "Torstar look", IL will assist Torstar, on terms to be mutually agreed upon. Such enhancements will be assisted by IL on a cost pass through basis. -8- ARTICLE IV SERVICES AND TAXES IV.1 Additional Services. Upon the prior written consent of Torstar, those additional Services rendered by IL which are reasonably contemplated hereunder as being provided at an additional charge and the charge for which is not otherwise set out herein may be charged to Torstar at IL's standard rates then in effect plus reasonable out- of-pocket expenses approved in advance by Torstar. IV.2 Taxes. Torstar shall pay to IL those taxes, duties, and other such assessments or charges now in force or enacted in the future that are applicable to this Agreement or are measured directly by payments made under it and are required to be collected by IL or paid by IL to tax authorities. This provision includes sales, use, service, and excise taxes, whether collected by withholding or otherwise assessed, but does not include taxes based on IL's net income. ARTICLE V REPRESENTATIONS, WARRANTIES AND INDEMNITIES V.1 Warranty and Indemnity re: Authority, Title and Proprietary Rights. (a) IL represents and warrants that it has the right to grant the licence hereby granted and that IL has the right to provide the E-Commerce Service. (b) IL agrees to defend and indemnify Torstar or Torstar Affiliates and hold each harmless from all losses, claims, damages or liabilities, including court costs and attorney's fees, in connection with or arising out of any claim asserted against Torstar or Torstar Affiliates based upon a contention that the E-Commerce Service or any of the Deliverables, or any portion thereof in the form accepted by Torstar or Torstar Affiliates and used within the scope of this Agreement infringes the Intellectual Property Rights of any third party provided that: (i) Torstar or Torstar Affiliates promptly notifies IL in writing of the claim and of all material developments in connection with such claim and provides all assistance otherwise reasonably requested by IL; (ii) IL has the right to control, at its own cost, the defence and all related settlement negotiations (Torstar has the right to participate at its own expense); -9- (iii) Torstar or Torstar Affiliates does not pay or settle any such claim without the express written consent of IL; and (iv) the liability in respect of which indemnity is sought does not arise out of or in connection with any unauthorized use of the IL Technology by Torstar or Torstar Affiliates. In addition, if the E-Commerce Service, any of the Deliverables, or any portion thereof is held to constitute an infringement of another Person's rights, and use thereof is enjoined, IL shall, at its election and expense, either: (A) procure the right to use the infringing element thereof; (B) procure the right to an element which performs the same function without any material loss of functionality; or (C) replace or modify the element thereof so that the infringing portion is no longer infringing and still performs the same function without any material loss of functionality; and shall make every reasonable effort to correct the situation with minimal effect upon the operations of Torstar or Torstar Affiliates. V.2 Requirements of the E-Commerce Service. IL warrants that the E-Commerce Service and the Deliverables shall perform in conformance with Torstar's Requirements therefor provided that the IL Technology is used in accordance with the Documentation and that IL shall have no liability for performance failures due to events or causes beyond its reasonable control or due to changes made by Torstar without the prior written approval of IL.. V.3 Disabling Device. IL warrants that any Software provided hereunder shall not contain any clock, timer, counter, or other limiting or disabling code, design or routine that would cause the Software to be made inoperable or otherwise rendered incapable of performing in accordance with Torstar's Requirements or otherwise limit or restrict Torstar's or Torstar Affiliates' ability to use same or after the lapse or occurrence of any triggering prompt. V.4 Media. IL represents and warrants that the media on which any Software is provided shall be compatible with the computer system on which Torstar or Torstar Affiliates advise it is to be installed and that -10- the media, as supplied by IL, shall be free from defects and computer viruses. V.5 Representations and Warranties re: Services. IL agrees that all services to be provided by it hereunder shall be provided in a timely fashion and in a professional manner by personnel appropriately trained in the performance of such services in accordance with all applicable governmental regulations governing such services. Response times shall be as outlined in Schedule C. If IL does not meet the response time requirements for a severity (1) or severity (2) event and such failure is not due to an event beyond the reasonable control of IL, Torstar shall have the right to insist that its' own engineers and designers assist IL's personnel at IL's premises to rectify the problem and IL shall co-operate fully in this process. V.6 Compliance with Applicable Laws. IL shall comply with all laws applicable to the provision of the E-Commerce Service or any part thereof. V.7 Provision of Source Code Materials. IL agrees to enter into a trust agreement with Torstar and Data Securities International, Inc. in the form attached as Schedule D for the deposit of the Source Code Materials such that in the event of default as provided therein, Torstar will have access to the Source Code Materials. V.8 Confidentiality. Each Party covenants to the other Party that it shall keep confidential the Confidential Information of the other Party to which such Party obtains access to as a consequence of entering into this Agreement and that it will take all reasonable precautions to protect such Confidential Information from any use, disclosure or copying except as expressly authorized by this Agreement. Each Party shall implement such procedures as the other Party may reasonably require from time to time to improve the security of the Confidential Information in its possession. This Section shall survive the termination of the Agreement. For greater certainty, IL acknowledges and agrees that all information respecting subscribers to T-O Online is the Confidential Information of Torstar including e-mail addresses and personal information obtained pursuant to this Agreement. IL shall not use such information for marketing purposes without the prior written consent of Torstar. V.9 Ownership of Software, etc. Torstar acknowledges that the Software constitutes commercially valuable trade secrets and proprietary data of IL and that no term of this Agreement shall be construed to convey title in the Software or the Online Auction trademark to Torstar. Notwithstanding the foregoing, all Intellectual Property Rights in the Sub-Branded Interfaces shall vest in Torstar and the parties shall execute such documentation as may be reasonably required to confirm the foregoing. -11- V.10 Limitation on Warranties. Except for those warranties otherwise provided herein, neither Party makes any warranties or representations, and there are no conditions, express or implied, in fact or in law, including without limitation, the implied warranties or conditions of merchantable quality and fitness for a particular purpose and those arising by statute or otherwise in law or from a course of dealing or usage of trade. ARTICLE VI DEFAULT AND TERMINATION VI.1 Term. (a) The term of this Agreement (the "Term") shall commence on the Effective Date and shall continue, subject to early termination in accordance with the terms hereof, until January 31, 2000 (the "Initial Term"). Thereafter, and subject to Section 7.1(b), the Agreement shall be automatically extended for consecutive one (1) year terms (each, being a "Subsequent Term") unless sixty (60) days prior notice in writing is given by Torstar prior to the end of any of the Initial Term or any of the Subsequent Terms, stating Torstar's intention to terminate the Agreement at the end of such term. (b) The extension of the Term of the Agreement into any of the Subsequent Terms shall be conditional upon the Parties, using appropriate diligence and acting in good faith, during the sixty days prior to the end of the Initial Term and each Subsequent Term, negotiating and agreeing on reasonable Net Revenue and advertising allocations for the upcoming Subsequent Term. If the Parties cannot reach such an agreement, the Parties will submit the determination of such allocation and fees to binding arbitration unless Torstar elects to terminate within sixty (60) days before the commencement of the Subsequent Term. Pending resolution of arbitration and subject to the payment or repayment of any amount based upon the arbitrator's order, as applicable, Torstar shall continue to pay the amounts paid during the expiring term. VI.2 Termination for Cause. Subject to the time frames set out below, this Agreement may be terminated immediately by either Party on written notice upon the occurrence of an event of default by the other Party. Each of the following constitutes an event of default for the purposes of this Agreement. (i) if either Party fails to perform any material obligation set forth in this Agreement (other than a failure to pay which is considered separately in (iii)) and such default in -12- the case of a default which is remediable continues for a period of thirty (30) days after written notice of such failure has been given by the non-defaulting Party; (ii) if there is repeated and ongoing failure by a Party to comply with or perform any of the material terms, conditions, agreements and obligations imposed on it by this Agreement; (iii) if a Party should fail to pay a material amount to the other when payable hereunder (other than such portion of an amount which such Party, in good faith, disputes is owing) and such breach is not cured within sixty (60) days after written notice stating that such amount is due and owing and that non-payment may result in termination; or (iv) if a Party becomes bankrupt or insolvent or ceases the operation of its business without a successor. VI.3 Survival. For a period of 12 months after this Agreement is terminated, all operative terms of this Agreement will remain in full force and effect including the use of the Sub-Branded Interfaces, allocation of Net Revenue and rights to share revenue and advertising. Thereafter and for a period not to exceed three months, IL will on request and at Torstar's expense cooperate with Torstar to assist Torstar in transitioning to a new technology. Except as otherwise provided herein, the terms of Articles II and VII and Sections 3.2 and 3.5 shall survive any termination or expiry of this Agreement and shall continue in force thereafter for the period contemplated by the Agreement as shall any other provision of this Agreement which, by the nature of the rights or obligations set out therein, might reasonably be expected to be intended to so survive. ARTICLE VII ARBITRATION VII.1 Dispute Resolution Process. If any dispute, disagreement, controversy or claim arising out of or relating to this Agreement including, without limitation, its application, interpretation, performance, breach, termination, enforcement or damages, or remedies arising out of the breach of or non-compliance therewith, shall be finally determined by arbitration before a single arbitrator to be commenced and conducted in the English language in Toronto in accordance with the Arbitration Act (Ontario). The Parties hereto agree that: (a) subject to mutual agreement between the Parties to the contrary, the arbitrator shall be a person who is legally trained and trained as a professional arbitrator and who has a -13- minimum of five (5) years experience in the licensing of computer software; (b) the Parties shall agree on the identity of the arbitrator within 10 days of notice of reference to arbitration and in default thereof, either party may apply to a Judge of the Supreme Court of Ontario, General Division, to appoint an arbitrator with the foregoing qualifications; (c) the Parties shall be required to make written submissions to the arbitrator within 5 days of appointment and shall not be entitled to make verbal representations or further submissions unless so requested by the arbitrator. Any party who does not comply with the foregoing time period shall not be entitled to make any submissions without the written approval of the other party; (d) the arbitrator shall be required to render his decision in writing within 10 days of the period mentioned in subsection 7.1(c); (e) neither of the Partners shall apply to the Courts of Ontario or any other jurisdiction to attempt to enjoin, delay, impede or otherwise interfere with or limit the scope of the arbitration or the powers of the arbitral tribunal provided for in the Arbitration Act (Ontario) (f) the award of the arbitral tribunal shall be a final and conclusive award and judgment with respect to all matters properly before the arbitral tribunal in accordance with the Arbitration Act (Ontario) and neither Party shall appeal such award in any manner whatever to any court, tribunal or other authority; and (g) the award of the arbitral tribunal may be entered and enforced by any court in any jurisdiction having jurisdiction over the Parties hereto or the subject matter of the award or the properties or assets of either of the Parties hereto. ARTICLE VIII MANAGEMENT AND REPORTING VIII.1 Management and Reporting. The Parties each agree to designate an individual from their respective companies with adequate authority and full technical competence to deal with matters relating to the implementation of the Deliverables (each, being a "Project Manager"). Specifically, these individuals will, on behalf of their respective Parties, in accordance with the spirit of this Agreement, use reasonable efforts to coordinate the provision of the E-Commerce Service. Upon such designations, each of IL and Torstar shall concurrently provide the other with details with respect to its Project Manager, including name, address and telephone number, and each of IL and Torstar may from time to time change its Project Manager with the consent of the other which will not be unreasonably withheld. -14- VIII.2 Reports. IL will provide Torstar with a monthly usage report that tracks all elements necessary to allocate revenues. In addition IL will provide such information as is available to it as to the users of the E- Commerce Service in the Territory and how users of the E-Commerce Service are navigating through the E-Commerce Service. VIII.3 Payment. All parties shall make payments owing by them to the others within fifteen days of the end of the month in which the obligation arises. ARTICLE IX GENERAL IX.1 Notice. Any notice or other communication (in this Section a "Notice") required or permitted to be given or made hereunder shall be in writing and shall be well and sufficiently given or made if: (a) delivered in person during normal business hours on a Business Day and left with a receptionist or other responsible employee of the relevant party at the applicable address set forth below; (b) sent by prepaid first class mail; or (c) sent by any electronic means of sending messages, including facsimile transmission, which produces a paper record (an "Electronic Transmission"), charges prepaid and confirmed by prepaid first class mail; in the case of a Notice to Subscriber addressed to it at: Toronto Star Newspapers Limited 1 Yonge Street Toronto, Ontario M4E 1E6 Attention: Vice President, Strategic Planning and New Media Fax No.: (416) 869-4762 -15- and in the case of a Notice to Issuer addressed to it at: Internet Liquidators International Inc. 5915 Airport Rd., Suite 330 Mississauga, Ontario L4V 1T1 Attention: Paul Godin Fax No.: (905) 672-5705 with a copy to: Gowling, Strathy & Henderson Barristers & Solicitors Commerce Court West Suite 4900 Toronto, Ontario M5L 1J3 Attention: David Pamenter Fax No.: (416) 862-7661 Any Notice given or made in accordance with this Section 9.1 shall be deemed to have been given or made and to have been received: (a) on the day it was delivered, if delivered as aforesaid; (b) on the fifth Business Day (excluding each day during which there exists any general interruption of postal services due to strike, lockout or other cause) after it was mailed, if mailed as aforesaid; and (c) on the day of sending if sent by Electronic Transmission during normal business hours of the addressee on a Business Day and, if not, then on the first Business Day after the sending thereof. Any Party may from time to time change its address for notice by giving Notice to other Party in accordance with the provisions of this Section 9.1. -16- IX.2 Assignment. The rights and obligations of IL under this Agreement shall not be assigned, in whole or in part, by IL without the prior consent in writing of Torstar and any purported assignment made without that consent is void and of no effect. No assignment of this Agreement shall relieve IL from any obligation under this Agreement or impose any liability upon Torstar, unless otherwise agreed to in writing by Torstar. Torstar may assign its rights and obligations under this Agreement to any Affiliate but no such assignment shall release Torstar from any obligation under this Agreement or impose any liability on IL, unless otherwise agreed to in writing by IL. IX.3 Binding on Successors. This Agreement shall enure to the benefit of and be binding upon the Parties and their respective successors and permitted assigns. IX.4 Further Assurances. Each Party agrees that upon the written request of the other Party, it will do all such acts and execute all such further documents, conveyances, deeds, assignments, transfers and the like, and will cause the doing of all such acts and will cause the execution of all such further documents as are within its power to cause the doing or execution of, as any other Party hereto may from time to time reasonably request be done and/or executed as may be necessary or desirable to give effect to this Agreement. IX.5 Independent Contractors. It is understood and agreed that in giving effect to this Agreement, no Party shall be or be deemed a partner, agent or employee of another Party for any purpose and that their relationship to each other shall be that of independent contractors. Nothing in this Agreement shall constitute a partnership or a joint venture between the Parties. No Party shall have the right to enter into contracts or pledge the credit of or incur expenses of liabilities on behalf of the other Party. IX.6 Waiver. A waiver by any Party hereto of any of its rights hereunder or of the performance by another Party of any of its obligations hereunder shall be without prejudice to all of the other rights hereunder of the Party so waiving and shall not constitute a waiver of any such other rights or, in any other instance, of the rights so waived, or a waiver of the performance by the other Party of any of its other obligations hereunder or of the performance, in any other instance, of the obligations so waived. No waiver by any Party of any of its obligations hereunder shall be effective or binding upon such Party unless the same shall be expressed in writing. -17- IN WITNESS WHEREOF this Agreement is executed by the Parties as of the date first written, above. INTERNET LIQUIDATORS INTERNATIONAL INC. By: ------------------------------------- (Duly Authorized Officer) By: ------------------------------------- (Duly Authorized Officer) TORONTO STAR NEWSPAPERS LIMITED By: ------------------------------------- (Duly Authorized Officer) By: ------------------------------------- (Duly Authorized Officer) -18- SCHEDULE "A" DEFINITIONS In this Agreement, unless the context otherwise requires, the following expressions have the meanings indicated below: "Above the Fold" means, in respect of a hyperlink, the ability to view the hyperlink without having to scroll down the applicable web page; "Agreement" means this E-Commerce Services Agreement and all schedules annexed to this Agreement as the same may be amended from time to time in accordance with the provisions hereof or thereof, "hereof'" "hereto" and "hereunder" and similar expressions mean and refer to this Agreement and not to any particular article or section; except where the context specifically requires, "Article" or "Section" means and refers to the specified article or section of this Agreement. "Business Day" means any day from Monday to Friday inclusive, except statutory or civic holidays observed in Toronto, Ontario; "Confidential Information" means all information relating to either Party or to such Party's business, products, sales, customers, trade secrets, technology or financial position to which access is obtained or granted hereunder, which when disclosed to the other Party is marked or otherwise designated as confidential, provided, however, that Confidential Information shall not include any data or information which: (i) is or becomes publicly available through no fault of the other Party; (ii) is already in the rightful possession of the other Party prior to its receipt from the other Party; (iii) is independently developed by the other Party; (iv) is rightfully obtained by the other Party from a third party not subject to an obligation of confidentiality; (v) is disclosed with the written consent of the Party whose information it is; or (vi) is disclosed pursuant to court order or other legal compulsion; -19- "Deliverables" means the whole of the activities, services, materials, software, matters and things required to be done, delivered or performed by IL in accordance with the terms of this Agreement, including the software, documentation and services and including all other rights and things, tangible or intangible, including intellectual property rights to be provided hereunder by IL to Torstar or Torstar Affiliates including, without limitation, any of the foregoing as described in Schedule "B"; "Documentation" means user manuals and the written instructions for the Software provided by IL which describe the design, performance and functional specifications of the Software, and which facilitate the use, operation and maintenance of the Software; "E-Commerce Service" means those internet auction services and storefront online commerce services provided by or on behalf of IL or its subsidiaries on the Internet at the URL "www.internetliquidators.com" or any other comparable on- line service which IL or its subsidiaries may provide or allow third parties to provide now or at some future time using the IL Technology or otherwise; "Effective Date" has the meaning attributed thereto on the face page of this Agreement; "Intellectual Property Rights" includes: (A) any and all proprietary rights provided under (i) patent law, (ii) copyright law, (iii) trademark law, (iv) design patent or industrial design law, (v) semi- conductor ship or mask work law, or (vi) any other statutory provision or common law principle applicable to this Agreement or the Software which may provide a right in either (a) ideas, formulae, algorithms, concepts, inventions or know-how generally, including trade secret law, or (b) the expression or use of such ideas, formulae, algorithms, concepts, inventions or know-how; and (B) any and all applications, registrations, licenses, sub-licenses, franchises, agreements or any other evidence of a right in any of the foregoing; "IL Technology" means the technology and know-how known by IL or its subsidiaries in respect of the provision of on-line auction services generally (and including all Intellectual Property Rights therein), whether patented or registered, and whether domestic or foreign including patent applications and copyrighted software, as more particularly described in Schedule "C" and including that technology and know-how used in respect of the operation of the E-Commerce Service in accordance with Torstar's Requirements; "Local Auction and Mall" means an auction or other conduct of online storefront commerce using the E-Commerce Service to sell products and services of local retailers and from charitable and community organizations to consumers; "Net Revenue" means the aggregate amount of revenue (including without limitation shipping and handling) received by a Party in connection with the purchase by end users of products or services offered through the E-Commerce Service, less cost of goods sold, credit card transaction fees, ISP -20- carrier costs and revenue splits (such as America Online) all sales and use taxes, duties, the cost of shipping and credits for returned goods or services and bad debts; "Parties" means IL, Torstar and Torstar Affiliates collectively and "Party" means any of them; "Person" includes an individual, company, corporation, partnership, government or government agency, authority or entity howsoever designated or constituted; "Required Advertising" has the meaning attributed thereto in Section 2.7(b); "Services" means those services to be provided by IL to Torstar or the Torstar Affiliates hereunder; "Software" means that computer software being provided to Torstar by IL hereunder to meet Torstar's Requirements, including any modifications or improvements to the Software (whether developed by IL, Torstar or otherwise); "Source Code Materials" means: (a) a complete copy of the source code version of all software required to allow Torstar to independently operate and maintain and support an auction service in accordance with Torstar Requirements including the Software, appropriate labeled to denote the version or release thereof, and the currency date thereof, in each of: (i) machine-readable form on machine-readable storage medium suitable for long term storage and compatible with the Software as then being used by Torstar and which, when compiled, will produce the object code version of the Software; and (ii) human-readable form with annotations in the English language on bond paper suitable for long term archival storage; and (b) a complete copy, in English, printed on bond paper, suitable for long term archival storage, and appropriately labeled to describe the contents thereof, of all applicable documentation and other explanatory materials including programmer's notes, technical or otherwise, for the Software as may be required by Torstar, using a competent computer programmer possessing ordinary skills and experience, to further develop, maintain and operate such software without further recourse to IL including, but not necessarily limited to, general flow-charts, input and output layouts, field descriptions, volumes and sort sequence, data dictionary, file layouts, processing requirements and calculation formula and the details of all algorithms; "Sub-Branded Interfaces" has the meaning attributed thereto in Section 3.3; "Territory" means the Province of Ontario; -21- "Torstar Affiliate" means any entity of which Torstar owns or has the right to acquire, whether directly or indirectly, 50.1% or more of the outstanding securities entitled to vote for the election of directors (or equivalent governing body) of such entity and which provides interactive services; "Torstar Interactive Services" means interactive services provided by Torstar and Torstar Affiliates, including, without limitation, the T-O Online service; "T-O Online" has the meaning attributed thereto in the recitals; "T-O Online Exclusive E-Commerce" has the meaning attributed thereto in Section 2.2; "Torstar's Requirements" shall mean the statement of the functions and capabilities of the E- Commerce Service provided hereunder by IL to Torstar and Torstar Affiliates, as more particularly described in Schedule "B". "Torstar Sponsored Auctions" has the meaning attributed thereto in Section 2.3; and "Work" means the Software and Documentation collectively. CP Doc#: 31481-1 March 23, 1999 SCHEDULE "B" Internet Liquidators Auction and Mall Technology ------------------------------------------------ The ILI Auction and Mall systems are based on market proven Microsoft and IBM software components. Relying on the Microsoft Windows NT server platform, Netscape Commerce Server and common Microsoft languages, the system is robust, has been thoroughly tested and is currently in use in the general market place. The system incorporates high performance, memory resident CGI cashing applications to provide the Internet user with CGI access at the same performance level as that found in general html file serving. In addition to the performance factors, a high volume transaction liknk across an encrypted Microlink Transaction system allows secure credit card transactions to be performed in real time, over the Internet. The Auction system can accommodate multiple, simultaneous auctions running on the same system. This allows unique identities to be associated with each specific auction location, while still utilizing the same system applications and hardware components. In the same manner, the Mall system will allow multiple Mall locations, with multiple stores to be executed within the same environment. All systems have been constructed in such a way to provide volume and performance scaling wherever necessary. Currently utilizing a higher performance Digital Alpha 1000 data server coupled with a 100Mb network backbone and an available 10Mb connection to the Internet, the system can be expanded to accommodate almost any loading requirements. In providing a system which will allow the consumer to purchase products within a secure environment, the system employs multiple encryption systems, industry standard firewall systems and Netscape SSL technology to meet the stringent requirements of all parties. All bank transactional information is processed on a bank certified system, running IBM's proven OS2/Warp operating system. Utilizing a multi- system transaction process, completely disconnected from the Internet, this system provides total security to the individual user's credit card information provided by the bank. Approved and declined information is fed directly from the bank to the user on the Internet, allowing the specific banking institution's to control the level of information passed to their clients. SCHEDULE "C" RESPONSE CHART 1. IL shall respond to a report of the Software failing to meet Torstar's Requirements in accordance with the severity level. The severity shall be reasonably determined by Torstar, and communicated to IL, based on the following definitions: Severity 1: indicates total inability to use Software, resulting in a critical impact on user objectives; Severity 2: indicates ability to use Software but user operation is severely restricted; Severity 3: indicates ability to use Software with limited functions which are not critical to overall user operations; and Severity 4: indicates that the problem has been bypassed or otherwise temporarily corrected and is not affecting user operations. 2. IL shall correct the Software to cause it to perform in accordance with Torstar's Requirements as follows: Severity 1: within 48 hours of notification by Torstar; Severity 2: within 96 hours of notification by Torstar; Severity 3: within 30 days of notification by Torstar; Severity 4: within 120 days of notification by Torstar; CP Doc #: 29548-1 January 29, 1997 SCHEDULE "D" MASTER PREFERRED ESCROW AGREEMENT Master Number ---------------------- This Agreement is effective February 12, 1997 among Data Securities International, Inc.("DSI"), Internet Liquidators International Inc. ("Depositor"), and any additional party signing the Acceptance Form attached to this Agreement ("Preferred Beneficiary") who collectively may be referred to in this Agreement as "the parties." 1. Depositor and Preferred Beneficiary have entered or will enter into a license agreement in the form attached to such Preferred Beneficiary's Acceptance Form regarding certain proprietary technology of Depositor (referred to in this Agreement as "the license agreement"). 2. Depositor desires to avoid disclosure of its proprietary technology except under certain limited circumstances. 3. The availability of the proprietary technology of Depositor is critical to Preferred Beneficiary in the conduct of its business and, therefore, Preferred Beneficiary needs access to the proprietary technology under certain limited circumstances. 4. Depositor and Preferred Beneficiary desire to establish an escrow with DSI to provide for the retention, administration and controlled access of certain proprietary technology materials of Depositor. ARTICLE 2 -- DEPOSITS 2.1 Obligation to Make Deposit. Upon the signing of this Agreement by the parties, including the signing of the Acceptance Form, Depositor shall deliver to DSI the proprietary information and other materials identified on an Exhibit A. DSI shall have no obligation with respect to the preparation, signing or delivery of Exhibit A. 2.2 Identification of Tangible Media. Prior to the delivery of the deposit materials to DSI, Depositor shall conspicuously label for identification each document, magnetic tape, disk, or other tangible media upon which the deposit materials are written or stored. Additionally, Depositor shall complete Exhibit B to this Agreement by listing each such tangible media by the item label description, the type of media and the quantity. The Exhibit B must be signed by Depositor and delivered to DSI with the deposit materials. Unless and until Depositor makes the initial deposit with DSI, DSI shall have no obligation with respect to this Agreement, except the obligation to notify the parties regarding the status of the deposit account as required in Section 2.2 below. 2.3 Deposit Inspection. When DSI receives the deposit materials and the Exhibit B, DSI will give a receipt for the deposit materials to the Depositor in the form provided by the -2- Depositor and conduct a deposit inspection by visually matching the labeling of the tangible media containing the deposit materials to the item descriptions and quantity listed on the Exhibit B. In addition to the deposit inspection, Preferred Beneficiary may elect to cause a verification of the deposit materials in accordance with Section 1.6 below. 2.4 Acceptance of Deposit. At completion of the deposit inspection, if DSI determines that the labeling of the tangible media matches the item descriptions and quantity on Exhibit B, DSI will date and sign the Exhibit B and deliver a copy thereof to Depositor and Preferred Beneficiary. If DSI determines that the labeling does not match the item descriptions or quantity on the Exhibit B, DSI will (a) note the discrepancies in writing on the Exhibit B; (b) date and sign the Exhibit B with the exceptions noted; and (c) provide a copy of the Exhibit B to Depositor and Preferred Beneficiary. DSI's acceptance of the deposit occurs upon the signing of the Exhibit B by DSI. Delivery of the signed Exhibit B to Preferred Beneficiary is Preferred Beneficiary's notice that the deposit materials have been received and accepted by DSI. 2.5 Depositor's Representations. Depositor represents as follows: (1) Depositor lawfully possesses all of the deposit materials deposited with DSI; (2) With respect to all of the deposit materials, Depositor has the right and authority to grant to DSI and Preferred Beneficiary the rights as provided in this Agreement; (3) The deposit materials are not subject to any lien or other encumbrance other than encumbrances arising in the ordinary cause of Depositor's business; (4) The deposit materials consist of the proprietary information and other materials identified in Exhibit A; and (5) The deposit materials are readable and useable in their current form or, if the deposit materials are encrypted, the decryption tools and decryption keys have also been deposited. 2.6 Verification. Preferred Beneficiary shall have the right, at Preferred Beneficiary's expense, to cause a verification of any deposit materials. A verification determines, in different levels of detail, the accuracy, completeness, sufficiency and quality of the deposit materials. If a verification is elected after the deposit materials have been delivered to DSI, then only DSI, or at DSI's election an independent person or company selected and supervised by DSI, may perform the verification. 2.7 Deposit Updates. Unless otherwise provided by the license agreement, Depositor shall update the deposit materials within 60 days of each release of a new version of the product which is subject to the license agreement. Such updates will be added to the existing deposit. All deposit updates shall be listed on a new Exhibit B and the new Exhibit B shall be signed by Depositor. Each Exhibit B will be held and maintained separately within the escrow account. -3- An independent record will be created which will document the activity for each Exhibit B. The processing of all deposit updates shall be in accordance with Sections 1.2 through 1.6 above. All references in this Agreement to the deposit materials shall include the initial deposit materials and any updates. 2.8 Removal of Deposit Materials. The deposit materials may be removed and/or exchanged only on written instructions signed by Depositor and Preferred Beneficiary, or as otherwise provided in this Agreement. ARTICLE 3 -- CONFIDENTIALITY AND RECORD KEEPING 3.1 Confidentiality. DSI shall maintain the deposit materials in a secure, environmentally safe, locked facility in the greater Toronto area which is accessible only to authorized representatives of DSI. DSI shall have the obligation to reasonably protect the confidentiality of the deposit materials. Except as provided in this Agreement, DSI shall not disclose, transfer, make available, or use the deposit materials. DSI shall not disclose the content of this Agreement to any third party. If DSI receives a subpoena or other order of a court or other judicial tribunal pertaining to the disclosure or release of the deposit materials, DSI will immediately notify the parties to this Agreement. It shall be the responsibility of Depositor and/or Preferred Beneficiary to challenge any such order; provided, however, that DSI does not waive its rights to present its position with respect to any such order. DSI will not be required to disobey any court or other judicial tribunal order. (See Section 7.5 below for notices of requested orders.) 3.2 Status Reports. DSI will issue to Depositor and Preferred Beneficiary a report profiling the account history at least semi-annually. DSI may provide copies of the account history pertaining to this Agreement upon the request of any party to this Agreement. 3.3 Audit Rights. During the term of this Agreement, Depositor and Preferred Beneficiary shall each have the right to inspect the written records of DSI pertaining to this Agreement. Any inspection shall be held during normal business hours and following reasonable prior notice. ARTICLE 4 -- GRANT OF RIGHTS TO DSI 4.1 Title to Physical Copies of Deposited Materials. (1) Depositor transfers to DSI in trust all legal title in and to the physical copies of the deposit materials provided to DSI from time to time in accordance with the terms of this Agreement. It is acknowledged by the parties hereto that such transfer by Depositor to DSI under this Section is not intended to, nor does it, transfer any intellectual property or other intangible rights in the deposit materials. DSI agrees -4- to hold the deposit materials in trust for Depositor and Preferred Beneficiary as provided in this Agreement. (2) The expression "in trust" is intended to refer strictly to the issue of ownership of the deposit materials and not to the level of care which must be taken by DSI in performing its duties under this Agreement. The duties of DSI are strictly contractual in nature and are as set out in this Agreement. It is not intended that DSI is to have the fiduciary duty of a trustee. 4.2 Right to Make Copies. DSI shall have the right to make copies of the deposit materials as reasonably necessary to perform this Agreement. DSI shall copy all copyright, nondisclosure, and other proprietary notices and titles contained on the deposit materials onto any copies made by DSI. With all deposit materials submitted to DSI, Depositor shall provide any and all instructions as may be necessary to duplicate the deposit materials including but not limited to the hardware and/or software needed. 4.3 Right to Transfer Upon Release. Depositor hereby grants to DSI the right to transfer deposit materials to Preferred Beneficiary upon any release of the deposit materials for use by Preferred Beneficiary in accordance with Section 4.5. Except upon such a release or as otherwise provided in this Agreement, DSI shall not transfer the deposit materials. ARTICLE 5 -- RELEASE OF DEPOSIT 5.1 Release Conditions. As used in this Agreement, "Release Conditions" shall mean the following: (1) voluntary bankruptcy of Depositor; (2) involuntary bankruptcy provided that the Depositor is not in good faith diligently taking steps to contest or set aside such process; (3) if Depositor becomes insolvent and ceases to continue to carry on its business; (4) if Depositor ceases the operation of its business and the business is not continued by a successor acceptable to the Preferred Beneficiary, acting reasonably; and (5) any additional release conditions identified on the attached Acceptance Form. 5.2 Filing For Release. If Preferred Beneficiary believes in good faith that a Release Condition has occurred, Preferred Beneficiary may provide to DSI written notice of the occurrence of the Release Condition and a request for the release of the deposit materials. Upon receipt of such notice, DSI shall deliver a copy of the notice to Depositor. -5- 5.3 Contrary Instructions. From the date DSI delivers the notice requesting release of the deposit materials, if the Release Condition is one defined in 4.1(b), 4.1(d) or 4.1(e) Depositor shall have ten business days to deliver to DSI Contrary Instructions. If the Release Condition is one defined in 4.1(a) or (c), DSI shall release the deposit materials pursuant to Section 4.4 within 48 hours of giving notice to the Depositor under Section 4.2. "Contrary Instructions" shall mean the written representation by Depositor that a Release Condition has not occurred or has been cured. Upon receipt of Contrary Instructions, DSI shall deliver a copy to Preferred Beneficiary. Additionally, DSI shall notify both Depositor and Preferred Beneficiary that there is a dispute to be resolved pursuant to the Dispute Resolution section of this Agreement (Section 7.3). Subject to Section 5.2, DSI will continue to store the deposit materials without release pending (a) joint instructions from Depositor and Preferred Beneficiary, (b) resolution pursuant to the Dispute Resolution provisions, or (c) order of a court. 5.4 Release of Deposit. If DSI does not receive Contrary Instructions from the Depositor, DSI is authorized to release the deposit materials to the Preferred Beneficiary or, if more than one beneficiary is registered to the deposit materials, to release a copy of the deposit materials to the Preferred Beneficiary who gave notice under Section 4.2. However, DSI or DSI's authorized representative is entitled to receive any fees due DSI or DSI's authorized representative before making the release. This Agreement will terminate with respect to the Preferred Beneficiary giving notice under Section 4.2 upon the release of the deposit materials held by DSI. 5.5 Right to Use Following Release. Unless otherwise provided in the license agreement, upon release of the deposit materials in accordance with this Article 4, Preferred Beneficiary shall have the right to use the deposit materials for the sole purpose of continuing the benefits afforded to Preferred Beneficiary by the license agreement. Preferred Beneficiary shall be obligated to maintain the confidentiality of the released deposit materials. ARTICLE 6 -- TERM AND TERMINATION 6.1 Term of Agreement. The initial term of this Agreement is for a period of one year. Thereafter, this Agreement shall automatically renew from year-to-year unless (a) Depositor and Preferred Beneficiary jointly instruct DSI in writing that the Agreement is terminated; or (b) the Agreement is terminated by DSI for nonpayment in accordance with Section 5.2. If the Acceptance Form has been signed at a date later than this Agreement, the initial term of the Acceptance Form will be for one year with subsequent terms to be adjusted to match the anniversary date of this Agreement. If the deposit materials are subject to another escrow agreement with DSI, DSI reserves the right, after the initial one year term, to adjust the anniversary date of this Agreement to match the then prevailing anniversary date of such other escrow arrangements. 6.2 Termination for Nonpayment. In the event of the nonpayment of fees owed to DSI or DSI's authorized representative, DSI shall provide written notice of delinquency to the parties to this Agreement affected by such delinquency. Any such party shall have the right to make the payment to DSI or DSI's authorized representative to cure the default. If the past due payment is -6- not received in full by DSI or DSI's authorized representative within one month of the date of such notice, then at anytime thereafter DSI shall have the right to terminate this Agreement to the extent it relates to the delinquent party by sending written notice of termination to such affected parties. DSI shall have no obligation to take any action under this Agreement so long as any payment due to DSI or DSI's authorized representative remains unpaid. 6.3 Disposition of Deposit Materials Upon Termination. Upon termination of this Agreement by joint instruction of Depositor and each Preferred Beneficiary, DSI shall return the deposit materials to the Depositor. Upon termination for nonpayment, DSI shall return the deposit materials to the Depositor. DSI shall have no obligation to return or destroy the deposit materials if the deposit materials are subject to another escrow agreement with DSI. 6.4 Survival of Terms Following Termination. Upon termination of this Agreement, the following provisions of this Agreement shall survive: (1) Depositor's Representations (Section 1.5); (2) The obligations of confidentiality with respect to the deposit materials; (3) The rights granted in the sections entitled Right to Transfer Upon Release (Section 3.3) and Right to Use Following Release (Section 4.5), if a release of the deposit materials has occurred prior to termination; (4) The obligation to pay DSI or DSI's authorized representative any fees and expenses due; (5) The provisions of Article 7; and (6) Any provisions in this Agreement which specifically state they survive the termination or expiration of this Agreement. 6.5 Alternative to DSI. If this Agreement terminates, Depositor and Preferred Beneficiary agree, at Preferred Beneficiary's request, to appoint a new agent by mutual agreement. If Depositor and Preferred Beneficiary cannot agree, Preferred Beneficiary shall appoint a trust company or other company specializing in the escrow business as the agent provided that such company has appropriate storage facilities located in or around Toronto and agrees to store the deposited materials there in accordance with the terms of this Agreement. The new agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named hereunder, without any further assurance, conveyance, act or deed. ARTICLE 7 -- DSI'S FEES -7- 7.1 Fee Schedule. DSI or DSI's authorized representative is entitled to be paid its standard fees and expenses applicable to the services provided. DSI or DSI's authorized representative shall notify the party responsible for payment of DSI's fees at least 90 days prior to any increase in fees. For any service not listed on DSI's standard fee schedule, DSI or DSI's authorized representative will provide a quote prior to rendering the service. 7.2 Payment Terms. DSI shall not be required to perform any service unless the payment for such service and any outstanding balances owed to DSI or DSI's authorized representative are paid in full. All other fees are due upon receipt of invoice. If invoiced fees are not paid, DSI may terminate this Agreement in accordance with Section 5.2. Late fees on past due amounts shall accrue at the rate of one and one-half percent per month (18% per annum) from the date of the invoice. ARTICLE 8 -- LIABILITY AND DISPUTES 8.1 Right to Rely on Instructions. DSI may act in reliance upon any instruction, instrument, or signature reasonably believed by DSI to be genuine. DSI may assume that any employee of a party to this Agreement who gives any written notice, request, or instruction has the authority to do so. DSI shall not be responsible for failure to act as a result of causes beyond the reasonable control of DSI, subject to Section 2.1. 8.2 Indemnification. DSI shall be responsible to perform its obligations under this Agreement and to act in a reasonable and prudent manner with regard to this escrow arrangement. Provided DSI has acted in the manner stated in the preceding sentence, Depositor and Preferred Beneficiary each agree to indemnify, defend and hold harmless DSI from any and all claims, actions, damages, arbitration fees and expenses, costs, attorney's fees and other liabilities incurred by DSI relating in any way to this escrow arrangement. 8.3 Dispute Resolution. Any dispute, difference or question arising among any of the parties concerning the construction, meaning, effect or implementation of this Agreement or any part hereof will be settled by a single arbitrator mutually agreed upon by the parties, or failing agreement, an arbitrator appointed pursuant to the Arbitration Act (Ontario) or similar legislation. The decision of such arbitrator appointed pursuant to this Agreement or such Act will be final and binding on the parties and no appeal will lie therefrom. 8.4 Controlling Law. This Agreement is to be governed and construed in accordance with the laws of the Province of Ontario except any laws which would refer any matter to the laws of another jurisdiction. All parties irrevocably attorn to the exclusive jurisdiction of the Courts of Ontario in respect of the subject matter hereof. 8.5 Notice of Requested Order. If any party intends to obtain an order from the arbitrator or any court of competent jurisdiction which may direct DSI to take, or refrain from taking any action, that party shall: -8- (1) Give DSI at least two business days' prior notice of the hearing; (2) Include in any such order that, as a precondition to DSI's obligation, DSI or DSI's authorized representative be paid in full for any past due fees and be paid for the reasonable value of the services to be rendered pursuant to such order; and (3) Ensure that DSI not be required to deliver the original (as opposed to a copy) of the deposit materials if DSI may need to retain the original in its possession to fulfill any of its other escrow duties. ARTICLE 9 -- GENERAL PROVISIONS 9.1 Entire Agreement. This Agreement, which includes the Acceptance Form and the Exhibits described herein, embodies the entire understanding between all of the parties with respect to its subject matter and supersedes all previous communications, representations or understandings, either oral or written. No amendment or modification of this Agreement shall be valid or binding unless signed by all the parties hereto, except that Exhibit A need not be signed by DSI, Exhibit B need not be signed by Preferred Beneficiary and the Acceptance Form need only be signed by the parties identified therein. 9.2 Notices. All notices, invoices, payments, deposits and other documents and communications shall be given to the parties at the addresses specified in the attached Exhibit C and Acceptance Form. It shall be the responsibility of the parties to notify each other as provided in this Section in the event of a change of address. The parties shall have the right to rely on the last known address of the other parties. Unless otherwise provided in this Agreement, all documents and communications may be delivered by First Class mail. 9.3 Severability. In the event any provision of this Agreement is found to be invalid, voidable or unenforceable, the parties agree that unless it materially affects the entire intent and purpose of this Agreement, such invalidity, voidability or unenforceability shall affect neither the validity of this Agreement nor the remaining provisions herein, and the provision in question shall be deemed to be replaced with a valid and enforceable provision most closely reflecting the intent and purpose of the original provision. 9.4 Successors. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties. However, DSI shall have no obligation in performing this Agreement to recognize any successor or assign of Depositor or Preferred Beneficiary unless DSI receives clear, authoritative and conclusive written evidence of the change of parties.
Data Securities International, Inc. Internet Liquidators International Inc. By: By: ---------------------------------------- --------------------------------------- Name: Name: ---------------------------------------- --------------------------------------- Title: Title: ---------------------------------------- --------------------------------------- Date: Date: ---------------------------------------- ---------------------------------------
ACCEPTANCE FORM Account Number ---------------------- Toronto Star Newspapers Limited, hereby (i) acknowledges that it is a Preferred Beneficiary referred to in the Master Preferred Escrow Agreement effective February 12, 1997 with Data Securities International, Inc. as the escrow agent and Internet Liquidators International, Inc. as the Depositor, (ii) agrees to be bound by all provisions of such Agreement, and (iii) agrees that in addition to the Release Conditions set forth in section 4.1 of this Agreement, a further Release Condition shall exist if the Depositor is in material default of its obligations to operate or maintain its E-Commerce Services as contained in the licence agreement attached hereto as Schedule "A" and such default is not cured as provided therein. By: ------------------------------ Name: ------------------------------ Title: ------------------------------ Date: ------------------------------ Notices and communications should be addressed to: Invoices should be addressed to: Company Name: -------------------------- -------------------------------- Address: -------------------------- -------------------------------- -------------------------- -------------------------------- -------------------------- -------------------------------- -------------------------- -------------------------------- Designated Contact: Contact: -------------------------- -------------------------------- Telephone: -------------------------- -------------------------------- Facsimile: -------------------------- -------------------------------- Depositor hereby enrolls Preferred Beneficiary to the following account(s): Account Name Account Number - ------------ -------------- - ------------------------------- --------------------------------- - ------------------------------- --------------------------------- - ------------------------------- --------------------------------- - ------------------------------- Data Securities International, Inc. Depositor SCHEDULE "A" LICENSE AGREEMENT EXHIBIT A MATERIALS TO BE DEPOSITED Account Number ---------------------- Depositor represents to Preferred Beneficiary that deposit materials delivered to DSI shall consist of the following: Internet Liquidators Inc. - Code Module Listing - ----------------------------------------------- [Confidential Information filed separately with the SEC] - -------------------------------- ---------------------------------- Depositor Preferred Beneficiary By: By: -------------------------- ---------------------------- Name: Name: -------------------------- ---------------------------- Title: Title: -------------------------- ---------------------------- Date: Date: -------------------------- ---------------------------- EXHIBIT B DESCRIPTION OF DEPOSIT MATERIALS Depositor Company Name ------------------------------------------------------- Account Number ------------------------------------------------------- PRODUCT DESCRIPTION: Product Name [Confidential Information filed separately with the SEC] Version[Confidential Information filed separately with the SEC] ------------- - ---------------------------------------------------------------------------- Operating System: [Confidential Information filed separately with the SEC] -- - ---------------------------------------------------------------------------- Hardware Platform: [Confidential Information filed separately with the SEC] - - ---------------------------------------------------------------------------- DEPOSIT COPYING INFORMATION: Hardware required: [Confidential Information filed separately with the SEC] - - ---------------------------------------------------------------------------- Software required: [Confidential Information filed separately with the SEC] - - ---------------------------------------------------------------------------- DEPOSIT MATERIAL DESCRIPTION: Qty Media Type& Size Label Description of Each Separate Item (Excluding documentation) Disk 3.5" or _________ 1 X DAT tape 4 mm No Documentation - CD-ROM Data Cartridge Tape__ TK 70 or _______ tape Magnetic tape________ Documentation Other:_______________ No Documentation I certify for Depositor that the above DSI has inspected and accepted the above described deposit materials have been materials (any exceptions are noted transmitted to DSI: above) Signature: Signature: ------------------------- ---------------------------- Print Name: Print Name: ------------------------- ---------------------------- Date: Date Accepted: ------------------------------- ------------------------- Exhibit B# Send materials to: DSI, 9555 Chesapeake Drive,#200, San Diego, CA 92123 EXHIBIT C DESIGNATED CONTACT Master Number ---------------------- Notices and communications should be addressed to: Invoices should be addressed to: Company Name: Address: Designated Contact: Contact: Telephone: Facsimile: Requests to change the designated contact should be given in writing by the designated contact or an authorized employee. Contracts, deposit materials and Invoice inquiries and fee remittances notices to DSI should be addressed to: to DSI or DSI's authorized representative should be addressed to: DSI Technology Asset Management Inc. Contract Administration Accounts Receivable Suite 200 Building 8, Suite 300 9555 Chesapeake Drive 5045 Orbitor Drive San Diego, CA 92123 Mississauga, Ontario L4W 4Y4 Telephone: (619) 694-1900 Telephone: (905) 602-9292 Facsimile: (619) 694-1919 Facsimile: (905) 602-6631 Date: ADDITIONAL ESCROW ACCOUNT AMENDMENT TO MASTER PREFERRED ESCROW AGREEMENT Master Number ---------------------- New Account Number ---------------------- ("Depositor") has entered - ------------------------------------------- into a Master Preferred Escrow Agreement with Data Securities International, Inc. ("DSI"). Pursuant to that Agreement, Depositor may deposit certain deposit materials with DSI. Depositor desires that new deposit materials be held in a separate account and be maintained separately from the existing account. By execution of this Amendment, DSI will establish a separate account for the new deposit materials. The new account will be referenced by the following name: ---------------------. Depositor hereby agrees that all terms and conditions of the existing Master Preferred Escrow Agreement previously entered into by Depositor and DSI will govern this account. The termination or expiration of any other account of Depositor will not affect this account. _____________________________________ Data Securities International, Inc. Depositor By: By: ------------------------------- ------------------------------ Name: Name: ------------------------------- ------------------------------ Title: Title: ------------------------------- ------------------------------ Date: Date: ------------------------------- ------------------------------ CP Doc #: 31392-1 February 12, 1997 EX-3.4 3 SUBSCRIPTION AGREEMENT Exhibit 3.4 SUBSCRIPTION AGREEMENT THIS AGREEMENT is made the 18th day of February, 1997 (the "Effective Date") by and between INTERNET LIQUIDATORS INTERNATIONAL INC., a corporation having a principal place of business at 5915 Airport Rd, Suite 330, Mississauga, Ontario L4V 1T1 ("Issuer") and AMERICA ONLINE, INC., a corporation having a principal place of business at 22000 AOL Way, Dulles, Virginia 20166 ("AOL"). BACKGROUND: 1. As more particularly described herein, AOL wishes to acquire, and Issuer wishes to provide, an interest in Issuer by AOL subscribing for previously unissued common shares in the capital of Issuer and by obtaining a warrant to acquire further common shares of Issuer. Issuer is a public company. 2. In conjunction with the subscription, AOL and Issuer will enter into certain agreements which will allow AOL and certain related entities including Digital City, Inc. ("DCI") to use and exploit certain technology of Issuer to interface and/or provide a link for certain of their on-line interactive users to an auction service provided by Issuer on the Internet. NOW THEREFORE in consideration of the premises, the mutual covenants contained in this Agreement, and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the Parties agree as follows: ARTICLE ONE INTERPRETATION -------------- 1.1 Definitions. In this Agreement, unless the context otherwise requires, ------------ each capitalized term shall have the meaning attributed thereto in Schedule "A". 1.2 Schedules. The following are the schedules attached to and forming part of ---------- this Agreement: Schedule A Definitions Schedule B Financial Statements Schedule C Subsidiaries Schedule D Options Schedule E Litigation Schedule F Licences Schedule G Opinions of Counsel Schedule H Form of Certificate of Originality Schedule I Auction Services Agreement Schedule J DCI Term Sheet Schedule K Shareholders' Agreement Schedule L Registration Rights Agreement Schedule M Material Contracts Schedule N Form of Warrant Schedule O Intellectual Property Rights Schedule P Major Shareholder Interests -2- Schedule Q Encumbrances Schedule R Yankee Auction Functional Specifications 1.3 Headings. The headings in this Agreement are for convenience of reference --------- only and shall not affect the construction or interpretation hereof. 1.4 Extended Meanings. Words in the singular include the plural and vice- ------------------ versa and words in one gender include all genders. 1.5 Entire Agreement. This Agreement and Schedules hereto constitute the ----------------- entire agreement between the Parties pertaining to the subject matter hereof and supersede all prior agreements, understandings, negotiations and discussions, oral or written, between the Parties. The execution of this Agreement has not been induced by, nor do either of the Parties rely upon or regard as material, any representations, warranties, conditions, other agreements or acknowledgements not expressly made in this Agreement or in the agreements and other documents to be delivered pursuant hereto. 1.6 Currency. Unless otherwise indicated, all dollar amounts referred to in --------- this Agreement are in U.S. funds. 1.7 Invalidity. If any of the provisions contained in this Agreement is found ----------- by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not be in any way affected or impaired thereby. 1.8 Governing Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of Ontario and the federal laws of Canada applicable therein (excluding any provisions that would result in the application of the law of another jurisdiction) and shall be treated, in all respects, as an Ontario contract. Issuer submits to the non-exclusive jurisdiction of the Courts of Virginia and the U.S. Federal Court and AOL submits to the non- exclusive jurisdiction of the Courts of Ontario. 1.9 Tender. Unless otherwise indicated, any tender of documents or money ------- hereunder may be made upon the Parties or their respective counsel and money shall be tendered by wire transfer in U.S. or Canadian funds, as applicable, from a U.S. or Canadian bank or by negotiable cheque or draft and certified by a U.S. or Canadian bank. 1.10 Performance on Holidays. If anything is required to be done or any action ------------------------ is required to be taken pursuant to this Agreement on or by a specified date which is not a Business Day, then such action shall be valid if taken on or by the next succeeding Business Day. 1.11 Calculation of Time. In this Agreement, a period of days shall be deemed -------------------- to begin on the first day after the event which began the period and to end at midnight (Toronto time) on the last day of the period, except that if the last day of the period does not fall on a Business Day, the period -3- shall terminate at midnight (Toronto time) on the next Business Day. ARTICLE TWO PURCHASE OF SHARES AND WARRANT ------------------------------ 2.1 Purchase of Shares and Warrant. Subject to the terms of this Agreement, ------------------------------- AOL agrees to subscribe for and purchase, and Issuer agrees to issue and sell to AOL, the Shares and the Warrant, in two stages as follows: (a) At the First Closing, 500,000 Shares ("Stage One Shares") and the Warrant; (b) On July 1, 1997, an additional 500,000 Shares ("Stage Two Shares")(the "Second Closing"). AOL is only required to purchase the Stage Two Shares if the Stage Two Conditions are fulfilled. 2.2 Subscription Price and Payment. The purchase price for the Shares and for ------------------------------- the Warrant shall be an aggregate purchase price of $1,000,000 Cdn. (the "Subscription Price") which shall be paid in cash and Advertising Credits as follows: (a) For Stage One Shares and Warrant, $500,000 Cdn in Advertising Credits; (b) For Stage Two Shares, at AOL's option: (i) $500,000 Cdn.; or (ii) $500,000 Cdn in Advertising Credits expiring on the first anniversary of the First Closing. AOL agrees that if Issuer has (i) satisfied the Yankee Auction Condition; (ii) Cleared Title, (iii) completed the Loan Repayment and (iv) raised an additional $425,000.00 CDN in equity all within 60 days of the First Closing they may on request require AOL to pay Issuer $250,000 Cdn in return for the cancellation of $250,000 Cdn of unused Advertising Credits granted to the Issuer on the First Closing and AOL agrees to do so within 10 Business Days. Issuer covenants and agrees to purchase, in aggregate, advertising on AOL's online service at rate card rates ($60 CPM), the rate typically charged to comparable advertisers for a comparable volume of advertising, equal to the aggregate amount of all cash contributed by AOL for the Shares before (a) June 30, 1997 with respect to any cash paid for the Stage One Shares and (b) February 21, 1998 with respect to any cash paid for Stage Two Shares. 2.3 Share and Warrant Certificate. Issuer shall deliver to AOL at each of the ------------------------------ Closings, one share certificate representing the Shares and, if applicable one warrant certificate representing the -4- Warrant, bearing appropriate legends to indicate the applicable hold period and to reference the restrictions in the Shareholders' Agreement, registered in the name of AOL. On each Closing, Issuer shall cause AOL or such nominee to be entered on the books of Issuer as the holder of the applicable Shares and Warrant, if any. 2.4 Place of Closings. The Closings shall take place at the Closing Time at ------------------ the offices of Fasken Campbell Godfrey, Suite 3700, Toronto-Dominion Bank Tower, Toronto-Dominion Centre, Toronto, Ontario, or at such other place as may be agreed upon by Issuer and AOL. ARTICLE THREE REPRESENTATIONS AND WARRANTIES ------------------------------ 3.1 Representations and Warranties of Issuer. Issuer represents and warrants ----------------------------------------- to AOL as follows and acknowledges that AOL is relying upon such representations and warranties in entering into this Agreement and completing the transactions contemplated hereby. 3.1.1 Corporate Matters. ------------------ (a) Issuer and each of the Subsidiaries is a corporation duly incorporated, organized and validly existing in good standing under the laws of its jurisdiction of incorporation. No proceedings have been taken or authorized by any of Issuer, any Subsidiary or, to the best of Issuer's knowledge, by any other Person with respect to the bankruptcy, insolvency, liquidation, dissolution or winding up of Issuer or any of the Subsidiaries. (b) Issuer has all necessary power and capacity to execute and deliver, and to observe and perform their covenants and obligations under, this Agreement and the Closing Documents to which each is a party. Issuer has taken all corporate action and caused all necessary shareholder action to authorize the execution and delivery of, and the observance and performance of their covenants and obligations under, this Agreement and the Closing Documents to which each is a party including, without limitation, the issuance and delivery of the Shares and Warrant. (c) Issuer and the Subsidiaries have all necessary power and authority to own or lease the Assets and to carry on the Business as at present carried on. Issuer and the Subsidiaries possess all Licences material to the conduct of the Business. Neither the nature of the Business nor the location or character of any of the Assets requires any of Issuer or the Subsidiaries to be registered, licensed or otherwise qualified as an extra-provincial or foreign corporation or to be in good standing in any jurisdiction other than jurisdictions where it is duly registered, licensed or otherwise qualified and in good standing for such purpose. (d) This Agreement has been, and each Closing Document to which Issuer is a party will on -5- Closing be, duly executed and delivered by Issuer, and this Agreement constitutes, and each Closing Document to which Issuer is a party will on Closing constitute, a valid and binding obligation of Issuer enforceable against Issuer in accordance with its terms. (e) A true copy of the Articles and all by-laws of the Issuer each as amended to date and currently in effect have been delivered to AOL by Issuer. The Articles and such by-laws of the Issuer constitute all of the constating documents and by-laws of the Company, are complete and correct and are in full force and effect, subject to confirmation of Issuer's general by-laws by their shareholders. 3.1.2 Authorized and Issued Capital of Issuer. The authorized capital of ---------------------------------------- Issuer consists of an unlimited number of common shares and an unlimited number of preference shares issuable in series. No more than 10,700,000 common shares are outstanding and such shares are fully paid and non-assessable shares. Except as listed in Schedule D, no other Voting Securities, Convertible Securities or Rights of Issuer have been issued or are outstanding. 3.1.3 Options. -------- (a) Except as listed in Schedule "D", no Person other than AOL, has any oral or written agreement, option, warrant, right, privilege or any other right capable of becoming any of the foregoing (whether legal, equitable, contractual or otherwise), for the purchase, subscription or issuance of any Voting Securities, Convertible Securities or Rights of Issuer. Issuer has no agreement or obligation (contingent or otherwise) to purchase, redeem or otherwise acquire any shares of its capital stock or any interest therein or to pay any dividend or make any other distribution in respect thereof. All of the issued and outstanding shares of capital stock of the Issuer have been offered, issued and sold by the Issuer in compliance with Applicable Laws. Except as set forth in Schedule "D", there are no preemptive rights, rights of first refusal, put or call rights or obligations or anti-dilution rights with respect to the issuance, sale or redemption of the Issuer's capital stock, other than rights to which AOL is entitled as set forth in this Agreement. 3.1.4 Subsidiaries. Issuer owns all of the issued shares and Voting ------------- Securities, Convertible Securities and Rights of each Subsidiary and the Subsidiaries are all of the bodies corporate of which any of Issuer or the Subsidiaries holds or has agreed to acquire any shares, Voting Securities, Convertible Securities or Rights. None of Issuer or the Subsidiaries is or has agreed to become a partner, member, owner, proprietor or equity investor of or in any partnership, joint venture or other management or business association or to acquire or lease any other business operation. 3.1.5 Insurance. Issuer and the Subsidiaries maintain valid policies of ---------- insurance with respect to its properties and business of the kinds and in the amounts not less than is customarily obtained by corporations of established reputation engaged in the same or similar business and similarly situated. There is no default under any such policy, nor, to the knowledge of Issuer or the Subsidiaries, has any event occurred which with notice, lapse of time or both would constitute a -6- material default thereunder. 3.1.6 Financial Statements. The Financial Statements: --------------------- (a) have been prepared from and in accordance with the books and records of Issuer and its Subsidiaries in accordance with Generally Accepted Accounting Principles (except as disclosed in the notes thereto) applied on a basis consistent with that of the preceding periods; (b) present fairly the assets, liabilities (whether accrued, absolute, contingent or otherwise) and financial condition of Issuer and the Subsidiaries and the results of the operations of Issuer and the Subsidiaries as at the date thereof and for the periods covered thereby; and (c) contain or reflect adequate reserves for all known or reasonably anticipated liabilities and obligations of Issuer and the Subsidiaries of any nature, whether absolute, contingent or otherwise, as at the date thereof. No information has come to the attention of Issuer or any Subsidiary that would render the Financial Statements incomplete or inaccurate in any material respect. 3.1.7 Undisclosed Liabilities. None of Issuer or the Subsidiaries has any ------------------------ known or reasonably anticipated liabilities (whether accrued, absolute, contingent or otherwise) of any kind and whether due or to become due, except: (a) liabilities disclosed or provided for in the Financial Statements; and (b) liabilities incurred in the ordinary course of business from and after the Financial Disclosure Date which are consistent with past practice, are not, in the aggregate, material and adverse to the Business, Assets, financial condition or results of operations of Issuer and the Subsidiaries, and do not violate any covenant or obligation contained in this Agreement or constitute a breach of any representation or warranty made in or pursuant to this Agreement. 3.1.8 Absence of Changes. Since the Financial Disclosure Date: ------------------- (a) Issuer and each of the Subsidiaries has conducted the Business in the ordinary course, has not incurred any debt, obligation or liability out of the ordinary course of business or of an unusual or extraordinary nature and has used its best efforts to preserve the Business and the Assets; (b) there has not been any change in the condition of the Business or the Assets or the financial condition or results of operations of any of Issuer, the Subsidiaries or the Business other than changes in the ordinary course of business, and such changes have not, either individually or in the aggregate, been materially adverse or have had or may be reasonably -7- expected to have, either before or after the Closing Time, a material adverse effect on the Business, the Assets or the future prospects of any of Issuer, any of the Subsidiaries or the Business; and (c) to the best of Issuer's knowledge, there has not been any change in, or creation of, any Applicable Law, any revocation of any Licence or any damage, destruction, loss, labour dispute or other event, development or condition of any character (whether or not covered by insurance) materially and adversely affecting any of Issuer, any Subsidiary, the Business or the Assets or the future prospects of any of Issuer, the Subsidiaries or the Business. 3.1.9 Tax Matters. Issuer and each of the Subsidiaries has filed all Tax ------------ Returns within the times and in the manner prescribed by law. Issuer and each Subsidiary has paid all Taxes due and payable and has paid all installments and made all other remittances required to be made on account of Taxes payable by them. No Tax Return has been reassessed nor has there been any notice of reassessment by any taxing authority and there are no actions, audits, assessments, reassessments, suits, appeals, proceedings, investigations or claims now pending or, to the best of Issuer's knowledge, threatened against Issuer or any Subsidiary in respect of Taxes or governmental charges by any Governmental Agency relating to claims for additional Taxes or assessments with reference to any of Issuer, the Subsidiaries, the Assets or the Business. There is in effect no waiver of applicable limitation of liability statutes with respect to any Taxes owed by Issuer or any Subsidiary. The provision for Taxes reflected in the Financial Statements is adequate for all Tax liabilities, whether or not yet due and payable and whether or not disputed or under appeal, for the periods covered by the Financial Statements and for all prior periods and none of Issuer or the Subsidiaries has any liability for any Tax in respect thereof of any nature other than those described in the Financial Statements and those arising in the ordinary course of its business since the Financial Disclosure Date. 3.1.10 Absence of Conflicting Agreements. None of the execution and delivery ---------------------------------- of, or the observance and performance by Issuer of any covenant or obligation under this Agreement or any Closing Document to which it is a party including the issuance of Shares pursuant to the exercise of the Warrant, or the Closing, contravenes or results in, or will contravene or result in, a material violation of or a material default under (with or without the giving of notice or lapse of time, or both), or in the acceleration of any material obligation under: (a) any Applicable Law; (b) any Licence held by or for Issuer, a Subsidiary or the Business; (c) the articles, by-laws, directors' or shareholders' resolutions of Issuer or any Subsidiary; or (d) any other agreement, lease, mortgage, security document, obligation or instrument to which Issuer or any Subsidiary is a party, or by which it or its Assets are bound. -8- The representation and warranty in Section 3.1.10(b) shall not apply to Generic Software. 3.1.11 Consents, Approvals, Etc. Subject to those certain filings with ------------------------- Canadian securities authorities identified in Section 3.1.19, no consent, approval, Licence, Order or authorization, registration, declaration or filing with any Governmental Agency or other Person is required by Issuer or any Subsidiary, or with respect to the Business, in connection with (a) the Closing or (b) the execution and delivery by Issuer of, and the observance and performance by Issuer of their obligations under, this Agreement and the Closing Documents to which either is a party. 3.1.12 Restrictions on Business. Other than statutory provisions and ------------------------- restrictions of general application to the Business or to corporations governed by the Act, none of Issuer or any Subsidiary is a party to any agreement, lease, mortgage, security document, obligation or instrument, or subject to any restriction in its articles or by-laws or directors' or shareholders' resolutions or subject to any restriction imposed by any Governmental Agency or subject to any Applicable Law which could materially restrict or interfere with the conduct of the Business or which could materially limit or restrict or otherwise adversely affect the Assets or the financial condition of Issuer on a consolidated basis. 3.1.13 Compliance with Applicable Law. Each of Issuer and the Subsidiaries has ------------------------------- conducted and is conducting the Business in compliance with all Applicable Laws, and is not in breach of any Applicable Laws except for breaches which in the aggregate are not material to Issuer and the Subsidiaries. For the purposes of this Section Applicable Laws means the laws of Canada and the Provinces therein and the laws of the United States of America and the States therein. 3.1.14 Litigation. Except as disclosed in Schedule E, there is no claim, ----------- demand, suit, action, cause of action, dispute, proceeding, litigation, investigation, grievance, arbitration, governmental proceeding or other proceeding including appeals and applications for review, in progress against or relating to Issuer or any Subsidiary or affecting the Shares, the Warrant, the Assets or the Business which, if determined adversely, might materially and adversely affect any of Issuer, any Subsidiary, the Shares, the Warrant, the Business or the Assets or the validity of the Agreement or any of the Closing Documents, nor are any of the same pending or to the best of the knowledge of Issuer threatened. To the knowledge of Issuer and the Subsidiaries, no event has occurred and no condition exists or the basis for which any of the foregoing might properly be instituted or commenced. There is not at present outstanding against any of Issuer or any Subsidiary any Order that materially and adversely affects Issuer, any Subsidiary, the Business or the Assets in any way or that in any way relates to this Agreement or the transactions contemplated hereby. 3.1.15 Title to Properties. Except as disclosed in the Financial Statements -------------------- and Schedule Q, Issuer and the Subsidiaries have good and marketable title to all of the Assets, free and clear of all Encumbrances except for Permitted Encumbrances. 3.1.16 Title to Shares and Warrant. The Shares and the Warrant shall be duly ---------------------------- authorized and created and upon the applicable Closing shall be validly issued and outstanding and the Shares shall -9- be fully paid and non-assessable shares in the capital of Issuer, free and clear of all rights, liens or other Encumbrances except Permitted Encumbrances. Upon payment of the exercise price, the shares issuable upon exercise of the Warrant will be fully paid and non-assessable, free and clear of all rights, liens and Encumbrances other than Permitted Encumbrances. 3.1.17 No Expropriation. None of Issuer or any Subsidiary has received any ----------------- notice of expropriation of any of the Assets. None of Issuer or any Subsidiary is aware of any expropriation proceeding, pending or threatened against or affecting any of the Assets. 3.1.18 Licences. The only Licences necessary or desirable for the operation of --------- the Business and the ownership of the Assets are listed in Schedule F and are in full force and effect unamended. Issuer or each Subsidiary, as the case may be, is in compliance in all material respects with all the terms and conditions relating to such Licences and there are no proceedings in progress, or to the best of the knowledge of Issuer, pending or threatened, which may result in revocation, cancellation, suspension or any adverse modification of any of such Licences. No Licence is void or voidable as a result of the completion of the transactions contemplated hereby or by the Closing Documents or by the exercise of the Warrant nor is any consent or approval of any Person required to assure the continued validity and effectiveness of any Licence in connection with the purchase of the Shares, this Agreement, any Closing Document or by the exercise of the Warrant or the transactions contemplated hereby or thereby. 3.1.19 Securities Legislation. Issuer is a "reporting issuer" in Ontario and ----------------------- is not in default under applicable securities legislation in such province. In particular, without limiting the foregoing, Issuer is in compliance with its obligations to make timely disclosure of all material changes relating to it and since the end of the Issuer's last completed fiscal year (other than in respect of material change reports filed on a confidential basis and thereafter made public or material change reports filed on a confidential basis and in respect of which the material change never came to fruition) no such disclosure has been made on a confidential basis and there is no material change relating to Issuer which has occurred and with respect to which the requisite material change statement has not been filed, except to the extent that this Agreement constitutes a material change. Issuer is not in default of any requirements of such securities legislation, and the issuance of the Shares and the Warrant to AOL will be made in compliance with all applicable Canadian securities legislation. Subject to the filing of a Form 27, Material Change Report and a press release following the execution hereof and the Closing, the issuance of the Shares and Warrant to AOL, and any subsequent exercise of rights under the Warrant, will not result in any contravention of any applicable Canadian securities legislation or the regulations thereunder (subject to filings required on Warrant exercise). The issuance of the Shares and the Warrant is exempt from the registration and prospectus requirements of securities legislation of the Province of Ontario and no prospectus will be required and no other document must be filed, proceeding taken or approval obtained in Ontario to permit the offering, issue, sale and delivery of the Shares and the Warrant to AOL or for the exercise of the Warrant other than the filing of those private placement reports, undertakings and questionnaires -10- referred to above. The Issuer's Shares are not listed or quoted for trading on any stock exchange or other public market other than the Canadian Dealing Network. 3.1.20 Environmental Matters. To the best of Issuer's knowledge: ---------------------- (a) Issuer, each Subsidiary, the Business and the Assets are in full compliance with all Applicable Laws in respect of environmental matters and are not the subject of any remedial or control action or Order, or any investigation or evaluation as to whether any remedial or control action or Order is needed to respond to an actual or threatened release, discharge, deposit, emission or spill of any hazardous substance, pollutant or contaminant into the environment or any facility or structure; (b) none of Issuer or the Subsidiaries is or may be liable to any Person as a result of an actual or alleged release, discharge, deposit, emission or spill of any hazardous substance, contaminant or pollutant into the environment or any facility or structure, nor has there been any release, discharge, deposit, emission or spill of any hazardous substance, contaminant or pollutant into the environment or into any facility or structure, which is the subject of or, after the giving of notice or the lapse of time would give rise to, any claim, demand, suit, action, cause of action, dispute, proceeding or Order relating to the violation of Applicable Laws in respect of environmental matters, nor is there any basis for any thereof being commenced; and (c) Issuer and each Subsidiary has complied in all material respects with all environmental reporting and inspection requirements of all Governmental Agencies having jurisdiction over it. All pollution control equipment operated as part of the Business is effective in meeting applicable emissions limits and effluent pre-treatment standards. 3.1.21 Significant Shareholders. Except as set forth in Schedule "P" there ------------------------- are no loans, leases, licences, guarantees, contracts, transactions, understandings or other arrangements or any nature between the Issuer or any Subsidiary and any officer, director or ten percent (10%) stockholder of the Issuer or any family member or affiliate of the foregoing persons. All persons owning ten percent (10%) or more of the presently outstanding common shares, are listed on Schedule "P". 3.1.22 Material Contracts. Except as set forth in Schedule "M" and except as ------------------- contemplated by this Agreement, neither Issuer nor any Subsidiary is a party or subject to or bound by: (a) any contract, lease or agreement creating any obligation of the Issuer or any Subsidiary to pay to any third party $50,000 or more with respect to any single such contract or agreement, except for purchase orders entered into in the ordinary course of business; -11- (b) any contract or agreement for the sale, license, lease or disposition of products in excess of $50,000; (c) any contract containing covenants directly or explicitly limiting the freedom of the Issuer or any Subsidiary to compete in any line of business or with any person or entity; (d) any license agreement (as licensor or licensee) other than licenses to Generic Software; (e) any contract or agreement for the purchase of any leasehold improvements, equipment or fixed assets for a price in excess of $50,000; (f) any indenture, mortgage, promissory note, loan agreement, guaranty or other agreement or commitment for borrowing in excess of $50,000 or any pledge or security arrangement except as disclosed in Schedule Q; (g) any material joint venture, partnership, manufacturing, development or supply agreement; (h) any employment contracts, or agreements with officers, directors, employees or stockholders of the Issuer or any Subsidiary or persons or organizations related to or affiliated with any such persons; (i) any stock redemption or purchase agreements or other agreements affecting or relating to the capital stock of the Issuer or any Subsidiary, including without limitation any agreement relating to the capital stock of the Issuer or any Subsidiary, including without limitation any agreement relating to anti-dilution rights, registration rights, voting arrangements, operating covenants or similar provisions; (j) any pension, profit sharing, retirement or stock option plans; (k) any royalty, dividend or similar arrangement based on the sales volume of the Issuer or any Subsidiary (l) any acquisition, merger or similar agreement; or (m) any other contract not executed in the ordinary course of business. All of such agreements and contracts are valid, binding on the Issuer or Subsidiary and in full force and effect, subject to (i) applicable bankruptcy, insolvency, reorganization, moratorium, fraudulent conveyance or similar laws affecting the rights of creditors generally, and (ii) statutory or decisional law concerning recourse by creditors to security in the absence of notice of hearing. -12- Neither Issuer nor any Subsidiary, nor, to the knowledge of the Issuer or any Subsidiary, any other party is in material default under any of such agreements or contracts (nor, to the knowledge of the Issuer or any Subsidiary, has any event occurred which with notice, lapse of time or both would constitute a material default thereunder), except to the extent that any such default would not have a material effect on the assets, liabilities, properties, business or proposals of the Issuer or any Subsidiary, and the Issuer or any Subsidiary has not received notice of any alleged default under any such contract, or agreement. 3.1.23 Intellectual Property Rights. ----------------------------- (a) Rights Schedule "O" contains a true and complete list of all Intellectual Property Rights which have been registered, or for which applications for registration have been filed in any jurisdiction. (b) Ownership Except for Permitted Encumbrances, the Issuer is the exclusive owner of the Technology and all right, title and interest in and to the Technology, free and clear of all Encumbrances and the Issuer has no knowledge of any claim of adverse ownership in any Technology. Except as set forth in Schedule "O", Issuer has not: (i) granted any third party licence or other right to any of the Intellectual Property Rights; or (ii) made any contract or arrangement whereby it may be liable for any royalty or other compensation for the use of the Intellectual Property Rights. (c) Validity The Intellectual Property Rights are in good standing and to the best of the Issuer's knowledge have not been used or enforced or failed to be used or enforced in a manner that would result in the abandonment, cancellation or unenforceability of any of the Intellectual Property Rights. All registrations and filings necessary to preserve the rights of the Issuer in and to the Intellectual Property Rights have been made. (d) Complete The Technology is sufficient and complete to enable the Issuer to carry on the Business as currently carried on and to perform its obligations under this Agreement and any related Closing Documents including the Auction Services Agreement. 13 (e) Infringements by Issuer Except as set forth in Schedule "O", there is no: (i) (1) claim of adverse ownership or invalidity or other opposition to or conflict with Issuer's ownership of the copyright, trade marks or trade secrets forming part of the Technology or the manner it is used in respect of the Business nor to the best of the knowledge of Issuer are there any such claims with respect to any other intellectual property forming part of the Technology; or (2) pending or threatened suit, proceeding, claim, demand, action or investigation of any nature or kind, to the best of the knowledge of Issuer, against Issuer relating to the Technology or the manner it is used in respect of the Business; or (ii) claim of which the Issuer has received notice (formal or informal) or is otherwise aware that any products, software or services manufactured, produced, used or sold by the Issuer or any process, method, packaging, advertising, or material that the Issuer employs in the manufacture, marketing, licensing or sale of any such product, software or service, or the use of any of the Technology breaches, violates, infringes or interferes with any rights of any Person or requires payment for the use of any copyright, trade mark or trade secret, know-how or technology of another Person or, to the best of Issuer's knowledge any other intellectual property of any Person. (f) Licenses and Covenants Not to Sue Schedule "O" sets forth a complete and correct list and brief description of all judgments, covenants of Issuer not to sue, permits, grants, franchises, licenses and other agreements and arrangements relating to any of the Technology owned by Issuer which bind, obligate or otherwise restrict either of them. (g) Third Party Infringements There are no infringements of, passing-off related to, or other interference with the Technology by third parties of which the Issuer has received notice (formal or informal) or is otherwise aware. -14- (h) Protection of Confidentiality Issuer has taken commercially reasonable precautions and made commercially reasonable efforts to protect their trade secrets and secure the confidentiality of their customer lists, and other proprietary information. 3.1.24 Major Suppliers and Customers. To the knowledge of the Issuer, no ------------------------------ major supplier or customer has any intention to change its relationship or any material terms upon which it will conduct business with Issuer or the Subsidiaries. There has been no interruption to or discontinuity in any customer or supplier arrangements or relationships referred to in this Section and Issuer and the Subsidiaries have not entered into any fixed price commitments (whether written or oral) which extend beyond the Closing Date of the First Closing. 3.1.25 Material Change Reports. Since the Financial Disclosure Date, ----------------------- other than in respect of material change reports filed on a confidential basis and in respect of which the material change so reported did not come to fruition and other than this Agreement and in respect of the Torstar transaction: (a) there has not been any material change in the assets, liabilities or obligations (absolute, accrued, contingent or otherwise) of the Issuer or its Subsidiaries which requires disclosure under applicable securities legislation and that has not been publicly disclosed; (b) there has not been any material change in the capital stock or long-term debt of the Issuer or its Subsidiaries which requires disclosure under applicable securities legislation and that has not been publicly disclosed; and (c) there has not been any material change in the business, business prospects, condition (financial or otherwise) or results of the operations of the Issuer or its Subsidiaries which requires disclosure under applicable securities legislation and that has not been publicly disclosed. 3.1.26 Information Record. No portion of the Issuer's Information Record ------------------- contained a misrepresentation as at its date of public dissemination. 3.1.27 Reportable Disagreement. During the last five (5) completed fiscal ------------------------ years there has never been any reportable disagreement (within the meaning of National Policy Statement No. 31 of the Canadian Securities Administrators) with the present or any former auditor of the Issuer. 3.1.28 Canadian Dealing Network. The Issuer shall use its best efforts ------------------------- exercised in a commercially reasonable manner to ensure that the Shares will continue to be quoted on the Canadian Dealing Network upon their issue. -15- 3.1.29 Employees. None of the employees of the Issuer or any Subsidiary is ---------- represented by any labour union, and, to the best of Issuer's knowledge, there is no labour strike or other labour trouble pending or threatened with respect to the Issuer or any Subsidiary (including, without limitation, any organizational drive). 3.1.30 Disclosure. No representation or warranty of the Issuer in this ----------- Agreement contains any untrue statement of a material fact or omits to state any material fact necessary to make any such representation or warranty not misleading to a prospective buyer of the Shares or Warrant seeking full information as to the Business and the Assets. Without limiting the scope of the foregoing, none of Issuer or any Subsidiary is aware of any change, event or occurrence related to the Business that has taken place or is pending that has, or in the future would have, a material adverse effect on the value of the Shares, the Warrant, the Assets or the Business which is not the result of general industry trends. The copies of documents concerning Issuer, the Subsidiaries, the Business and the Assets delivered to AOL on or prior to the date hereof are true and complete in all material respects. 3.2 Representations and Warranties of AOL. AOL represents and warrants to -------------------------------------- Issuer as follows and acknowledges that Issuer is relying upon such representations and warranties in connection with entering into this Agreement and completing the transactions contemplated hereby. 3.2.1 Incorporation. AOL is a company duly incorporated, organized and ------------- validly existing in good standing under the laws of Delaware. 3.2.2 Power, Capacity and Authority. AOL has all necessary power and capacity ------------------------------ to execute and deliver, and to observe and perform its covenants and obligations under, this Agreement and the Closing Documents to which it is a party. AOL has taken all corporate action necessary to authorize the execution and delivery of, and the observance and performance of its covenants and obligations under, this Agreement and the Closing Documents to which it is a party. 3.2.3 Enforceability of Obligations. This Agreement has been, and the Closing ------------------------------ Documents to which AOL is a party will on Closing be, duly executed and delivered by AOL and this Agreement constitutes, and each of the Closing Documents to which AOL is a party will on Closing constitute, a valid and binding obligation of AOL enforceable against AOL in accordance with its terms. 3.2.4 Absence of Conflicting Agreements. None of the execution and delivery ---------------------------------- of, or the observance and performance of, by AOL of, any covenant or obligation under, this Agreement or any Closing Document to which it is a party or the Closing contravenes or results in (with or without the giving of notice or lapse of time, or both) or will contravene or violate in any material respect or result in any material breach or default of, or acceleration of any obligation under: (a) any Applicable Law to AOL; (b) any Licence held by AOL; -16- (c) the articles, by-laws, directors' or shareholders' resolutions of AOL; or (d) any other agreement, lease, mortgage, security document, obligation or instrument to which AOL is a party, or by which it or its assets are bound. 3.2.5 Consents, Approvals, Etc. No consent, approval, Licence, Order or ------------------------- authorization, registration, declaration or filing with any Governmental Agency is required by AOL in connection with (a) the Closing or (b) the execution and delivery by it of, or the observance and performance of its obligations under, this Agreement or the Closing Documents to which it is a party. 3.3 Commission. Each Party represents and warrants to the other Party that ---------- the other Party will not be liable for any brokerage commission, finder's fee or other like payment in connection with the transactions contemplated hereby because of any action taken by, or agreement or understanding reached by, the first mentioned Party. 3.4 Qualification of Representations and Warranties. The representations or ------------------------------------------------ warranties made by a Party under Sections 3.1.1(d), 3.1.18, 3.1.22 and 3.2.3 as to the enforceability of this Agreement or the Closing Documents against such Party is subject to the following qualifications: (a) specific performance, injunctive relief and other equitable remedies are discretionary and, in particular, may not be available where damages are considered an adequate remedy; and (b) enforcement may be limited by bankruptcy, insolvency, liquidation, reorganization, reconstruction and other similar laws generally affecting enforceability of creditors' rights. 3.5 Non-Waiver. No investigations made by or on behalf of AOL at any time ----------- shall waive, diminish the scope of or otherwise affect any representation or warranty made by Issuer in this Agreement or any Closing Document or any document delivered pursuant to any of them. 3.6 Survival of Issuer Representations, Warranties, Covenants and Agreements. ------------------------------------------------------------------------- All representations, warranties, covenants and agreements made by Issuer in or pursuant to this Agreement shall survive the Closings as follows: (a) the representations and warranties set forth in Sections 3.1.1 to 3.1.4 inclusive, 3.1.9, 3.1.16, 3.1.21, 3.1.23, 3.1.28 and Section 3.3 shall survive beyond the Closings and continue without time limit; (b) all of the other representations and warranties contained in this Agreement or in any Closing Document shall unless expressly stated otherwise survive only for a period of 2 years from the First Closing. After such period, Issuer shall not have any further liability hereunder with respect to such representations and warranties except with respect to claims properly made within such period; and -17- (c) the covenants and agreements of Issuer contained in this Agreement shall survive the Closings and continue in accordance with Applicable Law. 3.7 Survival of AOL Representations, Warranties, Covenants and Agreements. --------------------------------------------------------------------- All representations warranties, covenants and agreements made by AOL in or pursuant to this Agreement shall survive the Closings as follows: (a) the representations and warranties set forth in Sections 3.2.1 to 3.2.3 inclusive and Sections 3.3 and 4.4 shall survive beyond the Closings and continue without time limit; (b) all of the other representations and warranties contained in this Agreement or in any Closing Document shall unless expressly stated otherwise survive only for a period of 2 years from the First Closing. After such period, AOL shall have no further liability hereunder with respect to such representations and warranties except with respect to claims properly made within such period; and (c) the covenants and agreements of AOL contained in this Agreement shall survive the Closings and continue in accordance with Applicable Law. 3.8 Knowledge of Issuer. Where any representation or warranty contained in -------------------- this Agreement is expressly qualified by reference to the "knowledge" of Issuer, it shall be deemed to refer to the knowledge of each of Issuer and any of the Subsidiaries and Issuer confirms that it has made due and diligent inquiry of such Persons (including without limitation appropriate officers of Issuer and the Subsidiaries) as it considers necessary as to the matters that are the subject of such representations and warranties. ARTICLE FOUR OTHER COVENANTS OF THE PARTIES ------------------------------ 4.1 Obligation of Issuer. From the date hereof to the First Closing, Issuer --------------------- shall act, and shall cause the Subsidiaries to act, as set forth in this Article 4.1. 4.1.1 Conduct Business in Ordinary Course. Except as otherwise contemplated or ------------------------------------ permitted by this Agreement, Issuer and the Subsidiaries shall conduct the Business in the ordinary course and shall not, without the prior written consent of AOL, enter into any transaction outside the ordinary course of business which, if entered into before the date hereof, could cause any representation or warranty of Issuer contained herein to be incorrect or constitute a breach of any covenant or agreement of Issuer contained herein. 4.1.2 Action by Issuer and Subsidiaries. Each of Issuer and the Subsidiaries ---------------------------------- shall at their sole cost take all action which may be necessary to ensure that the representations and warranties contained herein shall be true and correct in all material respects at the First Closing. -18- 4.1.3 Access for Investigation. Each of Issuer and the Subsidiaries shall ------------------------- permit AOL and its employees, agents, counsel and accountants or other representatives, without interference to the ordinary conduct of the Business, to have free and unrestricted access during business hours to the properties of Issuer and the Subsidiaries and to all the books, accounts and records relating to each of Issuer, the Subsidiaries, the Business, the Assets and to the employees of the Business. Issuer and each of the Subsidiaries shall furnish to AOL such financial and operating data and other information with respect to the Business and the Assets as AOL shall from time to time reasonably request. Issuer agrees that AOL may conduct such environmental investigations and tests on the properties of Issuer and the Subsidiaries as AOL considers necessary. 4.1.4 Disclosure. Issuer shall forthwith disclose in writing to AOL in ----------- supplemental schedules any matter arising other than in the ordinary course of business which has become known to it prior to the First Closing which is inconsistent in any material respect with any of the representations and warranties contained herein. Except as otherwise expressly agreed by AOL, no such disclosure shall cure any misrepresentation or breach of warranty for the purposes of Section 6.1.1 hereof. 4.1.5 Reporting Issuer Status. Issuer shall use its best efforts exercised in ------------------------- a commercially reasonable manner to maintain its status as a reporting issuer not in default of any requirements of the Securities Act (Ontario) and the regulations thereunder and shall use its best efforts not to be in default of any requirement of any securities laws or regulations to which Issuer is subject. 4.2 Actions to Satisfy Closing Conditions. Each of the Parties shall take ------------------------------------- all such action as is within its power to control, and shall use reasonable efforts to cause other actions to be taken which are not within its power to control, so as to ensure compliance with and satisfaction of all conditions set forth in Article 6 which are for the benefit of any Party. The Parties will cooperate in exchanging such information and providing such assistance as may be reasonably required in connection with the foregoing. 4.3 Injunctions. If any court having jurisdiction over either Party or any of ------------ the Subsidiaries issues any injunction, decree or similar order prior to the Closing Time which would prohibit or materially restrict or hinder the Closing, the Parties shall use their respective reasonable efforts to have such injunction, decree or order dissolved or otherwise eliminated as promptly as possible and, in any event, prior to the Closing Time. 4.4 Subscriber Representations AOL represents and warrants to Issuer as --------------------------- follows and acknowledges that Issuer is relying upon such representations and warranties in connection with entering into this Agreement and completing the transactions contemplated hereby. 4.4.1 Accredited Investor AOL is an accredited investor ("Accredited ------------------- investor") as defined in Rule 501(a) under the United States Securities Act of 1933 (the "1933 Act"), and is acquiring the Shares (the "Subject Securities") for its own account or for the account of an Accredited Investor as to which it exercises sole investment discretion, and not with a view to any resale, -19- distribution or other disposition of the Subject Securities in violation of the United States securities laws or applicable state securities laws; 4.4.2 Exempt Sale AOL is aware that the Subject Securities have not been and ----------- will not be registered under the 1933 Act and that the sale to it of such securities is being made in reliance on a private placement exemption from such registration, and the Subscriber certifies that: (a) it is and will be acquiring the Subject Securities for its own account or for the account of another accredited investor; and (b) it has received all information, financial and otherwise, with respect to the Issuer which it has requested and has had access to such additional information, if any, concerning the Issuer as it has considered necessary in connection with its investment decision to acquire the Subject Securities; 4.4.3 Sophisticated Investor AOL has such knowledge and experience in ----------------------- financial and business matters as to be capable of evaluating the merits and risks of its investment in the Subject Securities and is able to bear the economic risks of such investment; 4.4.4 U.S. Resident AOL and any account for which it is purchasing Subject ------------- Securities are resident in the United States; 4.4.5 Restricted Securities AOL acknowledges that the Subject Securities will --------------------- be "restricted securities" for the purposes of the 1933 Act and agrees that if it shall decide to offer, sell or otherwise transfer, pledge or hypothecate any of such securities, the same may be offered, sold or otherwise transferred, pledged or hypothecated only (a) to the Issuer, (b) outside the United States in accordance with Rule 904 of Regulation S under the 1933 Act, (c) inside the United States in accordance with Rule 144 under the 1933 Act, if available, and in compliance with any applicable state securities laws; or (d) pursuant to another exemption from registration under the 1933 Act and any applicable state securities laws; 4.4.6. Legend AOL understands that all certificates representing the Subject ------ Securities purchased by it as well as all certificates issued in exchange therefor, or in substitution thereof will bear a legend to the following effect: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), AND MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO THE CORPORATION, (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT, (C) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, AND IN COMPLIANCE WITH ANY APPLICABLE STATE SECURITIES LAWS, OR (D) PURSUANT TO ANOTHER EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT AND ANY APPLICABLE STATE SECURITIES LAWS. -20- DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE GOOD DELIVERY IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE BEARING NO LEGEND MAY BE OBTAINED FROM THE REGISTRAR AND TRANSFER AGENT UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO THE REGISTRAR AND TRANSFER AGENT AND THE CORPORATION, TO THE EFFECT THAT SUCH SALE IS BEING MADE IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE 1933 ACT."; provided that if Subject Securities are being sold outside the United -------- States in compliance with the requirements of Rule 904 of Regulation S, any such legend may be removed by providing a declaration to the registrar and transfer agent to the following effect or as the Issuer may prescribe from time to time: "The undersigned (a) acknowledges that the sale of the securities of Internet Liquidators International Inc. (the "Corporation") to which this declaration relates is being made in reliance on Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the "1933 Act") and (b) certifies that (1) the undersigned is not an affiliate of the Corporation as that term is defined in the 1933 Act, (2) the offer of such securities was not made to a person in the United States and either (A) at the time the buy order was originated, the buyer was outside the United States, or the seller and any person acting on its behalf reasonably believe that the buyer was outside the United States, or (B) the transaction was executed on or through the facilities of The Toronto Stock Exchange, The Montreal Exchange, The Alberta Stock Exchange or the Vancouver Stock Exchange and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States, (3) neither the seller nor any affiliate of the seller nor any person acting on any of their behalf has engaged or will engage in any directed selling efforts in the United States in connection with the offer and sale of such securities and (4) the transaction is not, although in technical compliance with Rule 904 of Regulation S, part of a plan or scheme to evade the registration requirements of the 1933 Act. Terms used herein have the meanings given to them by Regulation S."; and 4.4.7 Transfer Restriction AOL understands and acknowledges that the Issuer -------------------- has the right to instruct its transfer agent and registrar not to record a transfer by any person in the United States without first being notified by the Issuer that it is satisfied that such transfer is exempt from or not subject to registration under the 1933 Act and any applicable state securities laws. ARTICLE FIVE INDEMNIFICATION --------------- 5.1 Definitions. As used in this Article 5: ------------ "Affiliate" has the meaning attributed thereto in the Act; -21- "Claim" means any act, omission or state of facts and any demand, action, suit or proceeding which may constitute or give rise to a right to indemnification under Sections 5.2 or 5.3 hereof; "Direct Claim" means any Claim by an Indemnified Party against an Indemnifier which does not result from a Third Party Claim; "Indemnified Loss" means any loss, liability, damage, cost or expense relating to, resulting from or arising out of any Claim (including, without limitation, the costs and expenses of any action, suit, proceeding, demand, assessment, judgment, settlement or compromise relating thereto and all interest, punitive damages, fines and penalties and reasonable legal fees and expenses incurred in connection therewith but excluding loss profits and consequential damages) which is suffered or incurred by an Indemnified Party and for which such Indemnified Party is entitled to indemnification under the provisions hereof; "Indemnifier" means any Party obligated to provide indemnification under this Agreement; "Indemnified Party" means any Person entitled to indemnification under this Agreement; "Indemnity Payment" means any amount of Indemnified Loss required to be paid pursuant to Sections 5.2 or 5.3 hereof; and "Third Party Claim" means any Claim asserted against the Indemnified Party by any Person who is not a Party or an Affiliate of such a Party. 5.2 Indemnification by Issuer. Subject to the limits set forth in Section -------------------------- 5.11, each of Issuer shall indemnify, defend and save harmless AOL and each of its directors, officers, employees, agents and representatives from and against any and all Indemnified Losses suffered or incurred by them, as a direct or indirect result of: (a) subject to Section 3.6 hereof, any misrepresentation or breach of warranty made or given by Issuer in this Agreement, any Closing Document or in any document delivered pursuant to any of them; or (b) any failure by Issuer to observe or perform any covenant or obligation contained in this Agreement, any Closing Document or in any document delivered pursuant to any of them to be observed or performed by it. 5.3 Indemnification by AOL. Subject to the limits set forth in Section 5.11, ----------------------- AOL shall indemnify, defend and save harmless Issuer and its subsidiaries and each of its directors, officers, employees, agents and representatives from and against any and all Indemnified Losses suffered or incurred by them, as a direct or indirect result of: (a) subject to Section 3.7, any misrepresentation or breach of any warranty made or given by AOL in this Agreement, any Closing Document or in any document delivered pursuant to any or them; or -22- (b) any failure by AOL to observe or perform any covenant or obligation contained in this Agreement, any Closing Document or in any document delivered pursuant to any of them to be observed or performed by it. 5.4 Notice of and the Defense of Third Party Claims. If an Indemnified Party ------------------------------------------------ receives notice of the commencement or assertion of any Third Party Claim, the Indemnified Party shall give the Indemnifier reasonably prompt written notice thereof, but in any event no later than 30 calendar days after receipt of such notice of such Third Party Claim. Such notice to the Indemnifier shall describe the Third Party Claim in reasonable detail and shall indicate, if reasonably practicable, the estimated amount of the Indemnified Loss that has been or may be sustained by the Indemnified Party. The Indemnifier shall have the right to participate in or, by giving notice to that effect to the Indemnified Party not later than 30 calendar days after receipt of such notice of such Third Party Claim and subject to the rights of any insurer or other third party having potential liability therefor, to elect to assume the defense of any Third Party Claim at the Indemnifier's own expense and by such Indemnifier's own counsel, and the Indemnified Party shall co-operate in good faith in such defense. The Indemnified Party shall have the right to participate in the defense of any Third Party Claim assisted by counsel of its own choosing. If the Indemnified Party has not received notice within such 30 calendar day period that the Indemnifier has elected to assume the defence of such Third Party Claim, the Indemnified Party may, at its option, elect to settle or compromise the Third Party Claim or assume such defence, assisted by counsel of its own choosing and the Indemnifier shall be liable for all costs and expenses paid or incurred in connection therewith. 5.5 Assistance for Third Party Claims. In the event of any Third Party Claim, ---------------------------------- the Indemnifier and the Indemnified Party will use all reasonable efforts to make available to the Party which is undertaking and controlling the defense of such Third Party Claim, (a) those employees whose assistance, testimony or presence is necessary to assist such Party in evaluating and in defending any Third Party Claim; and (b) all documents, records and other materials in the possession of such Party reasonably required by such Party for its use in defending any Third Party Claim, and shall otherwise cooperate with the Party defending such Third Party Claim. The Indemnifier shall be responsible for all expenses associated with making such documents, records and materials available and for all expenses of any employees made available by the Indemnified Party to the Indemnifier hereunder, which expense shall be equal to an amount to be mutually agreed upon per person per hour or per day for each day or portion thereof that such employees are assisting the Indemnifier but such expenses shall not exceed the actual cost to the Indemnified Party associated with such employees. 5.6 Settlement of Third Party Claims. If an Indemnifier elects to assume the -------------------------------- defence of any Third Party Claim as provided in Section 5.4 hereof, the Indemnifier shall not be liable for any legal expenses subsequently incurred by the Indemnified Party in connection with the defence thereof. However, if the Indemnifier fails to take reasonable steps necessary to defend diligently such Third Party Claim within 30 calendar days after receiving notice from the Indemnified Party that the -23- Indemnified Party bona fide believes on reasonable grounds that the Indemnifier has failed to take such steps, the Indemnified Party may, at its option, elect to assume the defence of and to compromise or settle the Third Party Claim assisted by counsel of its own choosing and the Indemnifier shall be liable for all costs and expenses paid or incurred in connection therewith. Without the prior written consent of the Indemnified Party, the Indemnifier shall not enter into any compromise or settlement of any Third Party Claim which would lead to liability or create any financial or other material obligation on the part of the Indemnified Party for which the Indemnified Party is not entitled to indemnification hereunder. If a firm offer is made to settle a Third Party Claim without leading to liability or the creation of a financial or other obligation on the part of the Indemnified Party for which the Indemnified Party is not entitled to indemnification hereunder and the Indemnifier desires to accept such offer, the Indemnifier shall give written notice to the Indemnified Party to that effect. If the Indemnified Party fails to consent to such firm offer within 30 calendar days after its receipt of such notice, the Indemnified Party may continue to contest or defend such Third Party Claim and, in such event, the maximum liability of the Indemnifier with respect to such Third Party Claim shall be (a) the amount of the offer of settlement which the Indemnified Party refused to accept plus the costs and expenses of the Indemnified Party prior to the date the Indemnifier notifies the Indemnified Party of the offer of settlement and (b) the actual out-of-pocket amount the Indemnified Party is obligated to pay as a result of continuing to pursue such matter, whichever is the lesser. An Indemnifier shall be entitled to recover from the Indemnified Party any additional expenses incurred by such Indemnifier as a result of the decision of the Indemnified Party to contest or defend such Third Party Claim. 5.7 Direct Claims. Any Direct Claim shall be asserted by giving the -------------- Indemnifier reasonably prompt written notice thereof, but in any event not later than 30 calendar days after the Indemnified Party becomes aware of such Direct Claim, and the Indemnifier shall have a period of 30 calendar days within which to respond in writing to such Direct Claim. If the Indemnifier does not so respond within such 30 calendar day period, the Indemnifier shall be deemed to have rejected such Claim, in which event the Indemnified Party shall be free to pursue such remedies as may be available to the Indemnified Party. 5.8 Failure to Give Timely Notice. A failure to give timely notice as provided ------------------------------ in this Article 5 shall not affect the rights or obligations of either Party except and only to the extent that, as a result of such failure, any Party which was entitled to receive such notice was deprived of its right to recover any payment under its applicable insurance coverage or was otherwise directly and materially damaged as a result of such failure. 5.9 Reductions and Subrogation. If the amount of any Indemnified Loss, at any --------------------------- time subsequent to the making of an Indemnity Payment, is reduced by (a) any net tax benefit or (b) any recovery, settlement or otherwise under or pursuant to any insurance coverage, or pursuant to any claim, recovery, settlement or payment by or against any other Person, the amount of such reduction (less any costs, expenses (including taxes) or premiums incurred in connection therewith), together with interest thereon from the date of payment thereof at the Prime Rate, shall promptly be repaid by the Indemnified Party to the Indemnifier. Upon making any Indemnity Payment, the Indemnifier shall, to the extent of such Indemnity Payment, be subrogated to all rights of the Indemnified Party against any third party that is -24- not an affiliate (as defined in the Act) of the Indemnified Party in respect of the Indemnified Loss to which the Indemnity Payment relates but only if the Indemnifier shall then be in compliance with its obligations under this Agreement in respect of such Indemnified Loss. Until the Indemnified Party recovers full payment of its Indemnified Loss, any and all claims of the Indemnifier against any such third party on account of such Indemnity Payment shall be postponed and subordinated in right of payment to the Indemnified Party's rights against such third party. Without limiting the generality or effect of any other provision hereof, the Indemnified Party and Indemnifier shall duly execute upon request all instruments reasonably necessary to evidence and perfect the above-described postponement and subordination rights. 5.10 Interest on Indemnified Losses. All Indemnified Losses shall bear ------------------------------- interest at a rate per annum equal to the Prime Rate, calculated and payable monthly, both before and after judgment, with interest on overdue interest at the same rate, from the date that the Indemnified Party disbursed funds, suffered damages or losses or incurred a loss, liability or expense in respect of an Indemnified Loss, to the date of payment by the Indemnifier to the Indemnified Party. 5.11 Limitation. ----------- (a) With the exception of any claims arising in connection with title to the IL Technology, no claims for indemnification may be made hereunder by AOL against Issuer in respect of any Indemnified Losses arising in connection with any misrepresentation or breach of warranty made or given by Issuer in this Agreement, any Closing Document or in any document delivered pursuant to any of them, unless and until the Indemnified Losses suffered or incurred by AOL and by all of its directors, officers, employees, agents or representatives collectively, in respect of all such misrepresentations or breaches of warranty, exceed twenty-five Thousand Dollars ($25,000) in the aggregate (excluding claims each of which is less than $1,000), in which event the amount of all such Indemnified Losses including such twenty-five Thousand Dollars ($25,000) amount may be recovered by AOL. (b) No claims for indemnification may be made hereunder by Issuer against AOL in respect of any Indemnified Losses arising in connection with any misrepresentation or breach of warranty made or given by AOL in this Agreement, any Closing Document or in any document delivered pursuant to any of them, unless and until the Indemnified Losses suffered or incurred by Issuer and by all of its directors, officers, employees, agents or representatives collectively, in respect of all such misrepresentations or breaches of warranty, exceed twenty-five Thousand Dollars ($25,000) in the aggregate (excluding claims each of which is less than $1,000), in which event the amount of all such Indemnified Losses including such twenty-five Thousand Dollars ($25,000) amount may be recovered by Issuer. 5.12 Rights in Addition. The rights of indemnity set forth in this Article 5 ------------------- are in addition and supplemental to any other rights, actions, claims or causes of action which may arise in respect of this Agreement, the Closing Documents and the transactions contemplated hereby. -25- 5.13 Determination of Indemnified Loss. In determining the amount of any ---------------------------------- Indemnified Loss hereunder the market price of any securities of Issuer held by the Indemnified Party shall be only one factor to be taken into account. ARTICLE SIX CONDITIONS PRECEDENT -------------------- 6.1 AOL's Conditions. The obligation of AOL to complete the purchase of the ----------------- Shares and Warrant shall be subject to the prior satisfaction of, or compliance with, at or before the Closing Time, each of the conditions precedent set out in this Section 6.1, each of which is acknowledged to be for the exclusive benefit of AOL and may be waived by AOL in whole or in part in writing and upon such terms and conditions, if any, as AOL may require. 6.1.1 Accuracy of Representations and Performance of Covenants. All of the --------------------------------------------------------- representations and warranties of Issuer made in or pursuant to this Agreement shall be true and correct in all respects as at the First Closing and with the same effect as if made at and as of the Closing Time of the First Closing and as if any time at which such representation or warranty were accurate read the "Closing Time" (except as such representations and warranties may be affected by the occurrence of events or transactions expressly contemplated and permitted hereby) and AOL shall have received immediately prior to the Closing Time a certificate from the chief executive officer or the chief financial officer of Issuer confirming the foregoing to the best of their knowledge, information and belief, after due enquiry. With the exception of a certificate respecting Section 3.1.16, the foregoing conditions only apply to the First Closing. As at the Closing Time, Issuer shall have observed or performed in all respects, all of its covenants and obligations hereunder to be observed or performed by it at or before the applicable Closing Time. 6.1.2 No Material Adverse Change. No material adverse change shall have --------------------------- occurred since the Financial Disclosure Date with respect to any of Issuer, the Subsidiaries, the Business or the Assets or the future prospects for any of Issuer, the Subsidiaries or the Business other than as a result of general industry trends and AOL shall have received immediately prior to Closing a certificate from the chief executive officer or the chief financial officer of Issuer confirming that no such material adverse change has occurred. This condition only applies to the First Closing. 6.1.3 Litigation. No court order shall have been entered that enjoins, ----------- restrains, changes or prohibits the consummation of any of the transactions contemplated hereby, and no Party, or any of either Party's directors, officers, advisors, employees or agents, shall be a defendant or third party to or threatened with, any litigation or proceedings before any court or Governmental Agency which, in the opinion of AOL, acting reasonably, could prevent or restrict AOL or Issuer from observing and performing any of their respective covenants and obligations pursuant to this Agreement or the Closing Documents. 6.1.4 Receipt of Closing Documentation. All actions and proceedings taken on --------------------------------- or prior to the Closing in connection with the performance by Issuer of its covenants and obligations under this Agreement shall be satisfactory to AOL acting reasonably and AOL shall have received copies of the -26- Closing Documents and all such documentation or other evidence as it may reasonably request in connection with the Closing in form (as to certification and otherwise) and substance satisfactory to AOL. 6.1.5 Opinion of Counsel for Issuer. AOL shall have received an opinion dated ------------------------------ the Closing Date from counsel for Issuer in the form of the opinion attached hereto as Schedule G. In giving such opinion, counsel to Issuer may rely on certificates of senior officers of Issuer as to factual matters provided such certificates are attached to the opinion. Such opinion shall also cover such other matters as AOL or its counsel may reasonably request. This condition only applies to the First Closing. 6.1.6 Closing Documents. Each of the following documents shall have been ------------------ executed and delivered by the parties thereto other than AOL: (a) the Auction Services Agreement in the form of Schedule I; (b) the Shareholders' Agreement in the form of Schedule K; (c) the Registration Rights Agreement in the form of Schedule L; (d) the IP Rights and Non-Competition Agreement in the form of Schedule O; and (e) DCI Term Sheet in the form of Schedule J. 6.1.7 Cease Trade Orders. There shall be no cease trade orders in force by any ------------------- securities regulatory authorities or any other impediments (other than "control block" and "hold period" restrictions) to the general free trading of the Shares and the shares underlying the Warrant. 6.1.8 Equity Injection. Issuer shall have received net proceeds of no less than ----------------- $850,000 Cdn cash from the issuance of common shares from treasury of Issuer at an issue price of no less than $0.85 Cdn per common share (the "Condition Precedent Financing"). 6.2 Issuer's Conditions. The obligation of Issuer to complete the issuance ------------------- of the Shares shall be subject to the satisfaction of or compliance with, at or before the Closing Time, each of the conditions precedent set out in this Section 6.2, each of which is hereby acknowledged to be for the exclusive benefit of Issuer and may be waived by Issuer in whole or in part in writing upon such terms and conditions, if any, as Issuer may require. 6.2.1 Accuracy of Representations and Performance of Covenants. All of the --------------------------------------------------------- representations and warranties of AOL made in or pursuant to this Agreement shall be true and correct in all respects as at the First Closing and with the same effect as if made at and as of the Closing Time of the First Closing and as if any time at which such representation or warranty were accurate read the "Closing Time" (except as such representations and warranties may be affected by the occurrence of events or transactions expressly contemplated and permitted hereby) and Issuer shall have received immediately -27- prior to the Closing Time a certificate from the chief executive officer and the chief financial officer of AOL confirming the foregoing to the best of its knowledge, information and belief, after due enquiry. The foregoing condition only applies to the First Closing. As at the Closing Time, AOL shall have observed or performed in all respects, all of its covenants and obligations hereunder to be observed or performed by it at or before the applicable Closing Time. 6.2.2 Litigation. No court order shall have been entered that enjoins, ----------- restrains, changes or prohibits the consummation of any of the transactions contemplated hereby, and no Party, nor any of either Party's directors, officers, advisors, employees or agents, shall be a defendant or third party to or threatened with any litigation or proceedings before any court or Governmental Agency which, in the opinion of Issuer, acting reasonably, could prevent or restrict Issuer or AOL from observing and performing any of their respective obligations and covenants pursuant to this Agreement or the Closing Documents. 6.2.3 Receipt of Closing Documentation. All Closing Documents and all actions --------------------------------- and proceedings taken on or prior to the Closing in connection with the performance by AOL of its covenants and obligations under this Agreement shall be satisfactory to Issuer, and Issuer shall have received copies of the Closing Documents and all such documentation or other evidence as they may reasonably request for the Closing in form (as to certification and otherwise) and substance satisfactory to them. 6.2.4 Opinion of Counsel for AOL. IL shall have received an opinion dated the --------------------------- Closing Date from counsel for AOL in the form of the opinion attached hereto as Schedule G. In giving such opinion, counsel to AOL may rely on certificates of senior officers of AOL as to factual matters provided such certificates are attached to the opinion. Such opinion shall also cover such other matters as IL or its counsel may reasonably request. This condition only applies to the First Closing. 6.2.5 Closing Documents. Each of the following documents shall have been ------------------ executed and delivered by the parties thereto other than IL: (a) the Auction Services Agreement in the form of Schedule I; and (b) the Shareholders' Agreement in the form of Schedule K. 6.3 Waiver. Any Party may waive, by notice to the other Party, any condition ------- set forth in this Article 6 which is for its exclusive benefit. No waiver by a Party of any condition, in whole or in part, shall operate as a waiver of any other condition. 6.4 Failure to Satisfy Conditions. If any condition set forth in Sections ----------------------------- 6.1 or 6.2 is not satisfied on or before the Closing Time, the Party entitled to the benefit of such condition may send notice in writing to the other Party that this Agreement is to be terminated. 6.5 Destruction or Expropriation. If, prior to the Closing Time, there ---------------------------- occurs any material destruction or damage by fire or other cause or hazard to any material part of the Assets, or if the Assets -28- or any material part of them are expropriated or forcefully taken by any Governmental Agency or if notice of intention to expropriate a material part of the Assets has been filed in accordance with Applicable Law, then AOL may, at its option, terminate this Agreement by notice to Issuer. - -29-0 ARTICLE 7 GENERAL ------- 7.1 Expenses. Each Party shall pay all expenses it incurs in authorizing, --------- preparing, executing and performing this Agreement and the transactions contemplated hereunder, whether or not the Closing occurs, including all fees and expenses of its legal counsel, bankers, investment bankers, brokers, accountants or other representatives or consultants. 7.2 Time. Time is of the essence of this Agreement and each of its ---- provisions. 7.3 Notice. Any notice or other communication (in this Section a "Notice") ------- required or permitted to be given or made hereunder shall be in writing and shall be well and sufficiently given or made if: (a) delivered in person during normal business hours on a Business Day and left with a receptionist or other responsible employee of the relevant party at the applicable address set forth below; (b) sent by prepaid first class mail; or (c) sent by any electronic means of sending messages, including facsimile transmission, which produces a paper record (an "Electronic Transmission"), charges prepaid and confirmed by prepaid first class mail; in the case of a Notice to AOL addressed to it at: America Online, Inc. with a copy to: 22000 AOL Way America Online, Inc. Dulles, Virginia 20166 22000 AOL Way Dulles, Virginia 20166 Attention: Fred Singer, Vice-President Attention: General Counsel Fax No.: (703) 265-2409 Fax No.: (703) 265-2208 and in the case of a Notice to Corporation addressed to it at: Internet Liquidators International Inc. with a copy to: 5915 Airport Rd., Gowling, Strathy & Henderson Suite 330 Commerce Court West Mississauga, Ontario Suite 4900 L4V 1T Toronto, Ontario M5L 1J3 Attention: Paul Godin Attention: David Pamenter Fax No.: (905) 672-5705 Fax No.: (416) 862-7661 -30- Any Notice given or made in accordance with this Section 7.3 shall be deemed to have been given or made and to have been received: (a) on the day it was delivered, if delivered as aforesaid; (b) on the fifth Business Day (excluding each day during which there exists any general interruption of postal services due to strike, lockout or other cause) after it was mailed, if mailed as aforesaid; and (c) on the day of sending if sent by Electronic Transmission during normal business hours of the addressee on a Business Day and, if not, then on the first Business Day after the sending thereof. Any Party may from time to time change its address for notice by giving Notice to other Party in accordance with the provisions of this Section 7.3. 7.4 Public Announcements. Before the First Closing, no Party shall make any --------------------- public statement or issue any press release concerning the transactions contemplated by this Agreement except as may be necessary, in the opinion of counsel to the Party making such disclosure, to comply with the requirements of all Applicable Law and except for press releases with respect to the execution hereof. If any such public statement or release is so required, the Party making such disclosure shall consult with the other Parties prior to making such statement or release, and the Parties shall use all reasonable efforts, acting in good faith, to agree upon a text for such statement or release which is satisfactory to all Parties. 7.5 Assignment. None of this Agreement nor any right or obligation hereunder ----------- is assignable in whole or in part by either Party without the prior written consent of the other Party. Notwithstanding the foregoing, AOL may, without the consent of Issuer, assign this Agreement and its rights hereunder to any wholly- owned subsidiary on condition that AOL remains liable to observe and perform all of its covenants and obligations hereunder. Subject thereto, this Agreement shall enure to the benefit of and be binding upon the Parties and their respective successors (including any successor by reason of amalgamation or statutory arrangement of either Party) and permitted assigns. 7.6 Further Assurances. Each Party shall do such acts and shall execute and ------------------- deliver such further agreements, documents, conveyances, deeds, assignments, transfers and the like, and shall cause the doing of such acts and the execution and delivery of such further items as are within its power and as the other Party may in -31- writing at any time and from time to time reasonably request, in order to give full effect to the provisions of this Agreement and the Closing Documents. IN WITNESS WHEREOF the Parties have duly executed this Agreement. INTERNET LIQUIDATORS INTERNATIONAL INC. By: c/s Name: Title: AMERICA ONLINE, INC. By: c/s Name: Title: SCHEDULE "A" DEFINITIONS In this Agreement, unless the subject matter or context is inconsistent therewith: "Act" means the Business Corporations Act (Ontario) as amended or restated and any successor legislation of comparable effect; "Advertising Credits" means a credit to purchase advertising (to be used in accordance with AOL's then current advertising guidelines) on AOL's online service at rate card rates ($60 CPM). "Agreement" means this Subscription Agreement and all schedules annexed to this Agreement as the same may be amended from time to time in accordance with the provisions hereof or thereof; "hereof", "hereto" and "hereunder" and similar expressions mean and refer to this Agreement and not to any particular article or section; except where the context specifically requires, "Article" or "Section" means and refers to the specified article or section of this Agreement; "Articles" means the articles of amalgamation of Issuer dated January 9, 1997; "Applicable Law" means any domestic or foreign statute, law, ordinance, rule, regulation, regulatory policy or guideline, by-law (zoning or otherwise) or Order that applies to Issuer, the Subsidiaries, the Business, the way the Business is carried on or to the Shares or Warrant; "Assets" means all of the assets and undertaking of Issuer and the Subsidiaries, both tangible and intangible, including goodwill; "Business" means collectively the businesses carried on by Issuer and the Subsidiaries including the operation of an internet website which offers consumer products for sale via credit card transactions through an auction and storefront mall format for both retail and wholesale supplies; "Business Day" means any day of the week other than a Saturday, Sunday or statutory or civic holiday observed in Toronto, Ontario or Dulles, Virginia; "Cleared Title" means the execution and delivery to IL of assignments of Intellectual Property Rights and waivers of moral rights in a form acceptable to AOL's counsel, acting reasonably, by all consultants who provided development services to IL that gave rise to such rights in connection with the IL Auction Service; "Closings" means the First Closing and the Second Closing and "Closing" means either one of them; "Closing Date" means, in respect of any Closing such Business Day as the Parties agree in writing as the date on which such Closing is to take place; -2- "Closing Document" means any document delivered at or subsequent to the Closing Time as provided in or pursuant to, this Agreement; "Closing Time" means 11:00 a.m. (Toronto time) on the Closing Date or such other time on that date as the Parties agree that the Closing shall take place; "Condition Precedent Financing" has the meaning attributed thereto in Section 6.1.9; "Convertible Security" means a security of Issuer convertible into or exchangeable for one or more Voting Securities of Issuer; "Encumbrance" means any encumbrance of any kind whatever and includes a security interest, mortgage, lien, hypothec, pledge, hypothecation, assignment, charge, trust or deemed trust (whether contractual, statutory or otherwise arising), adverse claim, or any other option, right or claim of others of any kind whatever affecting the Assets, Shares or Warrant, as applicable and any restrictive covenant or other agreement, restriction or limitation (registered or unregistered) on the Assets, Shares or Warrant, as applicable; "Financial Disclosure Date" means final day reviewed by any of the Financial Statements and being December 31, 1996; "Financial Statements" means the unaudited consolidated balance sheet of Issuer as at December 31, 1996 and the unaudited consolidated statement of loss and deficit of Issuer for the 12 month period ending December 31, 1996, copies of which are attached as Schedule B, together with the notes thereto; "First Closing" means the issuance of the Stage One Shares and Warrant by Issuer to AOL and the completion of all other transactions contemplated in connection with the purchase of the Stage One Shares and Warrant; "fully diluted basis" refers to the percentage interest that AOL would have in the common shares of the Issuer if all Rights and Convertible Securities or other privileges issued or granted by Issuer (whether or not currently exercisable or exercisable on conditions but not including the Warrant) to purchase common shares had been exercised; "Generally Accepted Accounting Principles" means generally accepted accounting principles from time to time approved by the Canadian Institute of Chartered Accountants, or any successor institute, applicable as at the date on which any calculation or determination is required to be made in accordance with generally accepted accounting principles, and where the Canadian Institute of Chartered Accountants includes a recommendation in its Handbook concerning the treatment of any accounting matter, such recommendation shall be regarded as the only generally accepted accounting principle applicable to the circumstances that it covers; -3- "Generic Software" means off the shelf or mass-market software which is readily substitutable by the Business with minimum cost or interruption to the Business; "Governmental Agency" means any domestic or foreign government whether federal, provincial, state or municipal and any governmental agency, authority, tribunal, commission or instrumentality of any kind whatever; "Information Record" means any statement contained in any press release, material change report, financial statement or other document of Issuer or any Subsidiary which has been or is publicly disseminated pursuant to any applicable securities laws prior to the Closing Time; "Intellectual Property Rights" includes: (A) any and all proprietary rights provided under (i) patent law, (ii) copyright law, (iii) trade-mark law, (iv) design patent or industrial design law, (v) semi-conductor chip or mask work law, or (vi) any other statutory provision or common law principle, applicable to the Issuer, the Subsidiaries,the Business or Assets which may provide a right in either (a) ideas, formulae, algorithms, concepts, inventions or know-how generally, including trade secret law, or (b) the expression or use of such ideas, formulae, algorithms, concepts, inventions or know-how; and (B) any and all applications, registrations, licenses, sub-licenses, franchises, agreements or any other evidence of a right in any of the foregoing; "Licence" means any licence, permit, approval, right, privilege, concession or franchise; "Loan Repayment" means the repayment of the $250,000.00 bridge financing with Standard Mercantile Bancorp LP dated the 18th of October, 1996 and the release of all security given in connection therewith; "ordinary course" when used in relation to the conduct by Issuer and the Subsidiaries of the Business means any transaction which constitutes an ordinary day-to-day business activity of Issuer and the Subsidiaries conducted in a commercially reasonable and businesslike manner consistent with the past practices of Issuer and the Subsidiaries; "Order" means any order (draft or otherwise), judgment, injunction, decree, award or writ of any court, tribunal, arbitrator, Governmental Agency or other Person; "Parties" means Issuer and AOL collectively, and "Party" means either of them; "Permitted Encumbrances" means: (i) any lien for taxes or other government levies not yet due or which is being contested in good faith if a reasonable reserve with respect thereto is maintained by Issuer; (ii) any construction or repair or storage lien arising in the ordinary course of the Issuer's business which is not overdue or which is being contested in good faith, if a reasonable reserve or holdback with respect thereto is maintained by the Issuer; (iii) any statutory liens incurred or deposit made in the ordinary course of the -4- Issuer's business which is not overdue in connection with Worker's Compensation, Unemployment Insurance and similar legislation; (iv) any encumbrance not in excess of the acquisition price of property acquired by Issuer, granted by Issuer to the seller of such property (but no to a party who gives value to Issuer to acquire such property) solely to secure its indebtedness for the acquisition price of such property, or any extension or renewal or replacement of such indebtedness provided that neither the principal amount of such indebtedness nor the rate of interest accruing thereon is increased and the encumbrance is not extended to apply to any other property of Issuer or any Subsidiary; (v) any encumbrance consented to in writing by AOL; (vi) any encumbrance in favour of AOL; or (vii) any encumbrance disclosed in Schedule Q. "Person" shall be broadly interpreted and includes an individual, body corporate, partnership, joint venture, trust, association, unincorporated organization, the Crown, any Governmental Agency or any other entity recognized by law; "Prime Rate" for any day means the rate of interest expressed as a rate per annum that The Royal Bank of Canada establishes at its head office in Toronto as the reference rate of interest that it will charge on that day for Canadian dollar demand loans to its customers in Canada and which it at present refers to as its prime rate; "Regulatory Filings" means all material and reports filed, or required to be filed, with applicable securities regulatory authorities and any stock exchange on which the securities of the relevant body corporate are listed; "Rights" means any options, rights, warrants or subscription privileges issued or granted by Issuer (whether or not currently exercisable or exercisable on conditions) to purchase Voting Securities or Convertible Securities of Issuer; "Second Closing" has the meaning attributed thereto in Section 2.1(b); "Shares" means the 1,000,000 common shares in the capital stock of Issuer to be subscribed hereunder by AOL from Issuer; "Stage Two Conditions" means those conditions precedent which must be fulfilled by Issuer if AOL is to be required to acquire the Stage Two Shares and being each of: (i) fulfilling the Yankee Auction Condition, (ii) completing the Loan Repayment (iii) raising an additional $425,000.00 CDN in equity, (iv) Issuer meeting the standards under the AOL Merchant Certification Program, (v) Issuer making its auction website available and fully functional, with the exception of functionality reasonably contemplated by the Parties to be implemented at a future date in accordance with the Auction Services Agreement annexed hereto as Schedule "I", for AOL's end users 97% of the time between 8:00 a.m. and 2:00 a.m. from the date of First Closing to the date of the Second Closing except for routine maintenance, (vi) Issuer making available a quantity, quality -5- and variety of merchandise at least comparable to its competitors and in any event appropriate for maintaining and confirming the reputation of AOL as a provider of quality goods and services, (vii) Issuer continuing to update the Yankee Auction Technology to ensure that it contains at least substantially the same functionality as its competitors; and (viii) Issuer having Cleared Title. "Stage Two Shares" has the meaning attributed thereto in Section 2.1(b); "Subscription Price" has the meaning ascribed to that term in Section 2.2; "Subsidiaries" means the bodies corporate listed in Schedule C, and "Subsidiary" means any one of them; "Taxes" means all federal, provincial, local, foreign or other taxes, imposts, rates, levies, assessments and government fees or dues lawfully levied, assessed or imposed against Issuer and the Subsidiaries or in respect of the Business, including income, premium, sales, excise, use, property, capital, goods and services, business transfer and value added taxes and custom and import duties and includes all interest, fines and penalties with respect thereto; "Tax Returns" means all reports and returns filed or required to be filed by Issuer and the Subsidiaries in respect of Taxes; "Technical Information" means all right, title and interest in and to all know- how of Issuer including (i) all information of a scientific, technical or business nature whether in oral, written, graphic, machine readable, electronic or physical form; and (ii) all patterns, plans, designs, research data, research plans, trade secrets and other proprietary know-how, processes, formulas, drawings, technology, computer software and related manuals, unpatented blue prints, flow sheets, equipment and parts lists, instructions, manuals, records and procedures; "Technology" means the Intellectual Property Rights and the Technical Information; "Voting Securities" means the common shares of Issuer and all other securities of Issuer of any kind or class having power to vote for the election of directors either under all circumstances or in certain circumstances or in certain events (whether such circumstances or events exist or have occurred); "Warrant" means the warrant for the purchase of common shares in the capital of the Issuer to be issued to AOL hereunder in the form set out in Schedule "N"; "Yankee Auction Condition" means Issuer causing its Yankee Auction Technology to have, by no later than sixty (60) days from the First Closing, the functionality required to be generally -6- competitive with other Yankee Auction Technologies available on the WWW and as well having that level of functionality set out in Schedule R; and "Yankee Auction Technology" has the meaning attributed thereto in AOL Auction Services Agreement. SCHEDULE "B" FINANCIAL STATEMENTS Incorporated by Reference. See Registration Statement (File No. 001-14835) on Form 20-F. SCHEDULE "C" SUBSIDIARIES Internet Liquidators USA, Inc. a. Articles Articles of Incorporation dated May 6, 1996 b. By-laws By-laws dated May 6, 1996 CP-29729-1 January 31, 1997 INTERNET LIQUIDATORS USA, INC. - ARTICLES - STATE OF FLORIDA Department of State I certify the attached is a true and correct copy of the Articles of Incorporation of INTERNET LIQUIDATORS USA, INC., a Florida corporation, filed on May 6, 1996, as shown by the records of this office. I further certify the document was electronically received under FAX audit number H96000006359. This certificate is issued in accordance with section 15. 16, Florida Statutes, and authenticated by the code noted below. The document number of this corporation is P96000038926. Given under my hand and the Great Seal of the State of Florida, at Tallahassee, the Capital, this the Sixth day of May, 1996 Authentication Code: 196AO0021979-050696-P96000038926-1/1 ___________________________ Sandra B. Mortham Secretary of State ARTICLES OF INCORPORATION OF INTERNET LIQUIDATORS USA, INC. I, the undersigned, hereby make, subscribe, acknowledge and file with the Secretary of State of the State of Florida these Articles of Incorporation for the purpose of forming a corporation for profit in accordance with the laws of the State of Florida. ARTICLE I Name ---- The name of this corporation shall be: Internet Liquidators USA, Inc. The principal business and mailing address of this corporation shall be 550 North Reo Street, Suite 300, Tampa, Florida 33609-1013. ARTICLE II Existence of Corporation ------------------------ This corporation shall, have perpetual existence. ARTICLE III Purposes -------- The corporation may engage in the transaction of any or all lawful business for which corporations may be incorporated under the laws of the State of Florida. ARTICLE IV General Powers -------------- The corporation shall have power: (a) To sue and be sued, complain, and defend in its corporate name. (b) To have a corporate seal, which may be altered at will and to use it or a facsimile of it, by impressing or affixing it or in any other manner reproducing it. (c) To purchase, receive, lease. or otherwise acquire, own, hold, improve, use, and otherwise deal with real or personal property or any legal or equitable interest in property wherever located. (d) To sell, convey, mortgage, pledge, create a security interest in, lease, exchange, and otherwise dispose of all or any part of its property. (e) To lend money to', and use its credit to assist, its officers and employees in accordance with Section 607.0833, Florida Statutes. (f) To purchase, receive, subscribe for, or otherwise acquire; own, hold, vote, use, sell, mortgage, lend, pledge, or otherwise dispose of; and deal in and with shares or other interests in, or obligations of, any other entity. (g) To make contracts and guarantees, incur liabilities, borrow money, issue its notes, bonds, and other obligations (which may be convertible into or include the option to purchase other securities of the corporation), and secure any of its obligations by mortgage or pledge of any of its property, franchises, and income and make contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion, or attainment of the business of a corporation the majority of the outstanding stock of which is owned, directly or indirectly, by the contracting corporation; a corporation which owns, directly or indirectly, a majority of the outstanding stock of the contracting corporation; or a corporation the majority of the outstanding stock of which is owned, directly or indirectly, by a corporation which owns, directly or indirectly, the majority of th6 outstanding stock of the contracting corporation, which contracts of guaranty and suretyship shall be deemed to be necessary or convenient to the conduct, promotion, or attainment of the business of the contracting corporation, and make other contracts of guaranty and suretyship which are necessary or convenient to the conduct, promotion, or attainment of the business of the contracting corporation. (h) To lend money, invest and reinvest its funds, and receive and hold real and personal property as security for repayment. (i) To conduct its business, locate offices, and exercise the powers granted by law within or without this state. (j) To elect directors and appoint officers, employees, and agents of the corporation and define their duties, fix their compensation, and lend them money and credit. (k) To make and amend bylaws, not inconsistent with its Articles of Incorporation or with the laws of the State of Florida, for managing the business and regulating the affairs of the corporation. (l) To make donations f6y the public welfare or for charitable, scientific, or educational purposes. (m) To transact any lawful business that will aid governmental policy. (n) To make payments or donations or do any other act not inconsistent with law that furthers the business and affairs of the corporation. (o) To pay pensions and establish pension plans, pension trusts, profit- sharing plans, share bonus plans, share option plans, and benefit or incentive plans for any or all of its current 2 or former directors, officers, employees, and agents and for any or all of the current or former directors, officers, employees, and agents of its subsidiaries. (p) To provide insurance for its benefit on the life of any of its directors, officers, or employees, or on the life of any shareholder for the purpose of acquiring at his or her death shares of its stock owned by the shareholder or by the spouse or children of the shareholder. (q) To be a promoter, incorporator, partner, member, associate, or manager of any corporation, partnership, joint venture, trust, or other entity. ARTICLE V Capital Stock ------------- (a) The total number of shams of capital stock authorized to be issued by the corporation shall be 10,000 shams having a par value of $1.00 per share. Each of said shares of stock shall entitle the holder thereof to one (1) vote at any meeting of the stockholders. The Board of Directors may authorize shams to be issued for consideration consisting of any tangible or intangible property or benefit to the corporation, including cash, promissory notes, services performed, promises to perform services evidenced by a written contract, or other securities of the corporation. Before the corporation _____ shares, the Board of Directors shall determine that the consideration received or to be received for shares to be issued is adequate. All stock when issued shall be paid for and shall be nonassessable. (b) In the election of directors of this corporation there shall be no cumulative voting of the stock entitled to vote at such election. ARTICLE VI Indemnification By Court Order ------------------------------ No director, officer, employee, or agent of the corporation who is or was a party to a proceeding may apply to the court conducting the proceeding, the circuit court, or to another court of competent jurisdiction, seeking indemnification or advancement of expenses, or both, pursuant to Section 607.0850(9), Florida Statutes, without the permission, by a majority vote of the disinterested directors, of the Board of Directors. ARTICLE VII Affiliated Transactions ----------------------- The corporation expressly elects, pursuant to Section 607.0901(5)(a) of the Florida Statutes, not to be governed by the rules pertaining to affiliated transactions contained in Section 607.0901, Florida Statutes. 3 ARTICLE VIII Control-Share Acquisitions -------------------------- The corporation exercises its right, pursuant to Section 607.0902(5) of the Florida Statutes, to avoid the provisions pertaining to control-share acquisitions contained ill Sections 607.0902, 607.1302(c) and 607.1320, Florida Statutes. ARTICLE IX Registered Office and Registered Agent -------------------------------------- The street address of the corporation's initial registered office is 501 East Kennedy Boulevard, Suite 1700, Tampa, Florida 33602, Attn: R. Alan Higbee, Esq., and the name of the corporation's initial registered agent at such address is Fowler, White, Gillen, Boggs, Villareal and Banker, P.A. The corporation may change its registered office or its registered agent or body by filing with the Department of State of the State of Florida a statement complying with Section 607.0502, Florida Statutes. ARTICLE X Initial Board of Directors -------------------------- The number of directors constituting the initial Board of Directors shall be two (2), and the name and address of each person who is to serve as a member thereof is as follows: Name Address ----- ------- Paul Godin 550 North Reo Street Suite 300 Tampa, Florida 33609-1013 Jeff Lymburner 550 North Reo Street Suite 300 Tampa, Florida 33609-1013 ARTICLE XI Incorporators ------------- The name and address of the incorporator of this corporation is as follows: Name Address - ---- ------- R. Alan Higbee Post Office Box 1438 Tampa, Florida 33601 4 ARTICLE XII Amendment of Articles or Incorporation -------------------------------------- The corporation reserves the right to amend, alter, change or repeal any provision contained in these Articles of Incorporation in the manner now or. hereafter prescribed by status (e, and all rights conferred upon the stockholders herein are subject to this reservation. IN WITNESS WHEREOF, I, the undersigned, have executed these Articles for the uses and purposes therein stated. _______________________________ R. Alan Higbee, Incorporator 5 CERTIFICATE DESIGNATING PLACE OF BUSINESS OR DOMICILE FOR THE SERVICE OF PROCESS WITHIN FLORIDA, NAMING AGENT UPON WHOM PROCESS MAY BE SERVED In compliance with Section 48.091, Florida Statutes, the following is submitted: Internet liquidators USA, Inc. has named Fowler, White, Gillen, Boggs, Villareal and Banker, P.A., located at 501 East Kennedy Boulevard. Suite 1700, City of Tampa, County of Hillsborough, State of Florida, as its agent to accept service of process within Florida. ___________________________________ R. Alan Higbee, Incorporator Date:_______________________________ Having been named to accept service of process for the above-stated corporation, at the place designated in this certificate, I hereby agree to act in this capacity, and I further agree to comply with the provisions of all statutes relative to the proper and complete performance of my duties. FOWLER, WHITE, GILLEN, BOGGS, VILLAREAL AND BANKER, P.A., Registered Agent By:__________________________________ R. Alan Higbee, For the Firm Date:_________________________________ 6 INTERNET LIQUIDATORS USA, INC. - BY-LAWS - BYLAWS OF INTERNET LIQUIDATORS USA, INC. _____________________________________________________________________________ ARTICLE I Offices ------- The principal office shall be in the City of Tampa, County of Hillsborough, and State of Florida or at such other location, within or outside of Florida as the Board of Directors may elect. The corporation may also have offices at such other places both within and without the State of Florida as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II Stockholders ------------ Section 1. Annual Meeting . The annual meeting of the stockholders shall -------- -------------- be held within the three (3) month period beginning with the first day of the last month of tile fiscal year of the corporation for the purpose of electing directors and for the transaction of such other business as may come before the meeting; the actual day thereof to be set forth in the Notice of Meeting or in the Call and Waiver of Notice of Meeting. If the election of directors shall not be held at any such annual meeting of the stockholders, or at any adjournment thereof, the Board of Directors shall cause the election to be held at a special meeting of the stockholders as soon thereafter as may be convenient. Section 2. Special Meetings. Special meetings of the stockholders --------- ---------------- for any purpose or purposes. unless otherwise prescribed by law or by the Articles of Incorporation, may be called by the President or by the Board of Directors, and shall be called by the President or Secretary at the request in writing of a majority of the Board of Directors then in office, or at the request in writing of stockholders owning not less than one-tenth (1/10th) of the entire capitol stock of the corporation issued and outstanding and entitled to vote thereat. Such request shall state the purpose or purposes of the proposed meeting. Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice thereof. Section 3. Place of Meeting. The Board of Directors may designate any --------- ---------------- place either within or without the State of Florida, unless otherwise prescribed by law or by the Articles of Incorporation, as the place of meeting for any annual meeting or for any special meeting of the stockholders. A waiver of notice signed by all stockholders entitled to vote at a meeting may designate any place either within or without the State of Florida, unless otherwise prescribed by law or by the Articles of Incorporation, as the place for the holding of such meeting. If no designation is made or if a special meeting be otherwise called, the place of meeting shall be the principal office of the corporation in the State of Florida. Section 4. Notice of Meeting. Written or printed notice stating the --------- ----------------- place, day and flour of the meeting, and in the case of a special meeting, the purpose or purposes for which tile meeting is called shall be delivered not less than ten (10) nor more than sixty (60) days before the date of the meeting, either by hand delivery, express or other delivery service, telecopier, telegram, telex, mailgram, cablegram or other delivery method or by first-class mail, by or at the direction of the President or the Secretary, or the officer or persons calling the meeting, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail, addressed to the stockholder at his or her business or home address or the stockholder's address as it appears on the stock transfer books of the corporation, with postage thereon prepaid. Section 5. Waiver of Notice of Meeting. Whenever any notice to a --------- --------------------------- stockholder is required pursuant to the provisions of Section 4 hereinabove, each stockholder may waive such notice in writing at any time before or after the time for the delivery of such notice, and such written waiver of notice shall be equivalent to the giving of such notice. Attendance at ally meeting by any stockholder to whom notice of such meeting must be given pursuant to the provisions of Section 4 hereinabove shall constitute a waiver of notice of such meeting by such stockholder, except when the stockholder attends such meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business at the meetings because the meeting is not lawfully called or convened. Section 6. Voting List. The officer or agent having charge of the stock --------- ----------- transfer books for shares of the corporation shall make, at least ten (10) days before each meeting of stockholders, a complete list of the stockholders entitled to vote at such meeting or ally adjournment thereof arranged in alphabetical order, with the address and the number and class and series of shares held by each; which list, for a period of ten (10) days prior to such meeting, shall be kept on file at the principal office of the corporation and shall be subject to inspection by any stockholder during the whole time of tile meeting. The original stock transfer book shall be prima facie evidence as to who are the stockholders entitled to examine such list or transfer books or to vote at any meeting of the stockholders. Section 7. Quorum. A majority of tile outstanding shares of the --------- ------ corporation entitled to vote, represented in person or by proxy, shall constitute a quorum at a meeting of stockholders, unless otherwise provided in the Articles of Incorporation, but in no event shall a quorum consist of less than one-third (1/3) of the shares entitled to vote at the meeting. If less than a majority of the outstanding shares are represented at a meeting, a majority of the shares so represented may adjourn the meeting from time to time without further notice. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the meeting as originally notified. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. 2 Section 8. Voting of Shares. Each stockholder entitled to vote shall at --------- ---------------- every meeting of the stockholders be entitled to one (1) vote in person or by proxy, signed by him, for each share of the voting stock held by him that has been transferred on the books of the corporation prior to such meeting. Such right to vote shall be subject to the right of the Board of Directors to close the transfer books or to fix a record date for voting stockholders pursuant to the provisions of Article VIII hereinafter. Section 9. Proxies. At all meetings of stockholders, a stockholder may --------- ------- vote by proxy, executed in writing by the stockholder or by his or her duly authorized attorney-in-fact; but no proxy shall be valid after eleven (11) months from its date, unless the proxy provides for a longer period. Such proxies shall be riled with the Secretary of the corporation before or at tile time of the meeting. Section 10. Informal Action by Stockholders. ---------- -------------------------------- (a) Any action which may be taken or is required by law to be taken at any annual or special meeting of the stockholders may be taken without a meeting and without a vote, if a consent in writing, setting forth tile action so taken, shall be signed by the holders of a majority of the outstanding stock of the corporation. If ally class of stock is entitled to vote thereon as a class, such written consent shall be required of the holders of a majority of the stock of each class of stock entitled to vote as a class thereon and of tile total stock entitled to vote thereon. (b) Unless all of tile holders of tile outstanding stock of the corporation have signed a written consent to an action in accordance with the provisions of paragraph (a) hereinabove, then within ten (10) days after obtaining such written consent notice must be given to those stockholders who have not so consented in writing. The notice shall fairly summarize the material features of the authorized action, and, if the action be a merger, consolidation. or sale or exchange of assets for which dissenters' rights are provided by Florida law, the notice shall contain a clear statement of the right of stockholders dissenting therefrom to be paid the fair value of their shares upon compliance with Florida law regarding the rights of dissenting stockholders. ARTICLE III Board of Directors ------------------ Section 1. General Powers. The business and affairs of the corporation --------- -------------- shall be managed by its Board of Directors. Section 2. Number, Tenure and Qualifications. The number of directors of --------- --------------------------------- the corporation shall be not less than one (1), nor more than fifteen (15); the number of the same to be fixed by the stockholders at any annual or special meeting. Each director shall hold office until the next annual meeting of stockholders or until his or her successor has been elected, unless sooner removed by the stockholders at any general or special meeting. None of directors need be residents of the State of Florida. 3 Section 3. Annual Meeting. After each annual meeting of stockholders, --------- -------------- the Board of Directors shall hold its annual meeting at the same place as and immediately following such annual meeting of stockholders for the purpose of the election of officers and the transaction of such other business as may come before the meeting; and if a majority of the directors be present at such place and time, no prior notice of such meeting shall be required to be given to tile directors. The place and time of such meeting may also be fixed by written consent of the directors. Section 4. Regular Meetings. Regular meetings of the Board of Directors --------- ---------------- may be held without notice at such time and at such place as shall be determined from time to time by the Board of Directors. Section 5. Special Meetings. Special meetings of the Board of Directors --------- ---------------- may be called by the Chairman of the Board, if there be one, or the President or any two (2) directors. The person or persons authorized to call special meetings of the Board of Directors may fix the place, time and date for holding any special meetings of tile Board of Directors called by them. Section 6. Notice of Meeting or Waiver Thereof. Notice of any special --------- ----------------------------------- meeting shall be given at least two (2) days prior thereto by written notice delivered personally or mailed to each director at his or her business or home address. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail so addressed with postage thereon prepaid. If notice be given by telegram, such notice shall be deemed to be delivered when the telegram is delivered to tile telegraph company. If notice is given by cablegram. such notice shall be deemed to be delivered when the cablegram is dispatched. Any director may waive notice of such meeting either before, at or after such meeting. The attendance of a director at a meeting shall constitute a waiver of notice of such meeting, except where a director attends a meeting for the express purpose of objecting to the transaction of any business because the meeting is not lawfully called or convened. Notice need not specify the purpose of any meeting. Section 7. Quorum. A majority of the directors shall constitute a --------- ------ quorum, but a smaller number may adjourn from time to time without further notice until a quorum is secured. Section 8. Manner of Acting. The act of a majority of the directors --------- ---------------- voting for or against (disregarding any abstentions) at a meeting at which a quorum is present shall be the act of file Board of Directors. Section 9. Vacancies. Any vacancy occurring in the Board of Directors, --------- --------- including any vacancy created by reason of an increase in the number of directors, may be filled by the affirmative vote of a majority of the remaining directors, though less than a quorum of file Board of Directors. A director elected to fill a vacancy shall be elected for the unexpired term of his or her predecessor in office. Section 10. Compensation. By resolution of the Board of Directors, the ---------- ------------ directors may be paid their expenses, if any, for attendance at each meeting of the Board of Directors, and may be paid a fixed sum for attendance at each meeting of the Board of Directors, or a stated salary as 4 directors. No payment shall preclude any director from serving the corporation in any other capacity and receiving compensation therefor. Section 11. Presumption of Assent. A director who is present at a ---------- --------------------- meeting at which action on any corporate matter is taken shall be presumed to have assented to the action taken, unless lie votes against such action or abstains from voting in respect thereto. A director may abstain from voting on any matter in his or her sole discretion. Section 12. Informal Action by Board. Any action required or permitted ----------- ------------------------ to be taken by any provisions of law, by the Articles of Incorporation or these bylaws at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting if, prior to such action, a written consent thereto is signed by all members of the Board or of such committee, as the case may be, setting forth the actions so to be taken and filed in the minutes of file proceedings of the Board or of the committee. Section 13. Telephonic Meetings. Members of file Board of Directors or an ---------- ------------------- executive committee shall be deemed present at a meeting of such Board or committee if a conference telephone, or similar communications equipment, by means of which all persons participating in the meeting can hear each other at the same time, is used. Section 14. Removal. Any director may be removed, with or without cause, ---------- ------- by the stockholders at any general or special meeting, of file stockholders whenever, in the judgment of the stockholders, the best interest of file corporation will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person removed. This bylaw shall not be subject to change by the Board of Directors. ARTICLE IV Officers -------- Section 1. Number. The officers of the corporation shall be a --------- ------ President, a Secretary and a Treasurer, each of whom shall be elected by the Board of Directors. The Board of Directors may also elect a Chairman of the Board, one or more Vice Presidents, one or more assistant secretaries and assistant treasurers and such other officers as the Board of Directors shall deem appropriate. Any two (2) or more offices may be held by the same person. Section 2. Election and Term of Office. The officers of the corporation --------- --------------------------- shall be elected annually by the Board of Directors at its first meeting after each annual meeting of stockholders. If the election of officers shall not be held at such meeting, such election shall be held as soon thereafter as may be convenient. Each officer shall hold office until his or her successor shall have been duly elected and qualified or until his or her death or until he resigns or shall have been removed in the manner hereinafter provided. Section 3. Removal. Any officer elected or appointed by the Board of --------- ------- Directors may be removed by the Board of Directors whenever, in its judgment, the best interest of the corporation 5 will be served thereby, but such removal shall be without prejudice to the contract rights, if any, of the person so removed. Section 4. Vacancies. A vacancy in any office because of death, --------- --------- resignation, removal, disqualification or otherwise may be filled by the Board of Directors for the unexpired portion of the term. Section 5. Duties of Officers. The Chairman of the Board of the --------- ------------------ corporation, or the President if there shall not be a Chairman of the Board, shall preside over all meetings of tile Board of Directors and of the stockholders which he shall attend. The President shall be the chief executive officer of the corporation. Subject to the foregoing, the officers of the corporation shall have such powers and duties as usually pertain to their respective offices and such additional powers and duties specifically conferred by law, by the Articles of Incorporation. by these bylaws, or as may be assigned to them from time to time by the Board of Directors Section 6. Salaries. The salaries of the officers shall be fixed from --------- -------- time to time by the Board of Directors, and no officer shall be prevented from receiving such salary by reason of the fact that he is also a director of tile corporation. Section 7. Delegation of Duties. In the absence of or disability of any --------- -------------------- officer of tile corporation or for any other reason deemed sufficient by the Board of Directors, the Board may delegate his or her powers or duties to any other officer or to any other director for the time being. ARTICLE V Executive and Other Committees ------------------------------ Section 1. Creation of Committee. The Board of Directors may, by --------- --------------------- resolution passed by a majority of the Board, designate an Executive Committee and one (1) or more other committees, each to consist of one (1) or more of the directors of the corporation. Section 2. Executive Committee. The Executive Committee, if there shall --------- ------------------- be one, shall consult with and advise the officers of the corporation in the management of its business all shall have and may exercise, to the extent provided in the resolution of the Board of Directors creating such Executive Committee, such powers of the Board of Directors as call be lawfully delegated by the Board. Section 3. Other Committees. Such other committees shall have such --------- ---------------- functions and may exercise the powers of the Board of Directors, as can be lawfully delegated, and to the extent provided in the resolution or resolutions creating such committee or committees. Section 4. Meetings of Committees. Regular meetings of the Executive --------- ---------------------- Committee and other committees may be held without notice at such time and at such place as shall from time to time be determined by the Executive Committee or such other committees, and special meetings of the Executive Committee or such other committees may be called by any member thereof 6 upon two (2) days' notice to each of the other members of such committee; or on such shorter notice as may be agreed to in writing by each of the other members of such committee, given either personally or in the manner provided in Section 6 of Article III of these bylaws (pertaining to notice for directors' meetings). Section 5. Vacancies on Committees. Vacancies on the Executive Committee --------- ----------------------- or on such other committees shall be filled by the Board of Directors then in office at any regular or special meeting. Section 6. Quorum of Committees. At all meetings of the Executive --------- -------------------- Committee or such other committees, a majority of the committee members then in office shall constitute a quorum for the transaction of business. Section 7. Manner of Acting of Committees. The acts of a majority of the --------- ------------------------------ members of the Executive Committee or such other committees present at any time at which there is a quorum shall be the act of such committee. Section 8. Minutes of Committees. The Executive Committee, if there --------- --------------------- shall be one, and such other committees shall keep regular minutes of their proceedings and report the same to the Board of Directors when required. Section 9. Compensation. Members of the Executive Committee and such --------- ------------ other committees may be paid compensation in accordance with the provisions of Section 10 of Article III (pertaining to compensation of directors). ARTICLE VI Indemnification and Advancement of Expenses for Directors, Officers, Employees and Agents ----------------------------------------- The corporation shall indemnify and advance expenses to any person who was or is a party to any proceeding or threatened proceeding by reason of tile fact that he is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the corporation; subject in each instance to satisfaction of all applicable requirements under Chapter 607, Florida Statutes. Additionally, the corporation may make any other or further indemnification or advancement of expenses of any of its directors, officers, employees, or agents, as it may desire; subject, however, to the restrictions contained in Chapter 607, and in particular Section 607.0850(7), Florida Statutes. 7 ARTICLE VII Certificates or Stock --------------------- Section 1. Certificates for Shares. Every holder or stock in the --------- ----------------------- corporation shall be entitled to have a certificate, signed by the President or a Vice President and the Secretary or an assistant secretary exhibiting the holder's name and certifying the number of shares owned by him in the corporation. The certificates shall be numbered and entered in the books of the corporation as they are issued. Section 2. Transfer of Shares. Transfers of shares of [lie corporation --------- ------------------ shall be made upon its books by the holder of the shares in person or by his or her lawfully constituted representative upon surrender of the certificate of stock for cancellation. The person in whose name shares stand on the books of' the corporation shall be deemed by the corporation to be the owner thereof for all purposes, and tile corporation shall not be bound to recognize any equitable or other claim to or interest in such shares on the part of any other person whether or not it shall have express or other notice thereof, save as expressly provided by file laws of the State of Florida. Section 3. Facsimile Signature. Where a certificate is manually signed --------- ------------------- on behalf of a transfer agent or a registrar other than the corporation itself or an employee of the corporation, the signature of any such President, Vice President, Secretary or assistant secretary may be a facsimile. In case any officer or officers who have signed or whose facsimile signature or signatures shall cease to be such officer or officers of the corporation, such certificate or certificates may, nevertheless, be adopted by the corporation and be issued and delivered as though the person or persons who signed such certificate or certificates or whose facsimile signature or signatures have been used thereon had not ceased to be such officer or officers of the corporation. Section 4. Lost Certificates. The Board of Directors may direct that a --------- ----------------- new certificate or certificates be issued in place of any certificate or certificates theretofore issued by the corporation and alleged to have been lost or destroyed upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates or his or her legal representative to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. 8 ARTICLE VIII Record Date ----------- The Board of Directors is authorized from time to time to fix in advance a date, not more than sixty (60) nor less than ten (10) days before the date of any meeting of stockholders. or not more than sixty (60) days prior to the date for the payment of any dividend or the date for the allotment of rights, or the date when any change or conversion of or exchange of stock shall go into effect, or a date in connection with the obtaining of the consent of stockholders for any purpose, as a record date for the determination of the stockholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or entitled to receive payment of any such dividend, or to any such allotment, or to exercise the rights in respect of any such change. conversion or exchange of stock, or to give such consent, as the case may be; and, in such case, such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting and any adjournment thereof. or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, or to give such consent, as the case may be, notwithstanding any transfer of any stock on the books of the corporation after any such record date fixed as aforesaid. ARTICLE IX Dividends --------- The Board of Directors may from time to time declare and the corporation may pay dividends on its outstanding shares of capital stock in the manner and upon the terms and conditions provided by the Articles of Incorporation and by law. Dividends may be paid in cash, in property or in shares of stock, subject to the provisions of the Articles of Incorporation and to law. ARTICLE X Fiscal Year ----------- The fiscal year of the corporation shall be the twelve (12) month period selected by the Board of Directors as the taxable year of the corporation for Federal income tax purposes. ARTICLE XI Seal ---- The corporate seat shall bear the name of the corporation, which shall be between two concentric circles, and in the inside of the inner circle shall be the calendar year of incorporation; an impression of said seal appearing on the margin hereof. 9 ARTICLE XII Stock in Other Corporations --------------------------- Shares of stock in other corporations held by this corporation shall be voted by such officer or officers of this corporation as the Board of Directors shall from time to time designate for the purpose, or by a proxy thereunto duly authorized by said Board. ARTICLE XIII Amendments ---------- These bylaws may be altered, amended, or repealed in whole or in part, and new bylaws may be adopted by the Board of Directors or by the vote of stockholders owning a majority of the stock of the corporation entitled to vote thereon. 10 SCHEDULE "D" WARRANT TRANSFER REGISTER INTERNET LIQUIDATORS INTERNATIONAL INC. ---------------------------------------
- ------------------------------------------------------------------------------------------------------------------- DATE Certificates Surrendered TRANSFEROR Transfer ------------------ Class of ------------------------------------------------------------------ Number Mon. Day Yr. Shares No. Shares Transferred From - ------------------------------------------------------------------------------------------------------------------- 2 May 28 96 Comm 002 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 3 May 28 96 Comm 003 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 4 May 28 96 Comm 004 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 5 May 28 96 Comm 005 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 6 May 28 96 Comm 006 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 7 May 28 96 Comm 007 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 8 May 28 96 Comm 008 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 9 May 28 96 Comm 009 140,625 Treasury - ------------------------------------------------------------------------------------------------------------------- 10 May 28 96 Comm 010 140,625 Treasury - ------------------------------------------------------------------------------------------------------------------- 12 May 28 96 Comm 012 125,000 Treasury - ------------------------------------------------------------------------------------------------------------------- 13 May 28 96 Comm 013 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 15 May 28 96 Comm 015 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 16 May 28 96 Comm 016 56,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 17 May 28 96 Comm 017 34,375 Treasury - ------------------------------------------------------------------------------------------------------------------- 18 May 28 96 Comm 018 93,750 Treasury - ------------------------------------------------------------------------------------------------------------------- 19 May 28 96 Comm 019 109,375 Treasury - ------------------------------------------------------------------------------------------------------------------- 22 May 28 96 Comm. 022 15,625 Treasury - ------------------------------------------------------------------------------------------------------------------- 24 May 28 96 Comm 024 62,500 Treasury - ------------------------------------------------------------------------------------------------------------------- 25 May 28 96 Comm 025 31,250 Treasury - ------------------------------------------------------------------------------------------------------------------- 26 May 28 96 Comm 026 15,625 Treasury - ------------------------------------------------------------------------------------------------------------------- 29 May 28 96 Comm 001 31,250 Don & Mary Smythe - ------------------------------------------------------------------------------------------------------------------- 30 May 28 96 Comm 001 31,250 Don & Mary Smythe - ------------------------------------------------------------------------------------------------------------------- 31 July 18 96 Comm 020 46,875 Incorporated Investments Limited - ------------------------------------------------------------------------------------------------------------------- 32 July 18 96 Comm 020 46,875 Incorporated Investments Limited - ------------------------------------------------------------------------------------------------------------------- 33 July 18 96 Comm 020 46,875 Incorporated Investments Limited - ------------------------------------------------------------------------------------------------------------------- 34 July 18 96 Comm 020 46,875 Incorporated Investments Limited - ------------------------------------------------------------------------------------------------------------------- 35 July 18 96 Comm 014 132,500 Ellen Eisen - ------------------------------------------------------------------------------------------------------------------- 37 July 18 96 Comm 014 132,500 Ellen Eisen - ------------------------------------------------------------------------------------------------------------------- 38 July 18 96 Comm 011 250,000 Ennio D'Angela - ------------------------------------------------------------------------------------------------------------------- 39 July 18 96 Comm 011 250,000 Ennio D'Angela - ------------------------------------------------------------------------------------------------------------------- 40 July 18 96 Comm 011 250,000 Ennio D'Angela - ------------------------------------------------------------------------------------------------------------------- =================================================================================================================== - -------------------------------------------------------------------------------- Transfer TRANSFEREE New Certificate Issued - -------------------------------------------------------------------------------- Number Transferred To No. Shares - -------------------------------------------------------------------------------- 2 Donald & Joanne Harling - -------------------------------------------------------------------------------- 3 G.B. Stephens - -------------------------------------------------------------------------------- 4 Paul & Heather Sansom - -------------------------------------------------------------------------------- 5 William R. Dawson - -------------------------------------------------------------------------------- 6 Glen A. Mack - -------------------------------------------------------------------------------- 7 Robert C. Vogt - -------------------------------------------------------------------------------- 8 Heather Mamers - -------------------------------------------------------------------------------- 9 Wizard Holdings Inc. - -------------------------------------------------------------------------------- 10 G.L. Lozinski - -------------------------------------------------------------------------------- 12 Midland Walwyn in trust for Joel Neumark - -------------------------------------------------------------------------------- 13 Ellen Babbin in trust - -------------------------------------------------------------------------------- 15 Stephen J. Stren - -------------------------------------------------------------------------------- 16 Baker Street Limited - -------------------------------------------------------------------------------- 17 Warren Manis - -------------------------------------------------------------------------------- 18 Bribak Holdings Inc. - -------------------------------------------------------------------------------- 19 Atlantic Research Services Inc. - -------------------------------------------------------------------------------- 22 Kaufman Limited - -------------------------------------------------------------------------------- 24 TRL Investments Limited - -------------------------------------------------------------------------------- 25 Jay De Genova - -------------------------------------------------------------------------------- 26 John Scheel - -------------------------------------------------------------------------------- 29 Smythe 029 15,625 - -------------------------------------------------------------------------------- 30 Smythe 030 15,625 - -------------------------------------------------------------------------------- 31 Enannuc Holdings Inc. 031 9,375 - -------------------------------------------------------------------------------- 32 BET-MUR Investments Limited 032 11,719 - -------------------------------------------------------------------------------- 33 Permanent Developments Limited 033 11,719 - -------------------------------------------------------------------------------- 34 Incorporated Investments Limited 034 14,062 - -------------------------------------------------------------------------------- 35 Ellen Eisen 035 12,500 - -------------------------------------------------------------------------------- 37 Research Capital Corporation 037 107,500 - -------------------------------------------------------------------------------- 38 Comex Investments Ltd. 038 166,250 - -------------------------------------------------------------------------------- 39 James Canale Parola 039 25,000 - -------------------------------------------------------------------------------- 40 Rick Paolone 040 31,250 - -------------------------------------------------------------------------------- ================================================================================
- ---------------------------------------------------------------------------------------------------------- 41 July 18 96 Comm 011 250,000 Ennio D'Angela - ---------------------------------------------------------------------------------------------------------- 42 July 18 96 Comm 011 250,000 Ennio D'Angela - ---------------------------------------------------------------------------------------------------------- 44 July 18 96 Comm 021 78,k125 Donald Scott, in trust - ---------------------------------------------------------------------------------------------------------- 45 July 18 96 Comm 021 78,125 Donald Scott, in trust - ---------------------------------------------------------------------------------------------------------- 47 July 18 96 Comm 021 78,125 Donald Scott, in trust - ---------------------------------------------------------------------------------------------------------- 48 July 18 96 Comm 023 51,875 ES-LEA Holdings Limited - ---------------------------------------------------------------------------------------------------------- 49 July 18 96 Comm 023 51,875 ES-LEA Holdings Limited - ---------------------------------------------------------------------------------------------------------- 50 July 18 96 Comm 023 51,875 ES-LEA Holdings Limited - ---------------------------------------------------------------------------------------------------------- 51 96 Comm. 043 15,625 Edith Scott - ---------------------------------------------------------------------------------------------------------- 52 96 Comm. 046 15,625 Steve Cuddie - ---------------------------------------------------------------------------------------------------------- 53 96 Comm. 027 15,625 Joe Tersigni - ---------------------------------------------------------------------------------------------------------- 54 96 Comm. 027 15,625 Joe Tersigni - ---------------------------------------------------------------------------------------------------------- 55 96 Comm. 027 15,625 Joe Tersigni - ---------------------------------------------------------------------------------------------------------- 56 96 Comm. 027 15,625 Joe Tersigni - ---------------------------------------------------------------------------------------------------------- 57 96 Comm. 027 15,625 Joe Tersigni - ---------------------------------------------------------------------------------------------------------- 58 97 Comm. 036 12,500 Ellen Elsen - ---------------------------------------------------------------------------------------------------------- 59 97 Comm. 028 31,250 Peter Pristach - ---------------------------------------------------------------------------------------------------------- 60 97 Comm. 028 31,250 Peter Pristach - ---------------------------------------------------------------------------------------------------------- 61 97 Comm. 028 31,250 Peter Pristach - ---------------------------------------------------------------------------------------------------------- 62 97 Comm. 028 31,250 Peter Pristach - ----------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------- 41 Jonathan Robinson 041 15,625 - ------------------------------------------------------------------------------- 42 Laurie Campbell 042 11,875 - ------------------------------------------------------------------------------- 44 Lois Smith 044 15,625 - ------------------------------------------------------------------------------- 45 Barbara Nettleton 045 15,625 - ------------------------------------------------------------------------------- 47 Catherine Moore 047 15,625 - ------------------------------------------------------------------------------- 48 Investor Company/TD/ES-LEA 048 40,000 - ------------------------------------------------------------------------------- 49 Investor Company/TD/ES-LEA 049 7,875 - ------------------------------------------------------------------------------- 50 Investor Company/TD/ES-LEA 050 4,000 - ------------------------------------------------------------------------------- 51 RBC Dominion Securities Inc. In Trust 051 15,625 for Scott - ------------------------------------------------------------------------------- 52 RBC Dominion Securities Inc. In Trust 052 15,625 for Cuddie - ------------------------------------------------------------------------------- 53 Roland Girard 053 3,125 - ------------------------------------------------------------------------------- 54 Paul Plesman 054 3,125 - ------------------------------------------------------------------------------- 55 George Soltys 055 3,125 - ------------------------------------------------------------------------------- 56 Joe Tersigni 056 3,125 - ------------------------------------------------------------------------------- 57 David Kanes 057 3,125 - ------------------------------------------------------------------------------- 58 Heather Mintz 058 12,500 - ------------------------------------------------------------------------------- 59 Copez Management Ltd. 059 3,125 - ------------------------------------------------------------------------------- 60 Fred Dalley 060 6,250 - ------------------------------------------------------------------------------- 61 Lawrence Eckert 061 18,750 - ------------------------------------------------------------------------------- 62 Peter Pristach 062 3,125 - ------------------------------------------------------------------------------- NOTE: Additional Warrant issued to Toronto Star Newspapers Limited to acquire up to 500,000 common shares. A copy of the Warrant is contained in Schedule "M." SCHEDULE "E" LITIGATION As of the date hereof, there is currently no outstanding or contemplated litigation involving or that may involve Internet Liquidates International Inc. CP-29729-1 January 29. 1997 - -------------------------------------------------------------------------------- Thursday, 07, 1996 SCHEDULE "F" LICENSES INTERNET LIQUIDATORS INTERNATIONAL INC. THIRD PARTY SOFTWARE LICENCES PURCHASED TO JANUARY 30,1997 [Confidential Information filed separately with the SEC] 2 See attached papers. CP 29729-1 January 30. 1997 Asset Tracking (FTN)
Tag # Product Description* Qty Date Vendor Inv. # Cost PC Identification Number - ------------------------------------------------------------------------------------------------------------------------------------ IL100140 1 08/28/96 Focus Technologies Networks 56267 $ 972.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00139 1 08/29/96 Focus Technologies Networks 56267 $ 972.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00137 1 05/31/96 Focus Technologies Networks 52600 $ 693.36 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00135 1 08/28/96 Focus Technologies Networks 56046 $ 327.60 6419304 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00105 1 06/11/96 Focus Technologies Networks 51916 $ 3,385.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00096 1 05/31/96 Focus Technologies Networks 53250 $ 5,670.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00o92 1 05/23/96 Focus Technologies Networks 52863 $ 4,860.00 1F00305 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00081 1 04/19/96 Focus Technologies Networks 51916 $ 2,700.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00079 1 04/19/96 Focus Technologies Networks 51916 $ 430.92 - ----------------------------------------------------------------------------------------------------------------------------------- ILI00071 1 03/28/96 Focus Technologies Networks 51136 $ 2,316.60 S/N HLA2000601 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00070 1 03/28/96 Focus Technologies Networks 51136 $ 4,325.40 S/N 00029231 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00062 1 03/18/96 Focus Technologies Networks 50827 $ 16,200.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI0062 1 03/18/96 Focus Technologies Networks 50827 $ 9,369.00 S/N 446F0677 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00062 1 03/18/96 Focus Technologies Networks 50827 $ 1,323.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00062 1 03/18/96 Focus Technologies Networks 50827 $ 1,323.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00060 1 03/18/96 Focus Technologies Networks 50827 $ 37,335.60 S/N CX60202274, 75,78 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00059 1 03/18/96 Focus Technologies Networks 50827 $ 5,670.00 S/N NI549R8372 - ------------------------------------------------------------------------------------------------------------------------------------ ==================================================================================================================================== Thrusday, 07 November, 1996 Page 1 of 3
* Confidential Information filed separately with the SEC
Tag # Product Description* Qty Date Vendor Inv. # Cost PC Identification Number - ------------------------------------------------------------------------------------------------------------------------------------ ILI00039 1 12/14/95 Focus Technologies 48075 $ 4,860.00 S/N: 1F00286,1F00305 Networks - ------------------------------------------------------------------------------------------------------------------------------------ 1 04/19/96 Focus Technologies 51916 $ 405.00 Networks - ------------------------------------------------------------------------------------------------------------------------------------ 6 $ 0.00 - ------------------------------------------------------------------------------------------------------------------------------------ 1 $ 0.00 - ------------------------------------------------------------------------------------------------------------------------------------ 1 Bell $ 0.00 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00094 1 05/29/96 Focus Technologies Networks 53089 $ 8,559.00 1 S/N N161601Z11 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00094 1 05/31/96 Focus Technologies Networks 53250 $ 5,526.36 1 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00094 1 09/06/96 Focus Technologies Networks 56476 $ 585.00 1 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00094 1 05/29/96 Focus Technologies Networks 53089 $ 0.00 1 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00083 1 04/12/96 Focus Technologies Networks 51676 $ 18,630.00 2 S/N N161201LCA - ------------------------------------------------------------------------------------------------------------------------------------ ILI00083 1 04/12/96 Focus Technologies Networks 51676 $ 7,776.00 2 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00083 1 02/27/96 Focus Technologies Networks 50066 $ 1,225.00 2 0000F80034A9 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00083 1 04/12/96 Focus Technologies Networks 51676 $ 0.00 2 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00069 1 03/28/96 Focus Technologies Networks 51136 $ 18,630.00 3 S/N N1602018G8 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00069 1 04/12/96 Focus Technologies Networks 51676 $ 7,776.00 3 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00069 1 02/27/96 Focus Technologies Networks 50066 $ 1.225.00 3 08002BE6F63C - ------------------------------------------------------------------------------------------------------------------------------------ ILI00069 1 03/2896 Focus Technologies Networks 51136 $ 0.00 3 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00069 1 $ 0.00 3 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00069 1 $ 0.00 3 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00095 1 05/29/96 Focus Technologies Networks 53089 $ 18,630.00 4 S/N N161201KJL - ------------------------------------------------------------------------------------------------------------------------------------
*Confidential Information filed separately with the SEC 2
Tag # Product Description* Qty Date Vendor Inv. # Cost PC Identification Number - ------------------------------------------------------------------------------------------------------------------------------------ ILI00095 1 05/29/96 Focus Technologies Networks 53089 $ 5,526.36 4 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00095 1 02/27/96 Focus Technologies Networks 50066 $ 1,225.00 4 08002BE5F3A4 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00095 1 $ 0.00 4 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00095 1 $ 0.00 4 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00061 1 03/18/96 Focus Technologies Networks 50827 $ 32,880.60 5 S/N N1550R9894 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00061 1 01/31/96 Focus Technologies Networks 49219 $ 12,450.00 5 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00061 1 03/18/96 Focus Technologies Networks 50827 $ 7,776.00 5 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00061 1 03/18/96 Focus Technologies Networks 50827 $ 6,485.40 5 S/N 3D5370033 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00061 1 05/31/96 Focus Technologies Networks 53250 $ 5,250.00 5 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00061 1 03/18/96 Focus Technologies Networks 50827 $ 0.00 5 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00136 1 05/13/96 Focus Technologies Networks 52600 $ 2,399.00 6 6425318UN - ------------------------------------------------------------------------------------------------------------------------------------ ILI00138 1 03/28/96 Focus Technologies Networks 51136 $ 1,938.60 6 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00137 1 03/06/96 Focus Technologies Networks 50862 $ 2,619.00 7 3510A00872 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00137 1 04/16/96 Focus Technologies Networks 51786 $ 279.72 7 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00141 1 04/19/96 National Data Corporation $ 5,308.00 9 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00141 1 03/06/96 Focus Technologies Networks 50862 $ 2,619.00 9 - ------------------------------------------------------------------------------------------------------------------------------------ ILI00141 1 02/27/96 Focus Technologies Networks 50420 $ 189.00 9 TOTAL: $ 278,692.32 - ------------------------------------------------------------------------------------------------------------------------------------
*Confidential Information filed separately with the SEC 3 * Schedule "H" Form of Certificate of Originality ------------------------------------------------ CERTIFICATE OF ORIGINALITY -------------------------- - -------------------------------------------------------------------------------- For each item of Software and Documentation (collectively, "Software Material"), as defined in the Auction Services Agreement (the "Agreement"), you must complete a copy of this questionnaire. In addition you must provide any additional information needed for copyright registration or enforcement of legal rights relating to the Software Material. One questionnaire can cover one complete product, even if that product includes multiple modules. A separate questionnaire must be completed for code and another for its related documentation. Significant changes to the Software Material will require completion of a new questionnaire. Please do not leave any question blank. Write "not applicable" or "N/A" if a question is not relevant to the Software Material. If you need additional space to complete any question, please attach a separate sheet of paper that identifies the question number. 1.0 QUESTIONNAIRE 1. Name of the Software Material (provide complete identification including version, release and modification numbers for programs and documentation): 2. Was the Software Material or any portion thereof: (a) Written by any persons(s) other than you or your employees working within their job assignments? YES _____ NO _______ (If NO, skip to #3) (b) Did the person(s) write ALL or PART of the Software Material? ALL _______ PART _____ If PART, state the percentage written by the person(s) _________% (c) Was the Software Material provided to you by COMPANY(IES) or INDIVIDUAL(S) or both? COMPANY(IES) ______ INDIVIDUAL(S) _______ BOTH _______ (Complete (d) and (e) below) How did you acquire title to the Software Material or the right to grant the licenses in the Agreement? (d) For each COMPANY, provide the following information: Name: Address: How did the COMPANY acquire title to the Software Material? (For example, the Software Material was written by the COMPANY'S employees as part of their job assignment): Did the COMPANY have each non-US contributor to the Software Material sign a waiver of their moral rights? YES _______ NO _______ (e) For each INDIVIDUAL(S) in 2(c), provide the following: Name: Citizenship: Address: Did the INDIVIDUAL(S) create the Software Material while employed by, or under a contractual relationship with, another party? YES _______ NO _______ If YES, provide name and address of the other party: Did the INDIVIDUAL(S) create or first publish the Software Material in a country other than the US? YES _______ NO _______ If YES, did the INDIVIDUAL(S) sign a waiver of moral rights? YES _______ NO _______ (If YES, please attach a copy) (f) Was any part of the Software Material registered at any copyright office? YES _______ NO _______ (If YES, provide the following registration information:) 1) Claimant Name: 2 2) Registration Number: 3) Date of Registration: 4) Title of Work: 3. Was any part of the Software Material published? YES _______ NO _______ When and where was it published? Was there a copyright notice on the published material(s)? YES _______ NO ______ (If YES, provide the copyright notice below.) Was any part of the Software Material distributed by you to any third parties other than those contemplated in the Agreement? YES _________ NO _____ When and where was the Software Material distributed? To whom was the Software Material distributed? Why was the Software Material distributed? Under what conditions was the Software Material distributed? (for example, under a contract.) 3 4. Was any part of the Software Material derived from preexisting material(s)? YES _______ NO ________ (If YES, provide the following information for each of the preexisting materials:) (a) Name of the material: (b) Author (if known): (c) Owner (if known): (d) Copyright notice appearing on the material (if any): (e) Was any new function added to the preexisting software? YES _______ NO _______ Briefly describe the new function(s) below: ___________% of preexisting material used ___________% of preexisting material modified ___________% of preexisting material consisting of or deriving from preexisting materials (f) Briefly describe below how the preexisting material has been used: 5. Were any part of the display screens, data formats, instruction or command formats, operator messages interfaces, etc. (collectively called "External Characteristics") of the Software Material copied or derived from the External Characteristics of another program or product of yours or a third party? YES _______ NO _______ (If YES, provide the following information:) 1. Name of Developer's or third party's program or product: 2. Author (if known): 3. Owner (if known): 4 4. Copyright notice relating to the preexisting External Characteristics (if any): 5. Have the preexisting External Characteristics been modified? YES _______ NO ________ (Describe how they have been modified below:) 6. Identify below any other circumstances that might effect the execution of the terms of the Agreement: (a) confidentiality or trade secrecy of preexisting materials: (b) known or expected royalty obligations to others: (c) preexisting materials developed for another party or customer (including government) where you may not have retained full rights to the materials: (d) materials acquired from a person or company possibly having no title to them: 7. Employee Identification. You recognize that for purposes of copyright registration or enforcement of legal rights relating to the Software Material, the names, addresses and citizenships of all persons who wrote or contributed to the writing of the Software Materials is required. You agree to keep accurate records of all such information according to the IDA and to provide them as necessary to carry out the terms of the Agreement. 8. An "ICON" is generally defined as a symbol on a display screen that a user can point to with a device such as a mouse in order to select a particular operation or software application. For each ICON contained in the Software Materials, you will have its creator complete an ICON IDENTIFICATION FORM and submit them as appendices to this Certificate of Originality. 5 2.0 CERTIFICATION By signing below, you certify that all information contained in this Certificate of Originality, including any attachments or appendices to it, are accurate and complete. Developer Name: Signature: _______________________ Print name: _______________________ Title:______________________________ Date:_______________________________ 6 SCHEDULE "I" AUCTION SERVICES AGREEMENT THIS AGREEMENT is made the 21st day of February, 1997 (the "Effective Date") between INTERNET LIQUIDATORS INTERNATIONAL INC., a corporation having a principal place of business at 5915 Airport Rd, Suite 330, Mississauga, Ontario L4V 1T1 ("IL") and AMERICA ONLINE, INC., a corporation having a place of business at 22000 AOL Way, Dulles, Virginia ("AOL"). BACKGROUND: 1. IL has developed and owns all applicable rights in, certain electronic auction software, technology and services. 2. IL uses a portion of the IL Technology in an auction service provided at internetliquidators.com. 3. On the terms set out in this Agreement, IL wishes to allow AOL and certain related entities who provide interactive services to, and AOL has agreed to accept such rights to: (i) use and commercially exploit the IL Auction Service; and (ii) if AOL elects use the Software and the IL Technology to operate an AOL Auction Service with an AOL end users' interface; and 4. In connection with the AOL Auction Service, AOL wishes to have IL provide certain related services and other deliverables. NOW THEREFORE in consideration of the premises, the mutual covenants contained in this Agreement, and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the Parties agree as follows: ARTICLE ONE INTERPRETATION -------------- 1.1 Definitions. In this Agreement, unless the context otherwise requires, ------------ each capitalized term shall have the meaning attributed thereto in Schedule "A". 1.2 Schedules. The following are the schedules attached to and forming part of ---------- this Agreement: Schedule "A" - Definitions Schedule "B" - Revenue Sharing Schedule "C" - AOL Source Code Trust Agreement Schedule "D" - Recognized Browsers Schedule "E" - AOL Merchant Certification Program Schedule "F" - AOL/IL Auction Service Overview 1.3 Headings. The headings in this Agreement are for convenience of reference --------- only and shall not affect the construction or interpretation hereof. 1.4 Extended Meanings. Words in the singular include the plural and vice-versa ------------------ and words in one gender include all genders. 1.5 Entire Agreement. This Agreement, and any agreements and other documents ----------------- contemplated herein or to be delivered pursuant to it, constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, oral or written, between the Parties. The execution of this Agreement has not been induced by, nor do either of the Parties rely upon or regard as material, any representations, warranties, conditions, other agreements or acknowledgements not expressly made in this Agreement or in the agreements and other documents to be delivered pursuant hereto. 1.6 Currency. Unless otherwise indicated, all dollar amounts referred to in --------- this Agreement are in U.S. funds. 1.7 Invalidity. If any of the provisions contained in this Agreement is found ----------- by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not be in any way affected or impaired thereby. 1.8 Governing Law. This Agreement shall be governed by and construed in -------------- accordance with the laws of Ontario and the federal laws of Canada applicable therein (excluding any provisions that would result in the application of the law of another jurisdiction) and shall be treated, in all respects, as an Ontario contract. IL submits to the non-exclusive jurisdiction of the Courts of Virginia and the U.S. Federal Court and AOL submits to the non-exclusive jurisdiction of the Courts of Ontario. The Parties expressly exclude the application of the United Nations Convention on Contracts for the International Sale of Goods. 1.9 Provision of Services. For the purposes of this Agreement, references to ---------------------- the sale of products through the IL Auction Service or the AOL Auction Service shall be deemed to include the provision of services as well. ARTICLE TWO USE OF IL AUCTION SERVICE ------------------------- 2.1 IL Auction Service. IL grants to AOL and AOL Affiliates, a non-exclusive ------------------- right to direct AOL Users by way of an AOL Interactive Service or otherwise to the IL Auction Service to purchase goods and services. 2.2 AOL Exclusive Auctions. AOL shall be allocated, on a non-consecutive and ----------------------- non-cumulative basis, at least sixty minutes per day on the IL Auction Service to sell products exclusively to AOL Users in the United States and Canada ("AOL Exclusive Auctions"). AOL will have the right to determine at what times such AOL Exclusive Auctions will occur, subject to IL's approval which shall not be unreasonably withheld. During the times that AOL is conducting the AOL Exclusive Auctions, IL will not conduct any other auctions through the IL Auction Service or 2 any other means nor will it authorize or allow any third party to do so, other than the Local Auctions. The Parties agree to develop mutually acceptable disclaimers, warnings and intellectual property notices to be displayed with respect to the auction service being provided thereon. 2.3 Term of Exclusive Auction. --------------------------- (a) The AOL Exclusive Auctions will continue for a period of one year from the Effective Date; provided, that AOL will have the option at any time to relinquish its rights to the AOL Exclusive Auctions. If AOL elects to relinquish it's rights in the first year it will receive the [Confidential Information filed separately with the SEC] during such period when it has relinquished its right in accordance with Schedule "B". (b) For each year after the first year beginning on the Effective Date, AOL will have the option, to be exercised by notice in writing on or before the commencement of each year, of extending the AOL Exclusive Auctions for another year or receiving the [Confidential Information filed separately with the SEC]. (c) For the first 18 months from the Effective Date, IL will not grant any third party the right to operate an exclusive auction similar to the AOL Exclusive Auctions if the effect is that any AOL User is prevented from accessing and participating in all activity on the IL Auction Service at any time. 2.4 Promotion and Avails. --------------------- (a) Hyperlinks. IL will prominently promote the AOL Interactive Services by ----------- (i) placing on the first page of the IL Auction Service website a permanent (i.e., always on the screen) Above The Fold hyperlink to a World Wide Web site selected by AOL and (ii) placing on each page of the IL Auction Service website hyperlinks to a World Wide Web site selected by AOL. The hyperlinks in the preceding sentence shall be at least as prominent and favorably positioned as any other third party hyperlink on such page, but in no event shall such hyperlink be less than 5,000 square pixels. AOL will not select a hyperlink under this section which links to the World Wide Web site of an entity which IL determines, acting reasonably, is a direct and material competitor with the IL Auction Service in the on-line auction business. (b) Sales of Ad Avails. AOL will be entitled to sell up to [Confidential ------------------- Information filed separately with the SEC] of IL's banner advertisements on the first page of the IL Auction Service's website and any page of the IL Auction Service's website that is directly linked to the first page, provided that AOL sells at least half of this entitlement within the first year of this Agreement. All revenue, net of any commercially reasonable, third party commissions for fees, collected by AOL for sales of these banner advertisements shall be allocated 50% to IL and 50% to AOL. (c) Marketing and Advertising. IL will purchase advertising from AOL in -------------------------- accordance with the Subscription Agreement. IL agrees that any such advertising on AOL Interactive Services pursuant to this Section [Confidential Information filed separately with the SEC] All 3 other advertising by IL on AOL Interactive Services may point to any entity, [Confidential Information filed separately with the SEC], except with the prior written consent of AOL. 2.5 [Confidential Information filed separately with the SEC] 2.6 General Revenue Splits For Auction Services. All Gross Margin received in --------------------------------------------- connection with the sale of products through the IL Auction Service and the AOL Auction Service will be allocated as set out in Schedule "B". 2.7 Right to Source Own Products. AOL may source, fulfill and sell products on ----------------------------- the IL Auction Service for no more than 25 Auctions during the first three months of this Agreement and no more than 150 Auctions during the first six months of this Agreement. 2.8 Improvements to the IL Auction Services. IL agrees immediately to use its ----------------------------------------- best efforts to improve its IL Auction Services as follows: a) create separate URL's for the IL Auction Services site for the U.S. and for Canada; b) modify the Software and the IL Technology to recognize the browsers listed in Schedule "D" (for the purpose of this covenant, "recognize" means that users of either browser shall have full access to the functionality of the IL Auction Services); c) ensure that IL shall support 40, 56 and 128 bit encryption technology; d) have the Yankee auction operational within 60 days of receiving the AOL approved specifications therefor as contemplated by the Subscription Agreement; and e) modify the Software and the IL Technology to initially handle 10,000 simultaneous users and thereafter within 90 days such number as AOL specifies in its quarterly "architecture and development plan" report. 2.9 User Interface Branding. Using the IL Technology and in co-ordination ------------------------ with AOL, IL will create AOL branded user interfaces for the IL Auction Service for use on the AOL Interactive Services on which the IL brand is a sub-brand (the "AOL Sub-Branded Interfaces") and will integrate the IL Technology and the IL Auction Service into the AOL Interactive Services. The branding and look and feel of the AOL Sub-Branded Interfaces shall be determined by AOL in its sole discretion. AOL shall operate or otherwise test the AOL Sub-Branded Interfaces in accordance with the acceptance testing provisions set out in Sections 3.7 to 3.10. 2.10 Reports. Once per month (or more frequently on reasonable request), IL -------- shall provide AOL with a monthly usage report that tracks all elements necessary to allocate revenues with respect to the IL Auction Service (including at a minimum sales, average order size, merchant name and address, geographic information, re: buyers, type of credit card, gross traffic) and how users of the IL Auction Service are navigating through the IL Auction Service. 4 2.11 Security. At all times during the term of this Agreement, IL will provide --------- a secure data line between AOL and IL offices acceptable to AOL acting reasonably for the transmission of credit card information at IL's expense. IL's annual expense, other than one-time charges for such matters as installation, shall not exceed the sum of $15,500 CDN and $38,200 US. IL shall cooperate with AOL's Operation Security in the performance of an initial security review of the IL Auction Service and such periodic security reviews as AOL may reasonably require. At all times during the term of this Agreement, AOL will retain ownership of all AOL's system administration tools. Access to any of the Servers in the AOL Auction Service may be given and/or denied to ILI staff at AOL's sole discretion. 2.12 International Markets. [Confidential Information filed separately with the --------------------- SEC], IL may give AOL notice that IL wishes to reserve such country for 3 months in order to permit IL to attempt to negotiate an exclusive license with a third party for such country to exploit the IL Technology. [Confidential Information filed separately with the SEC] IL shall have 3 months in which to negotiate a term sheet with a third party and an additional 2 months to conclude the exclusive transaction. [Confidential Information filed separately with the SEC]. 2.13 Network Operations Center. IL agrees to permit the AOL Network Operations -------------------------- Center to monitor the IL Auction Service and to designate a person for the Network Operations Center to contact in the event of a performance malfunction of the IL Auction Service. The AOL Network Operations Center will have full system administrative access for emergency situations when the AOL Auction is relocated to AOL Data Centers pursuant to section 3.1. 2.14 Software Service Levels. IL agrees to provide AOL with the following Service Levels in response to software, access, and hardware problems as found and assessed by AOL in its sole discretion: Severity 1: Function broken: bug fix or work around required within twenty-four (24) hours of first report to IL. Severity 2: Function impaired: bug fix or work around required within three (3) calendar days of first report to IL. Severity 3: Function change or improvement: bug fix or work around required within one (1) calendar week of first report to IL. Severity 4: Non-functional change or improvement: fix or change required within one (1) calendar month of first report to IL. 2.15 Specification of Deliverables and Implementation. IL and AOL agree that ------------------------------------------------- the architecture design for the Auction Service shall be consistent with Schedule "F" (as amended by mutual agreement from time to time). AOL shall provide IL with a written request specifying any Deliverables to be performed in connection with AOL's right to direct AOL Users by way of an AOL Interactive Service. IL, acting in good faith, shall consider and shall provide AOL with a reasonable business proposal with respect thereto. Once agreed upon, the Parties shall set out a detailed statement of work, specifications and an implementation schedule in an addendum hereto. The Parties will also agree on an implementation schedule for the Deliverables. IL will provide AOL with technical support and training in connection with AOL's use of the Software. IL shall 5 also provide all Services necessary or desirable to permit AOL to support the Deliverables without recourse to IL. ARTICLE THREE OPTION TO HOST AOL AUCTION SERVICE ---------------------------------- 3.1 AOL Auction Service. IL acknowledges and agrees that AOL may provide 90 -------------------- days notice that it wishes to establish, operate and maintain an auction service on one or more AOL servers referred to herein as the AOL auction Service. In such event, IL at its cost shall perform the modifications required to permit such a transfer. IL and AOL shall share moving and setup costs including hardware and offsite maintenance costs (other than modification costs) but IL's share shall not exceed $100,000 (US). Within these limits, IL agrees that it is responsible for taking the technical steps to permit such a transfer including providing all necessary assistance, training, technical support, Software and Documentation in connection with the AOL Auction Service and AOL's use of the IL Technology as may be reasonably required by AOL, using reasonably qualified software professionals, to achieve such objective. If AOL provides such notice, AOL shall have primary operations responsibility for AOL Auction Service with support from IL as provided for herein. IL shall grant AOL an non-exclusive, royalty free license to use the Software and Documentation in connection with the AOL Auction Service. 3.2 Specification of Deliverables. IL and AOL agree that the architecture ------------------------------ design for the Auction Service shall be consistent with Schedule "F" (as amended by mutual agreement from time to time). AOL shall provide IL with a written request specifying the Deliverables to be performed in connection with the election in section 3.1 herein. IL, acting in good faith, shall consider and shall provide AOL with a reasonable business proposal with respect thereto. Once agreed upon, the Parties shall set out a detailed statement of work, specifications and an implementation schedule in an addendum hereto. 3.3 Implementation. The Parties will agree on an implementation schedule for --------------- the Deliverables. IL will provide AOL with technical support and training in connection with AOL's use of the Software. IL shall also provide all Services necessary or desirable to permit AOL to support the Deliverables without recourse to IL. 3.4 Training. For a period of 2 months, IL shall provide suitably qualified --------- staff and appropriate documentation and manuals to train, and shall train, AOL's personnel in the proper use, operation and routine maintenance of the Software and the IL Technology (the "Training"). 3.5 Documentation. Without limiting the generality of Section 3.1, IL shall -------------- provide to AOL three (3) sets, or such other number as agreed in writing, of the Documentation in accordance with this Agreement. IL shall provide further Documentation, and revisions to current Documentation, as developed in respect of the Software from time to time for so long as AOL continues to receive Maintenance Services (as defined in Section 3.10) for such Software and covenants to AOL that for such period the Documentation furnished will be reasonably complete so as to allow AOL to provide for routine maintenance of the Software and for its operation and use as contemplated under this Agreement. AOL may, at no additional cost, make such copies of the Documentation as it may reasonably require for the contemplated uses of the Deliverables hereunder. 6 3.6 Project Management. The Parties each agree to designate an individual from ------- ----------- their respective companies with adequate authority and full technical competence to deal with matters relating to the implementation of the Deliverables (each, being a "Project Manager"). Specifically, these individuals will, on behalf of their respective Parties, in accordance with the spirit of this Agreement, use reasonable efforts to co-ordinate the delivery, installation, acceptance and maintenance and support of the Deliverables and for the provision of Services generally as contemplated herein. Upon such designations, each of AOL and IL shall concurrently provide the other with details with respect to its Project Manager, including name, address and telephone number, and each of AOL and IL may from time to time change its Project Manager with the consent of the other which will not be unreasonably withheld. 3.7 Support. IL agrees to provide support in the form of bug fixes, assistance -------- to AOL in integrating the Software with AOL's Service. IL further agrees to provide such documentation of software, bug fixes, alterations, changes, and upgrades to the Software as may be required by AOL during the development and integration of the Software with AOL's Service. 3.8 Acceptance Testing. ------------------- (a) Within a reasonable time after the completion of the installation of Software and the provision of the basic training and related Documentation provided for in this Agreement in respect of such Software, for an appropriate test period, AOL in conjunction with IL, shall operate or otherwise test the Software in accordance with agreed upon operating practices (the "Acceptance Testing"). The Software will be deemed accepted when all Severity Level 1 and 2 bugs (as set out in Section 2.14) are fixed. AOL shall notify IL in writing of any instances in which the Software has not performed in accordance to AOL's requirements. (b) If IL receives such written notification, then it shall take all such actions as are necessary to allow the Software to perform in accordance to AOL's Requirements within the time frames defined for each Severity Levels as set out in Section 2.14. (c) Notwithstanding Sections 3.8(a) and (b) above, AOL acknowledges and agrees that there may be minor deficiencies defined as Severity Level 3 and 4 bugs that do not in the aggregate have a material impact upon performance of the Software and provided that on notification thereof, IL promptly rectifies deficiencies to the satisfaction of AOL, acting reasonably, the acceptance of the Software will not be delayed thereby. 3.9 Reports. IL will provide AOL with a regular report on changes to the IL -------- Auction Service. 3.10 Maintenance and Support. ------------------------ (a) Except as otherwise provided herein, IL will be responsible for maintaining and updating the IL Technology used in the AOL Auction Service and will make available those Software maintenance and support services agreed upon by the Parties (the "Maintenance Services"), including meeting the Service Levels set out in Section 2.14. IL will provide AOL with no less than the most favorable support and maintenance terms (e.g., response times and training classes) provided by IL to any third party. (b) At least once per calendar quarter IL shall have the appropriate technical support staff physically visit the AOL website to provide maintenance and support. 7 (c) If AOL requests the inclusion in the IL Technology, the IL Auction Service, or the AOL Auction Service of functionality which IL reasonably believes to be an AOL-specific requirement or one that is not required to keep pace with IL's competition, IL will assist AOL, on terms to be mutually agreed upon, in developing or obtaining such functionality in the IL Technology and AOL Sub-Branded Interfaces. 3.11 Future Provision of Additional or Amended Deliverables. If AOL wishes ------------------------------------------------------- to have IL provide deliverables in addition to those contemplated by section 3.1 herein, whether to develop improvements for the Software or to develop similar software products, or otherwise, or to amend certain Services, AOL shall provide IL with a written request specifying the additional or amended Deliverables to be performed in connection therewith. IL, acting in good faith, shall consider and, if appropriate, shall provide AOL with a proposal with respect thereto. Once agreed upon, the Parties shall set out a detailed statement of work, specifications, the basis, if any, upon which AOL may terminate such specific additional or amended Deliverables prior to their completion, and an implementation schedule in an addendum hereto. Upon entering into such an addendum, such additional services or amended Deliverables, as applicable, shall form part of the Services. 3.12 Capability of IL Technology. ---------------------------- (a) IL will ensure that the AOL Auction Service and the AOL Sub-Branded Interfaces will have the right and capability to use all of the functionality that is used in connection with the IL Auction Service at the same time as such functionality is used on the IL Auction Service. (b) Any updates and/or upgrades and corresponding instructional materials to the IL Technology and IL Auction Service will be provided by IL to AOL at the same time such updates and/or upgrades and corresponding instructional materials are provided for the IL Auction Service or to any third party. (c) IL will continue to update and/or upgrade the IL Technology and IL Auction Service to ensure that it contains at least substantially the same functionality as its competitors. (d) IL will ensure that at all times both the IL Auction Service and the AOL Auction Service are compatible with the browsers listed in Schedule "D" and the then most popular three Internet browsers and that within a reasonable period it shall modify the IL Technology, the Software and the AOL Sub- branded Interfaces to be compatible with all AOL end users' interfaces then in use by AOL customers with browsers defined in Schedule "D". 3.13 Reports. Once per month (or more frequently on reasonable request), AOL -------- shall provide IL with a monthly usage report that tracks all elements necessary to allocate revenues with respect to the AOL Auction Service (including at a minimum sales, average order size, merchant name and address, geographic information, re: buyers, type of credit card, gross traffic) and how users of the AOL Auction Service are navigating through the AOL Auction Service. ARTICLE FOUR FEES AND REVENUE SHARING ------------------------ 8 4.1 Fees and Revenue Sharing. As consideration for all obligations, services ------------------------- and licenses provided for herein the Parties agree to share all Gross Margin received in connection with the sale of products through the IL Auction Service and the AOL Auction Service in accordance with Schedule "B". 4.2 Additional Services. Upon the prior written consent of AOL, those -------------------- additional Services rendered by IL contemplated hereunder in section 3.10(c) and section 3.11 as being provided at an additional charge may be charged to AOL at current market rates then in effect plus reasonable out-of-pocket expenses approved in advance by AOL. 4.3 Taxes. AOL shall pay to IL those taxes, duties, and other such assessments ------ or charges now in force or enacted in the future that are payable in respect of payments to be made hereunder and are required to be collected by IL under the relevant legislation. Similarly, IL shall pay to AOL those taxes, duties, and other such assessments or charges now in force or enacted in the future that are payable in respect of payments to be made hereunder and are required to be collected by AOL under the relevant legislation. This provision includes sales, use, goods and services, and excise taxes, but does not include taxes based on AOL's or IL's net income. For greater certainty, the parties hereto expressly acknowledge that any income taxes which are the debt of IL under any national or local law on any amounts to be paid to IL by AOL or under this Agreement shall be withheld by AOL to the extent required by law, and AOL shall provide proof to IL of its withholding and payment of any such taxes. 4.4 [Confidential Information filed separately with the SEC] ARTICLE FIVE REPRESENTATIONS, WARRANTIES AND INDEMNITIES ------------------------------------------- 5.1 Warranty and Indemnity re: Authority, Title and Proprietary Rights: --------------------------------------------------------------------- (a) IL represents and warrants that they each have the right to grant the licenses hereby granted and that there are not, nor will there be any lien, encumbrance, security interest or other rights against the Software and Documentation which would prohibit such license, and that IL has the right to provide the IL Auction Service, and that title to media upon which the Software and the Documentation will be provided, will be provided free and clear of all encumbrances by IL to AOL or AOL Affiliates. (b) IL agrees to indemnify AOL or AOL Affiliates and hold each harmless from all losses, claims, damages or liabilities, including court costs and attorney's fees, in connection with or arising out of any claim asserted against AOL or AOL Affiliates based upon a contention that the IL Auction Service or any of the Deliverables, or any portion thereof, in the form accepted by AOL or AOL Affiliates and used within the scope of this Agreement infringes the Intellectual Property Rights of any third party provided that: (i) AOL or AOL Affiliates promptly notifies IL in writing of the claim and of all material developments in connection with such claim and provides all assistance otherwise reasonably requested by IL; (ii) IL has the right to control, at its own cost, the defense and all related settlement negotiations (AOL has the right to participate at its own expense); and 9 (iii) AOL or AOL Affiliates does not pay or settle any such claim without the express written consent of IL. In addition, if the IL Auction Service, any of the Deliverables, or any portion thereof is held to constitute an infringement of another Person's rights, and use thereof is enjoined, IL shall, at its election and expense, either: (A) procure the right to use the infringing element thereof; (B) procure the right to an element which performs the same function without any material loss of performance or functionality; or (C) replace or modify the element thereof so that the infringing portion is no longer infringing and still performs the same function without any material loss of functionality. and shall make every reasonable effort to correct the situation with minimal effect upon the operations of AOL or AOL Affiliates. 5.2 Disabling Device. IL warrants that any Software provided hereunder shall ----------------- not contain any clock, timer, counter, or other limiting or disabling code, design or routine that would cause the Software to be made inoperable or otherwise rendered incapable of performing in accordance with AOL's Requirements or otherwise limit or restrict AOL's or AOL Affiliate's ability to use same or after the lapse or occurrence of any triggering prompt and to the best of IL's knowledge, information and belief does not contain any virus. 5.3 Media. IL represents and warrants that the media on which any Software is ------ provided shall be compatible with the computer system on which it is to be installed and that the media, as supplied by IL, shall be free from defects and computer viruses. 5.4 Representations and Warranties re: Services. IL agrees that all services --------------------------------------------- to be provided by it hereunder shall be provided in a timely fashion and in a workmanlike manner by personnel appropriately trained in the performance of such services in accordance with all applicable governmental regulations governing such services. If IL does not meet the response time requirements for a severity (1) or severity (2) event as outlined in section 2.14 herein and such failure is not due to an event beyond the reasonable control of IL, AOL shall have the right to insist that its own engineers and designers assist IL's personnel at IL's premises and rectify the problem and IL shall cooperate fully in this process. 5.5 Compliance with Applicable Laws. IL shall comply with all laws applicable -------------------------------- to the provision of the IL Auction Service or any part thereof. Evidence of compliance with such laws shall be furnished by IL to AOL's Project Manager at such times as AOL's Project Manager may reasonably request. Without limiting the generality of the foregoing, IL warrants and represents to AOL that the operation of the IL Auction Service shall comply with all consumer protection legislation and all other laws or regulations respecting the sale of goods to consumers in all jurisdictions in which goods are sold through the IL Auction Service. AOL shall comply with all laws applicable to the provision of the AOL Auction Service or any part thereof. Evidence of compliance with such laws shall be furnished by AOL to IL's Project Manager at such times as IL's 10 Project Manager may reasonably request. Without limiting the generality of the foregoing, AOL warrants and represents to IL that the operation of the AOL Auction Service shall comply with all consumer protection legislation and all other laws or regulations respecting the sale of goods to consumers in all jurisdictions in which goods are sold through the AOL Auction Service. 5.6 Manufacturer's Warranty. Each of AOL and IL agree to be responsible for ------------------------ the goods it sources for sale through either the IL Auction Service or the AOL Auction Service, including ensuring that such goods shall be sold with no less than the manufacturer's or distributor's warranty except for goods for which warranties are not generally available. The Party that sources goods for sale on either the IL Auction Service or the AOL Auction Service agrees to indemnify, defend and hold harmless the other Party for any liabilities arising from the sale of such goods. 5.7 Provision of Source Code Materials. At the written request of AOL, IL ----------------------------------- agrees to enter into a trust agreement with AOL and Data Securities International, Inc. or other mutually agreed third party for the use of the Source Code Materials. Such materials are to be released to AOL on the following conditions: (a) bankruptcy or insolvency of IL; (b) discontinuation by IL of the auction services business; or (c) failure of IL to fulfill its maintenance and support obligations. IL represents and warrants to AOL that the Source Code Materials furnished pursuant to such an agreement will be reasonably complete so as to allow AOL using a competent computer programmer possessing ordinary skills and experience, to further develop, maintain and operate the Software in the manner contemplated hereunder without further recourse to IL. At AOL's request, IL agrees to enter into, and fulfill its obligations under, the source code trust agreement attached as Schedule "C". 5.8 Confidentiality. Each Party covenants to the other Party that it shall ---------------- keep confidential the Confidential Information of the other Party to which such Party obtains access to as a consequence of entering into this Agreement and that it will take all reasonable precautions to protect such Confidential Information from any use, disclosure or copying except as expressly authorized by this Agreement. Each Party shall implement such procedures as the other Party may reasonably require from time to time to improve the security of the Confidential Information in its possession. This Section shall survive the termination of the Agreement. For greater certainty, IL acknowledges and agrees that all information respecting AOL Users is the Confidential Information of AOL including e-mail addresses and personal information obtained pursuant to this Agreement. IL shall not use such information for any purpose not specifically contemplated herein or of for marketing purposes without the prior written consent of AOL. IL shall not provide such information to third parties for any reason whatsoever without the prior written consent of AOL. 5.9 Acknowledgement of Title. ------------------------- (a) AOL acknowledges that the Software constitutes commercially valuable trade secrets and proprietary data of IL and that no term of this Agreement shall be construed to convey title in the Software to AOL. Notwithstanding the foregoing, all intellectual property rights in the 11 AOL Sub-Branded Interfaces shall vest in AOL and the Parties shall execute such documentation as may be reasonably required to confirm the foregoing. (b) AOL shall ensure that to the extent that AOL Affiliates utilize the license in Article Three they do so pursuant to this Agreement. Subject to the terms of this Agreement, AOL shall indemnify, defend and hold harmless IL for any breach of this Agreement by AOL or AOL Affiliates which are authorized by this Agreement to have access to the IL Technology. Subject to the terms of this Agreement, IL shall indemnify, defend and hold harmless AOL or AOL Affiliates which are authorized by this Agreement to have access to the IL Technology for any breach of this Agreement by IL. (c) AOL shall take all reasonable precautions to prevent third parties from using the IL Technology in its possession in any way that would constitute a breach of this Agreement including, without limitation, such precautions as it would otherwise take to protect its own proprietary technology. 5.10 AOL Merchant Certification Program. IL shall meet all standards required ---------------------------------- under the AOL Merchant Certification Program as set out in Schedule "E". 5.11 Limitation on Warranties. Except for those warranties otherwise provided ------------------------- herein, neither Party makes any warranties or representations, and there are no conditions, express or implied, in fact or in law, including without limitation, the implied warranties or conditions of merchantable quality and fitness for a particular purpose and those arising by statute or otherwise in law or from a course of dealing or usage of trade. ARTICLE SIX DEFAULT AND TERMINATION ----------------------- 6.1 Term. ----- (a) The term of this Agreement (the "Term") shall commence on the Effective Date and shall continue, subject to early termination in accordance with the terms hereof, for a period of three (3) years (the "Initial Term"). Thereafter, and subject to Section 6.1(b), the Agreement shall be automatically extended for each of three (3) additional one (1) year terms (each, being a "Subsequent Term") unless sixty (60) days' notice in writing is given by AOL prior to the end of any of the Initial Term or the first two (2) Subsequent Terms, as applicable, stating AOL's intention to terminate the Agreement at the end of such term. (b) The extension of the Term of the Agreement into any of the three Subsequent Terms shall be subject to the Parties, using appropriate diligence and acting in good faith, during the sixty days prior to the end of the Initial Term and each Subsequent Term, renegotiating the allocation of revenues described in Schedule "B" and advertising pursuant to Section 2.4(c) and agreeing on reasonable gross profit allocations and license fees, if any, for the upcoming Subsequent Term. If the Parties cannot reach such an agreement, the Parties will submit the determination of such allocation and fees to binding arbitration by a single arbitrator in New York in accordance with AAA Rules, unless AOL elects to terminate. Pending resolution of arbitration and subject to the payment or repayment of any amount based upon the 12 arbitrator's order, as applicable, AOL shall continue to pay the amounts paid during the just completed term. 6.2 Termination for Cause. Subject to the time frames set out below, this ---------------------- Agreement may be terminated immediately by either Party on written notice upon the occurrence of an event of default by the other Party. Each of the following constitutes an event of default for the purposes of this Agreement: (i) if a Party commits any material fraudulent act in the performance of any of its obligations hereunder or any material misrepresentation hereunder; or (ii) if either Party fails to perform any material obligation set forth in this Agreement (other than a failure to pay which is considered separately in (iv)) and such default in the case of a default which is remediable continues for a period of thirty (30) days after written notice of such failure has been given by the non-defaulting Party; (iii) if there is repeated and ongoing failure by a Party to comply with or perform any of the material terms, conditions, agreements and obligations imposed on it by this Agreement; (iv) if a Party should fail to pay a material amount to the other when payable hereunder (other than an amount which such Party, in good faith, disputes is owing) and such breach is not cured within sixty (60) days after written notice stating that such amount is due and owing and that non-payment shall result in termination; or (v) if a Party declares bankruptcy, becomes insolvent or ceases the operation of its business without a successor. 6.3 Survival. Upon termination of this Agreement, for a period of 12 months --------- after the date this Agreement is terminated, all operative terms of this Agreement will remain in full force and effect and AOL will be entitled to use the AOL Sub-Branded Interfaces in the same manner it was entitled to use them as of the date of termination and AOL and IL will continue to allocate revenue as set forth above. After the 12-month period, AOL will not have any right to use the AOL Sub-Branded Interfaces and IL will cooperate with AOL to assist AOL in transitioning to a new technology. Except as otherwise provided herein, the terms of Articles 5 and 6 shall survive any termination or expiry of this Agreement and shall continue in force thereafter for the period contemplated by the Agreement as shall any other provision of this Agreement which, by the nature of the rights or obligations set out therein, might reasonably be expected to be intended to so survive. ARTICLE SEVEN GENERAL -------- 7.1 Notice. Any notice or other communication (in this Section a "Notice") ------- required or permitted to be given or made hereunder shall be in writing and shall be well and sufficiently given or made if: (a) delivered in person during normal business hours on a Business Day and left with a receptionist or other responsible employee of the relevant party at the applicable address set forth below; 13 (b) sent by prepaid first class mail; or (c) sent by any electronic means of sending messages, including facsimile transmission, which produces a paper record (an "Electronic Transmission"), charges prepaid and confirmed by prepaid first class mail; in the case of a Notice to AOL addressed to it at: America Online, Inc. 22000 AOL Way Dulles, Virginia 20166 Attention: Fred Singer, Vice-President Fax No.: (703) 265-2409 with a copy to: America Online, Inc. 22000 AOL Way Dulles, Virginia 20166 Attention: General Counsel Fax No.: (703) 265-2208 and in the case of a Notice to Corporation addressed to it at: Internet Liquidators International Inc. 5915 Airport Rd., Suite 330 Mississauga, Ontario L4V 1T1 Attention: Paul Godin Fax No.: (905) 672-5705 with a copy to: Gowling, Strathy & Henderson Barristers & Solicitors Commerce Court West Suite 4900 Toronto, Ontario M5L 1J3 Attention: David Pamenter Fax No.: (416) 862-7661 Any Notice given or made in accordance with this Section 7.1 shall be deemed to have been given or made and to have been received: (a) on the day it was delivered, if delivered as aforesaid; 14 (b) on the fifth Business Day (excluding each day during which there exists any general interruption of postal services due to strike, lockout or other cause) after it was mailed, if mailed as aforesaid; and (c) on the day of sending if sent by Electronic Transmission during normal business hours of the addressee on a Business Day and, if not, then on the first Business Day after the sending thereof. Any Party may from time to time change its address for notice by giving Notice to other Party in accordance with the provisions of this Section 7.1. 7.2 Assignment. The rights and obligations of IL under this Agreement shall ----------- not be assigned, in whole or in part, by IL without the prior consent in writing of AOL and any purported assignment made without that consent is void and of no effect. No assignment of this Agreement shall relieve IL from any obligation under this Agreement or impose any liability upon AOL , unless otherwise agreed to in writing by AOL. AOL may assign its rights and obligations under this Agreement to any AOL Affiliate or to a party purchasing the part of its business by which the applicable Deliverables are primarily used, without IL's prior written consent. 7.3 Binding on Successors. This Agreement shall inure to the benefit of and be ---------------------- binding upon the Parties and their respective successors and permitted assigns. 7.4 Further Assurances. Each Party agrees that upon the written request of ------------------- the other Party, it will do all such acts and execute all such further documents, conveyances, deeds, assignments, transfers and the like, and will cause the doing of all such acts and will cause the execution of all such further documents as are within its power to cause the doing or execution of, as any other Party hereto may from time to time reasonably request be done and/or executed as may be necessary or desirable to give effect to this Agreement. 7.5 Independent Contractors. It is understood and agreed that in giving effect ------------------------ to this Agreement, no Party shall be or be deemed a partner, agent or employee of another Party for any purpose and that their relationship to each other shall be that of independent contractors. Nothing in this Agreement shall constitute a partnership or a joint venture between the Parties. No Party shall have the right to enter into contracts or pledge the credit of or incur expenses of liabilities on behalf of the other Party. 15 7.6 Waiver. A waiver by any Party hereto of any of its rights hereunder or of ------- the performance by another Party of any of its obligations hereunder shall be without prejudice to all of the other rights hereunder of the Party so waiving and shall not constitute a waiver of any such other rights or, in any other instance, of the rights so waived, or a waiver of the performance by the other Party of any of its other obligations hereunder or of the performance, in any other instance, of the obligations so waived. No waiver by any Party of any of its obligations hereunder shall be effective or binding upon such Party unless the same shall be expressed in writing. IN WITNESS WHEREOF this Agreement is executed by the Parties as of the date first written above. INTERNET LIQUIDATORS INTERNATIONAL INC. By: _c/s Name: Title: By: _c/s Name: Title: AMERICA ONLINE, INC. By: _c/s Name: Title: 16 SCHEDULE "A" DEFINITIONS In this Agreement, unless the context otherwise requires, the following expressions have the meanings indicated below: "10% Share" means the payment to AOL by IL of 10% of the Gross Margin from the products sold through the IL Auction Service which IL sources and fulfills to a Person that is not an AOL User as described in Schedule "B"; "Above the Fold" means the portion of any AOL Sub-Branded Interface or a World Wide Web page, as applicable, that is designed to be visible by users upon first entering such AOL Sub-Branded Interface or World Wide Web page without requiring a user with standard configurations (currently a 640 pixel by 480 pixel display) to scroll lower through such AOL Sub-Branded Interface or World Wide Web page; "Agreement" means this Auction Services Agreement and all schedules annexed to this Agreement as the same may be amended from time to time in accordance with the provisions hereof or thereof; "hereof", "hereto" and "hereunder" and similar expressions mean and refer to this Agreement and not to any particular article or section; except where the context specifically requires, "Article" or "Section" means and refers to the specified article or section of this Agreement; "AOL Affiliate" means any corporation, limited liability company, joint venture, partnership or other entity (collectively an "Entity") with a principal place of business in the United States or Canada, of which AOL owns or has the contractual right to acquire, whether directly or indirectly through one or more Entities, 19.9% or more of the outstanding securities entitled to vote for the election of directors (or in the case of a partnership or joint venture, 19.9% or more of the equity interest entitled to vote for the election of the equivalent governing body no matter how such equity interest is evidenced) of such Entity; "AOL Auction Service" means AOL's online interactive auction service to be established and operated hereunder using the IL Technology (as updated, improved, enhanced or otherwise modified, and as it evolves during the term of this Agreement) accessible via America Online Service or the Internet; "America Online Service" means the primary America Online brand computer online, interactive, information, communication and transaction service offered by AOL, as that service evolves during the term of this Agreement; "AOL Interactive Services" means AOL's and any AOL Affiliates' content and services accessed through a network such as the Internet or a proprietary network, including, without limitation, the America Online Service, the AOL Canada Service, and the Digital City Service. "AOL Exclusive Auctions" has the meaning attributed thereto in Section 2.2; -2- "AOL Sub-Branded Interface" has the meaning attributed thereto in Section 2.9; "AOL User" means an end-user who pays or is obligated to pay to AOL for access to the America Online Service; "Auction" means the sale of the entire supply of single type of product on the IL Auction Service or the AOL Auction Service provided that the sale period for such product is not to extend beyond thirty (30) days; "Business Day" means any day from Monday to Friday inclusive, except statutory or civic holidays observed in Toronto, Ontario or Virginia; "Confidential Information" means any information relating to or disclosed in the course of discussing, negotiating, executing or implementing this Agreement, which is, or should be reasonably understood to be, confidential or proprietary to the disclosing party, including, but not limited to, the material terms of this Agreement, information about AOL Users, technical processes and formulas, source code, product designs, sales, cost and other unpublished financial information, product, service, and business plans, projections, marketing data and all other information that gives such party a competitive advantage but shall not include any information which: (i) is or becomes publicly available through no fault of the other Party; (ii) is already in the rightful possession of the other Party prior to its receipt from the other Party; (iii) is independently developed by the other Party; (iv) is rightfully obtained by the other Party from a third party not subject to an obligation of confidentiality; (v) is disclosed with the written consent of the Party whose information it is; or (vi) is disclosed pursuant to court order or other legal compulsion; "Deliverable" means the whole of the activities, services, materials, equipment, software, matters and things required to be done, delivered or performed by IL herein, including any hardware, the software, documentation and services and including all other rights and things, tangible or intangible, including intellectual property rights to be provided hereunder by IL to AOL or AOL Affiliates; "Documentation" means user manuals for the Software which describe the design, performance and functional specifications of the Software, and which facilitate the use, operation and maintenance of the Software; "Effective Date" has the meaning attributed thereto on the face page of this Agreement; -3- "Gross Margin" means the aggregate amount of revenue (including without limitation shipping and handling) received by a Party in connection with the purchase by end users of products offered through the IL Auction Service, less cost of goods sold, credit card transaction fees, all sales and use taxes, duties, the cost of shipping, credits for returned goods or services, reasonable deductions for bad debt and commercially reasonable fees owed by IL to a Internet service provider as a result of a purchase by a non AOL user; "IL Auction Service" means IL's online interactive auction service (as may be updated, improved, enhanced or otherwise modified, and as it evolves during the term of this Agreement) accessible via the Internet or other publicly accessible network which is carried on at internetliquidators.com and based on, among other things, IL's proprietary database engine and the database repository; "IL Technology" means the technology and know-how used by IL or its subsidiaries to operate on-line auction services generally (and including all Intellectual Property Rights therein), whether patented or registered, and whether domestic or foreign including patent applications and copyrighted software and including that technology and know-how used in respect of the operation of the IL Auction Service and, if established as contemplated herein, the AOL Auction Service; "internetliquidators.com" means any site or area accessible through the use of standard protocols associated with the worldwide network of computers commonly referred to as the Internet (or any successor thereto) or any site or area within another publicly accessible network containing IL's branded version of the IL Auction Service, specifically excluding any third party web site which points or links, through a co-branded interface or otherwise, to IL's website; "Intellectual Property Rights" includes: (A) any and all proprietary rights provided under (i) patent law, (ii) copyright law, (iii) trademark law, (iv) design patent or industrial design law, (v) semi-conductor chip or mask work law, or (vi) any other statutory provision or common law principle applicable to this Agreement or the Software which may provide a right in either (a) ideas, formulae, algorithms, concepts, inventions or know-how generally, including trade secret law, or (b) the expression or use of such ideas, formulae, algorithms, concepts, inventions or know-how; and (B) any and all applications, registrations, licenses, sub-licenses, franchises, agreements or any other evidence of a right in any of the foregoing; "Local Auction" means an online auction accessed through Torstar, Digital City, Inc. or other entity, to sell products or services to consumers, provided however that (i) the auction is aimed primarily at consumers inside the local market and (ii) the auction is promoted exclusively in such local market (for the purposes of this definition local market when used in reference to Torstar means Ontario and when used in reference to a Digital City Affiliate means the geographic area allocated to such Digital City Affiliate); "Maintenance Services" has the meaning given it in Section 3.10; "Parties" means IL and AOL collectively and "Party" means either of them; "Person" includes an individual, company, corporation, partnership, government or government agency, authority or entity howsoever designated or constituted; "Services" means those services to be provided by IL to AOL or to the AOL Affiliates hereunder; -4- "Software" means all the computer software necessary or desirable to operate the AOL Auction Service, which software is being provided to AOL by IL hereunder to meet AOL's Requirements, including any modifications or improvements to the Software (whether developed by IL, AOL or otherwise); and "Source Code Materials" means: (a) a complete copy of the source code version of all software required to allow AOL to independently operate and maintain and support an auction service in accordance with AOL's Requirements including the Software, appropriately labeled to denote the version or release thereof, and the currency date thereof, in each of: (i) machine-readable form on machine-readable storage medium suitable for long term storage and compatible with the Software as then being used by AOL and which, when compiled, will produce the object code version of the Software; and (ii) human-readable form with annotations in the English language on bond paper suitable for long term archival storage; and (b) a complete copy, in English, printed on bond paper, suitable for long term archival storage, and appropriately labeled to describe the contents thereof, of all applicable documentation and other explanatory materials including programmer's notes, technical or otherwise, for the Software as may be required by AOL, using a competent computer programmer possessing ordinary skills and experience, to further develop, maintain and operate such software without further recourse to IL including, but not necessarily limited to, general flow-charts, input and output layouts, field descriptions, volumes and sort sequence, data dictionary, file layouts, processing requirements and calculation formula and the details of all algorithms; "Torstar" means the Toronto Star Newspapers Limited. SCHEDULE "B" REVENUE SHARING 1. During the term of this Agreement, Gross Margins from the operation of the IL Auction Service or AOL Auction Service shall be divided among AOL and IL as follows:
AOL IL Revenue Description % % ------------------- --- -- 1. IL sources and fulfills product purchased on IL Auction Service by a non AOL User (i) if AOL retains its rights to AOL Exclusive Auctions or [XXX] [XXX] (ii) if AOL has elected to relinquish its rights to AOL Exclusive Auctions in exchange for its [Confidential Information filed separately with the SEC] in accordance with [XXX] [XXX] section 2.3 2. IL sources and fulfills product purchased on IL Auction 50 50 Service or AOL Auction Service by an AOL User 3. AOL sources and fulfills product purchased on IL Auction 50 50 Service by non AOL User 4. AOL sources product purchased on IL Auction Service or AOL [XXX] [XXX] Auction Service by an AOL User - IL fulfills 5. AOL sources and fulfills product purchased on IL Auction [XXX] [XXX] Service or AOL Auction Service by an AOL User (IL handles credit card transactions)
Note: [XXX] denotes Confidential Information filed separately with the SEC With respect to the last category, IL is additionally entitled for processing and handling to the lesser of: a) [Confidential Information filed separately with the SEC] of the price at which a good or service is sold; and b) [Confidential Information filed separately with the SEC] per product. SCHEDULE "C" AOL SOURCE CODE TRUST AGREEMENT MASTER PREFERRED ESCROW AGREEMENT Master Number __________ This Agreement is effective February 12, 1997 among Data Securities International, Inc.("DSI"), Internet Liquidators International Inc. ("Depositor"), and any additional party signing the Acceptance Form attached to this Agreement ("Preferred Beneficiary") who collectively may be referred to in this Agreement as "the parties." A. Depositor and Preferred Beneficiary have entered or will enter into a license agreement in the form attached to such Preferred Beneficiary's Acceptance Form regarding certain proprietary technology of Depositor (referred to in this Agreement as "the license agreement"). B. Depositor desires to avoid disclosure of its proprietary technology except under certain limited circumstances. C. The availability of the proprietary technology of Depositor is critical to Preferred Beneficiary in the conduct of its business and, therefore, Preferred Beneficiary needs access to the proprietary technology under certain limited circumstances. D. Depositor and Preferred Beneficiary desire to establish an escrow with DSI to provide for the retention, administration and controlled access of certain proprietary technology materials of Depositor. ARTICLE 1 - DEPOSITS 1.1 Obligation to Make Deposit. Upon the signing of this Agreement by the parties, including the signing of the Acceptance Form, Depositor shall deliver to DSI the proprietary information and other materials identified on an Exhibit A. DSI shall have no obligation with respect to the preparation, signing or delivery of Exhibit A. 1.2 Identification of Tangible Media. Prior to the delivery of the deposit materials to DS1, Depositor shall conspicuously label for identification each document, magnetic tape, disk, or other tangible media upon which the deposit materials are written or stored. Additionally, Depositor shall complete Exhibit B to this Agreement by listing each such tangible media by the item label description, the type of media and the quantity. The Exhibit B must be signed by Depositor and delivered to DSI with the deposit materials. Unless and until Depositor makes the initial deposit with DSI, DSI shall have no obligation with respect to this Agreement, except the obligation to notify the parties regarding the status of the deposit account as required in Section 2.2 below. 1.3 Deposit Inspection. When DSI receives the deposit materials and the Exhibit B, DSI will give a receipt for the deposit materials to the Depositor in the form provided by the Depositor and conduct a deposit inspection by visually matching the labeling of the tangible media containing the deposit materials to the item descriptions and quantity listed on the Exhibit B. In addition to the deposit inspection, Preferred Beneficiary may elect to cause a verification of the deposit materials in accordance with Section 1.6 below. 1.4 Acceptance of Deposit. At completion of the deposit inspection, if DSI determines that the labeling of the tangible media matches the item descriptions and quantity on Exhibit B, DSI will date and sign the Exhibit B and deliver a copy thereof to Depositor and Preferred Beneficiary. If DSI determines that the labeling does not match the item descriptions or quantity on the Exhibit B, DSI will (a) note the discrepancies in writing on the Exhibit B; (b) date and sign the Exhibit B with the exceptions noted; and (c) provide a copy of the Exhibit B to Depositor and Preferred Beneficiary. DSI's acceptance of the deposit occurs upon the signing of the Exhibit B by DSI. Delivery of the signed Exhibit B to Preferred Beneficiary is Preferred Beneficiary's notice that the deposit materials have been received and accepted by DSI. 1.5 Depositor's Representations. Depositor represents as follows: (a) Depositor lawfully possesses a of the deposit materials deposited with DSI; (b) With respect to all of the deposit materials, Depositor has the right and authority to grant to DSI and Preferred Beneficiary the rights as provided in this Agreement; (c) The deposit materials are not subject to any lien or other encumbrance other than encumbrances arising in the ordinary cause of Depositor's business; (d) The deposit materials consist of the proprietary information and other materials identified in Exhibit A; and (e) The deposit materials are readable and useable in their current form or, if the deposit materials are encrypted, the decryption tools and decryption keys have also been deposited. 1.6 Verification. Preferred Beneficiary shall have the right, at Preferred Beneficiary's expense, to cause a verification of any deposit materials. A verification determines, in different levels of detail, the accuracy, completeness, sufficiency and quality of the deposit materials. If a verification is elected after the deposit materials have been delivered to DSI, then only DSI, or at DSI's election an independent person or company selected and supervised by DSI, may perform the verification. 1.7 Removal of Deposit Materials. The deposit materials may be removed and/or exchanged only on written instructions signed by Depositor and Preferred Beneficiary, or as otherwise provided in this Agreement -3- ARTICLE 2 - CONF1DENTIALITY AND RECORD KEEPING 2.1 Confidentiality. DSI shall maintain the deposit materials in a secure, environmentally safe, locked facility in the greater Toronto area which is accessible only to authorized representatives of DSI. DSI shall have the obligation to reasonably protect the confidentiality of the deposit materials. Except as provided in this Agreement, DSI shall not disclose, transfer, make available, or use the deposit materials. DSI shall not disclose the content of this Agreement to any third party. If DSI receives a subpoena or other order of a court or other judicial tribunal pertaining to the disclosure or release of the deposit materials, DSI will immediately notify the parties to this Agreement. It shall be the responsibility of Depositor and/or Preferred Beneficiary to challenge any such order, provided, however, that DSI does not waive its rights to present its position with respect to any such order. DSI will not be required to disobey any court or other judicial tribunal order. (See Section 7.5 below for notices of requested orders.) 2.2 Status Reports. DSI will issue to Depositor and Preferred Beneficiary a report profiling the account history at least semi-annually. DSI may provide copies of the account history pertaining to this Agreement upon the request of any party to this Agreement. 2.3 Audit Rights. During the term of this Agreement, Depositor and Preferred Beneficiary shall each have the right to inspect the written records of DSI pertaining to this Agreement. Any inspection shall be held during normal business hours and following reasonable prior notice. ARTICLE 3 - GRANT OF RIGHTS TO DSI 3.1 Title to Physical Copies of Deposited Materials. (a) Depositor transfers to DSI in trust all legal title in and to the physical copies of the deposit materials provided to DSI from time to time in accordance with the terms of this Agreement It is acknowledged by the parties hereto that such transfer by Depositor to DSI under this Section is not intended to, nor does it, transfer any intellectual property or other intangible rights in the deposit materials. DSI agrees to hold the deposit materials in trust for Depositor and Preferred Beneficiary as provided in this Agreement. (b) The expression "in trust" is intended to refer strictly to the issue of ownership of the deposit materials and not to the level of care which must be taken by DSI in performing its duties under this Agreement. The duties of DSI are strictly contractual in nature and are as set out in this Agreement. It is not intended that DSI is to have the fiduciary duty of a trustee. 3.2 Right to Make Copies. DSI shall have the right to make copies of the deposit materials as reasonably necessary to perform this Agreement. DSI shall copy all copyright, nondisclosure, and other proprietary notices and titles contained on the deposit materials onto any copies made by DS1 * With all deposit materials submitted to DSI, Depositor shall provide -4- any and all instructions as may be necessary to duplicate the deposit materials including but. not limited to the hardware and/or software needed. 3.3 Right to Transfer Upon Release. Depositor hereby grants to DSI the right to transfer deposit materials to Preferred Beneficiary upon any release of the deposit materials for use by Preferred Beneficiary in accordance with Section 4.5. Except upon such a release or as otherwise provided in this Agreement, DSI shall not transfer the deposit materials. ARTICLE 4 - RELEASE OF DEPOSIT 4.1 Release Conditions. As used in this Agreement, "Release Conditions" shall mean the following: (a) voluntary bankruptcy of Depositor; (b) involuntary bankruptcy provided that the Depositor is not in good faith diligently taking steps to contest or set aside such process; (c) if Depositor becomes insolvent and ceases to continue to carry on its business; (d) if Depositor ceases the operation of its business and the business is not continued by a successor acceptable to the Preferred Beneficiary, acting reasonably; and (e) any additional release conditions identified on the attached Acceptance Form. 4.2 Filing For Release. If Preferred Beneficiary believes in good faith that a Release Condition has occurred, Preferred Beneficiary may provide to DS1 written notice of the occurrence of the Release Condition and a request for the release of the deposit materials. Upon receipt of such notice, DSI shall deliver a copy of the notice to Depositor. 4.3 Contrary Instructions. From the date DSI delivers the notice requesting release of the deposit materials, if the Release Condition is one defined in 4. 1 (b), 4.1 (d) or 4. 1 (e) Depositor shall have ten business days to deliver to DSI Contrary Instructions. If the Release Condition is one defined in 4. 1 (a) or (c), DSI shall release the deposit materials pursuant to Section 4.4 within 48 hours of giving notice to the Depositor under Section 4.2. "Contrary Instructions" shall mean the written representation by Depositor that a Release Condition has not occurred or has been cured. Upon receipt of Contrary Instructions, DSI shall deliver a copy to Preferred Beneficiary. Additionally, DSI shall notify both Depositor and Preferred Beneficiary that there is a dispute to be resolved pursuant to the Dispute Resolution section of this Agreement (Section 7.3). Subject to Section 5.2, DSI will continue to store the deposit materials without release pending (a) joint instructions from Depositor and Preferred Beneficiary, (b) resolution pursuant to the Dispute Resolution provisions, or (c) order of a court. -5- 4.4 Release of Deposit. If DSI does not receive Contrary instructions from the Depositor, DSI is authorized to release the deposit materials to the Preferred Beneficiary or, if more than one beneficiary is registered to the deposit materials, to release a copy of the deposit materials to the Preferred Beneficiary who gave notice under Section 4.2. However, DSI or DSI's authorized representative is entitled to receive any fees due DSI or DSI's authorized representative before making the release. This Agreement will terminate with respect to the Preferred Beneficiary giving notice under Section 4.2 upon the release of the deposit materials held by DSL 4.5 Right to Use Following Release. Unless otherwise provided in the license agreement, upon release of the deposit materials in accordance with this Article 4, Preferred Beneficiary shall have the right to use the deposit materials for the sole purpose of continuing the benefits afforded to Preferred Beneficiary by the license agreement. Preferred Beneficiary shall be obligated to maintain the confidentiality of the released deposit materials. ARTICLE 5 - TERM AND TERMINATION 5.1 Term of Agreement. The initial term of this Agreement is for a period of one Year. Thereafter, this Agreement shall automatically renew from year-to- year unless (a) Depositor and Preferred Beneficiary jointly instruct DSI in writing that the Agreement is terminated; or (b) the Agreement is terminated by DSI for nonpayment in accordance with Section 5.2. If the Acceptance Form has been signed at a date later than this Agreement, the initial term of the Acceptance Form will be for one year with subsequent terms to be adjusted to match the anniversary date of this Agreement. If the deposit materials are subject to another escrow agreement with DSI, DSI reserves the right, after the initial one year term, to adjust the anniversary date of this Agreement to match the then prevailing anniversary date of such other escrow arrangements. 5.2 Termination for Nonpayment. In the event of the nonpayment of fees owed to DSI or DSI's authorized representative, DSI shall provide written notice of delinquency to the parties to this Agreement affected by such delinquency. Any such party shall have the right to make the payment to DSI or DSI's authorized representative to cure the default. If the past due payment is not received in full by DSI or DSI's authorized representative within one month of the date of such notice, then at anytime thereafter DSI shall have the right to terminate this Agreement to the extent it relates to the delinquent party by sending written notice of termination to such affected parties. J)SI shall have no obligation to take any action under this Agreement so long as any payment due to DSI or DSI's authorized representative remains unpaid. 5.3 Disposition of Deposit Materials. Upon Termination. Upon termination of this Agreement by joint instruction of Depositor and each Preferred Beneficiary, DSI shall return the deposit materials to the Depositor. Upon termination for nonpayment, DSI shall return the deposit materials to the Depositor. DSI shall have no obligation to return or destroy the deposit materials if the deposit materials are subject to another escrow agreement with DSI. -6- 5.4 Survival of Terms Following Termination. Upon termination of this Agreement, the following provisions of this Agreement shall survive: (a) Depositor's Representations (Section 1.5); (b) The obligations of confidentiality with respect to the deposit materials; (c) The rights granted in the sections entitled Right to Transfer Upon Release (Section 3.3) and Right to Use Following Release (Section 4.5), if a release of the deposit materials has occurred prior to termination; (d) The obligation to pay DSI or DSI's authorized representative any fees and expenses due; (e) The provisions of Article 7; and (f) Any provisions in this Agreement which specifically state they survive the termination or expiration of this Agreement. 5.5 Alternative to DSI. If this Agreement terminates, Depositor and Preferred Beneficiary agree, at Preferred Beneficiary's request, to appoint a new agent by mutual agreement. if Depositor and Preferred Beneficiary cannot agree, Preferred Beneficiary shall appoint a trust company or other company specializing in the escrow business as the agent provided that such company has appropriate storage facilities located in or around Toronto and agrees to store the deposited materials there in accordance with the terms of this Agreement. The new agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named hereunder, without any further assurance, conveyance, act or deed. ARTICLE 6 - DSI'S FEES 6.1 Fee Schedule. DSI or DSI's authorized representative is entitled to be paid its standard fees and expenses applicable to the services provided. DS1 or DSI's authorized representative shall notify the party responsible for payment of DSI's fees at least 90 days prior to any increase in fees., For any service not listed on DSI's standard fee schedule, DSI or DSI's authorized representative will provide a quote prior to rendering the service. 6.2 Payment Terms. DSI shall not be required to perform any service unless the payment for such service and any outstanding balances owed to DSI or DSI's authorized representative are paid in full. All other fees are due upon receipt of invoice. If invoiced fees are not paid, DSI may terminate this Agreement in accordance with Section 5.2. Late fees on past due amounts shall accrue at the rate of one and one-half percent per month (18% per annum) from the date of the invoice. -7- ARTICLE 7 - LIABILITY AND DISPUTES 7.1 Right to Rely on Instructions. DSI may act in reliance upon any instruction, instrument, or signature reasonably believed by DSI to be genuine. DSI may assume that any employee of a party to this Agreement who gives any written notice, request, or instruction has the authority to do so. DSI shall not be responsible for failure to act as a result of causes beyond the reasonable control of DSI, subject to Section 2.1. 7.2 Indemnification. DSI shall be responsible to perform its obligations under this Agreement and to act in a reasonable and prudent manner with regard to this escrow arrangement. Provided DSI has acted in the manner stated in the preceding sentence, Depositor and Preferred Beneficiary each agree to indemnify, defend and hold harmless DSI from any and all claims, actions, damages, arbitration fees and expenses, costs, attorney's fees and other liabilities incurred by DSI relating in any way to this escrow arrangement. 7.3 Dispute Resolution. Any dispute, difference or question arising among any of the -parties concerning the construction, meaning, effect or implementation of this Agreement or any part hereof will be settled by a single arbitrator mutually agreed upon by the parties, or failing agreement, an arbitrator appointed pursuant to the Arbitration Act (Ontario) or similar legislation. The decision of such arbitrator appointed pursuant to this Agreement or such Act will be final and binding on the parties and no appeal will lie therefrom. 7.4 Controlling Law. This Agreement is to be governed and construed in accordance with the laws of the Province of Ontario except any laws which would refer any matter to the laws of another jurisdiction. All parties irrevocably attorn to the exclusive jurisdiction of the Courts of Ontario in respect of the subject matter hereof. 7.5 Notice of Requested Order. If any party intends to obtain an order from the arbitrator or any court of competent jurisdiction which may direct DSI to take, or refrain from taking any action, that party shall: (a) Give DSI at least two business days' prior notice of the hearing; (b) Include in any such order that, as a precondition to DSI's obligation, DSI or DSI's authorized representative be paid in full for any past due fees and be paid for the reasonable value of the services to be rendered pursuant to such order; and (c) Ensure that DSI not be required to deliver the original (as opposed to a copy) of the deposit materials if DSI may need to retain the original in its possession to fulfill any of its other escrow duties. ARTICLE 8 - GENERAL PROVISIONS 8.1 Entire Agreement. This Agreement, which includes the Acceptance Form and the Exhibits described herein, embodies the entire understanding between all of the parties with -8- respect to its subject matter and supersedes all previous communications, representations or understandings, either oral or written. No amendment or modification of this Agreement shall be valid or binding unless signed by all the parties hereto, except that Exhibit A need not be signed by DSI, Exhibit B need not be signed by Preferred Beneficiary and the Acceptance Form need only be signed by the parties identified therein. 8.2 Notices. All notices, invoices, payments, deposits and other documents and communications shall be given to the parties at the addresses specified in the attached Exhibit C and Acceptance Form. It shall be the responsibility of the parties to notify each other as provided in this Section in the event of a change of address. The parties shall have the right to rely on the last known address of the other parties. Unless otherwise provided in this Agreement, all documents and communications may be delivered by First Class mail. 8.3 Severability. In the event any provision of this Agreement is found to be invalid. voidable or unenforceable, the parties agree that unless it materially affects the entire intent and purpose of this Agreement, such invalidity, voidability or unenforceability shall affect neither the validity of this Agreement nor the remaining provisions herein, and the provision in question shall be deemed to be replaced with a valid and enforceable provision most closely reflecting the intent and purpose of the original provision. 8.4 Successors. This Agreement shall be binding upon and shall inure to the benefit of the successors and assigns of the parties. However, DSI shall have no obligation in performing this Agreement to recognize any successor or assign of Depositor or Preferred Beneficiary unless DSI receives clear, authoritative and conclusive written evidence of the change of parties. Data Securities International, Inc. Internet Liquidators International Inc. By:____________________ By:____________________ Name:__________________ Name:__________________ Title:_________________ Title:_________________ Date:__________________ Date:__________________ -9- ACCEPTANCE FORM Account Number __________ America Online, Inc., hereby (i) acknowledges that it is a Preferred Beneficiary referred to in the Master Preferred Escrow Agreement effective February 12, 1997 with Data Securities International, Inc. as the escrow agent and Internet Liquidators International, Inc. as the Depositor, (ii) agrees to be bound by all provisions of such Agreement, and (iii) agrees that in addition to the Release Conditions set forth in section 4.1 of this Agreement, a further Release Condition shall exist if the Depositor is in material default of its obligations to operate or maintain its E-Commerce Services as contained in the license agreement attached hereto as Schedule "A" and such default is not cured as provided therein. By:________________________ Name:______________________ Title:_____________________ Date:______________________ Notices and communications should be addressed to: Invoices should be addressed to: Company Name:_________________ ____________________________________ Address: _________________ ____________________________________ _________________ ____________________________________ Designated Contact: __________________ Contact:______________________________ Telephone __________________ _____________________________________: Facsimile: __________________ ______________________________________ Depositor hereby enrolls Preferred Beneficiary to the following account(s): Account Name Account Number - ------------ -------------- _________________________ _________________________ _________________________ _________________________ _________________________ _________________________ Depositor _________________________ Data Securities International, Inc. -2- SCHEDULE"A" LICENSE AGREEMENT EXHIBIT A MATERIALS TO BE DEPOSITED Account Number Depositor represents to Preferred Beneficiary that deposit materials delivered to DSI shall consist of the following: [Confidential Information filed separately with the SEC] ________________________ _________________________ Depositor Preferred Beneficiary By:_____________________ By:______________________ Name:___________________ Name:____________________ Title:__________________ Title:___________________ Date:___________________ Date:____________________ EXHIBIT B DESCRIPTION OF DEPOSIT MATERL4LS Depositor Company Name_________________________________________________________ Account Number_________________________________________________________________ PRODUCT DESCRIPTION: Product Name [Confidential Information filed separately with the SEC]_Version [Confidential Information filed separately with the SEC] Operating System: [Confidential Information filed separately with the SEC] ________________________________________________________________________________ Hardware Platform:[Confidential Information filed separately with the SEC]______ DEPOSIT COPYING INFORMATION: Hardware required: [Confidential Information filed separately with the SEC]_____ -- software required:[Confidential Information filed separately with the SEC]______ -- ________________________________________________________________________________ DEPOSIT MATERIAL DESCRIPTION: Qty Media Type & Size Label Description of Each Separate Item (Excluding documentation) Disk 3.5" or __________ I X DAT tape 4 mm No Documentation CD-ROM Data Cartridge Tape _____ TK 70 or __________ tape Magnetic tape __________ Documentation No Documentation Other:_______________
I certify for Depositor that the above described DSI has inspected and accepted the above materials (any deposit materials have been transmitted to DSL exceptions are noted above): Signature: ___________________________________________
Print Name: _______________________ Date:_______________________ Date Accepted:_____________________ Exhibit B# Send materials to: DSI, 9555 Chesapeake Drive, #200, San Diego, CA 92123 -2- EXHIBIT C DESIGNATED CONTACT Master Number____________________ Notices of communications should be Invoices should be addressed to: addressed to: Company Name: _______________________ _________________________ Address: _______________________ _________________________ _______________________ _________________________ _______________________ _________________________ Designated _______________________ Contact:: _______________________ Contact:_________________ Telephone: _______________________ _________________________ Facsimile _______________________ _________________________ Requests to change the designated contact should be given in writing by the designated contact or an authorized employee.
Invoice inquiries and fee remittances to DSI Contracts, deposit materials and notices to DSI or DSI's authorized representatives should should be addressed to: be addressed to: DSI Technology Asset Management Inc. Contract Administration Accounts Receivable Suite 2000 Building 8, Suite 300 9555 Chesapeake Drive 5045 Orbitor Drive San Diego, CA 92123 Mississauga, Ontario L4W 4Y4 Telephone: (619) 694-1900 Telephone: (905) 602-9292 Facsimile (619) 694-1919 Facsimile: (905) 602-6631
ADDITIONAL ESCROW ACCOUNT AMENDMENT TO MASTER PREFERRED ESCROW AGREEMENT Master Number ____________________ New Account Number ____________________ ____________________ ("Depositor") has entered into a Master Preferred Escrow Agreement with Data Securities International, Inc. ("DSI"). Pursuant to that Agreement, Depositor may deposit certain deposit materials with DSI. Depositor desires that new deposit materials be held in a separate account and be maintained separately from the existing account. By execution of this Amendment, DSI will establish a separate account for the new deposit materials. The new account will be referenced by the following name: ____________________. Depositor hereby agrees that all terms and conditions of the existing Master Preferred Escrow Agreement previously entered into by Depositor and DSI will govern this account. The termination or expiration of any other account of Depositor will not affect this account. ___________________________ Data Securities International, Inc. Depositor By:___________________________ By:___________________________ Name:_________________________ Name:___________________________ Title:___________________________ Title:___________________________ Date: ___________________________ Date:___________________________ ACCEPTANCE FORM Account Number America Online, Inc. hereby (i) acknowledges that it is a Preferred Beneficiary referred to in the Master Preferred Escrow Agreement effective February 12, 1997 with Data Securities International, Inc. as the escrow agent and Internet Liquidators International Inc. as the Depositor, (ii) agrees to be bound by all of the provisions of such Agreement and (iii) agrees that in addition to the Release Conditions set forth --in Section 4.1 of this Agreement, a further Release Condition shall exist if the Depositor is in material default of its obligations to operate or maintain its IL Auction Service or to maintain the AOL Auction Service as set out in the Auction Services Agreement attached hereto as Schedule "A" and such default is not cured as provided therein. Notwithstanding Section 2.1, the deposit materials for AOL shall be maintained in a DSI vault in the USA By:________________________ Name: WENDY L. BROWN _______________________ Title: VICE PRESIDENT, ELECTRONIC COMMERCE _____________________________________ Date:_______________________________________ Notices, communications and invoices should be addressed to: Company Name: America Online, Inc. Address: 22000 AOL Way Dulles, Virginia 20166 Designated Contact: Legal Department (re: Internet Liquidators) Telephone: (703)265 Facsimile: (703) 265-2208 Depositor hereby enrolls Preferred Beneficiary to the following account: Account Name Account Number - ------------ -------------- ______________________ ___________________________ Internet Liquidators International Inc. (Depositor) ____________________________________ Data Securities International, Inc. SCHEDULE "D" RECOGNIZED BROWSERS Windows: [Confidential Information filed separately with the SEC] Mac: [Confidential Information filed separately with the SEC] SCHEDULE "E" AOL MERCHANT CERTIFICATION PROGRAM The 10 Criteria for Merchant Certification The following 10 criteria are the current standards to receive the America Online Seal of Approval. We will continue to monitor and review these criteria to make sure they meet reasonable customer's expectations for ordering online. 1. Receive orders electronically to process orders within 1 business day of receipt. 2. Deliver all merchandise in professional packaging. All packages should arrive undamaged ,well packed and neat (barring any shipping disasters). 3. Dedicated Customer Service personnel to be responsible for on-line medium. In other words, there should be people whose primary concern is the on-line customer's orders. Quite often the on-line customer is given a lower priority in the fulfillment area, they need to be given as much priority as the rest of your business. 4. Receive and respond to e-mails within 1 business day of receipt via a computer available to the customer service staff. 5. Provide the customer with an order confirmation within 1 business day of receipt. Order confirmation should include any information such as order status (temporary back order or out of stock situations), and expected delivery times. 6. Ability to handle volumes in excess of 25% to 50% of your average daily order volumes. 7. Monitor on-line store to minimize/eliminate out of stock merchandise available. 8. Ship the displayed product at the price displayed without substituting. 9. Stellar Customer service policies- "The Customer is always Right, even when he/she is not". The commitment to provide each customer with a win/win experience. 10. Complete details on your customer service policies posted in your on-line customer service area including: Shipping Information, Return Policies, Warranty Information, and Contact Information. SCHEDULE "F" AOL/IL AUCTION SERVICE OVERVIEW AQL/Internet Liquidators Auction System Overview ------------------------------------------------ The architectural platform for the Top Bid and Dutch Auction system will be as follows: Hardware: - -------- [Confidential Information filed separately with the SEC] Web Server/s (scalable items) [Confidential Information filed separately with the SEC] Software: - -------- All operating systems (Excluding transaction system) [Confidential Information filed separately with the SEC] Transaction operating system [Confidential Information filed separately with the SEC] Database [Confidential Information filed separately with the SEC] Application Development languages (As required per application) [Confidential Information filed separately with the SEC] Performance [Confidential Information filed separately with the SEC] SCHEDULE "J" February 14, 1997 Ms. Ellen Kirsh VP Corporate Development, General Counsel & Secretary Digital City Inc. 1595 Spring Hill Road 5th floor, Vienna, Virginia 22182 Fax: 703-918-1198 Dear Ellen, As you know, Internet Liquidators Inc. ("ILII") remains very interested in pursuing licensing agreements with Digital City Inc. ("DCI), an affiliate of America Online, Inc. ("AOL"). In order to proceed towards this end, we have set forth immediately below the general terms upon which ILII is willing to continue to pursue negotiations and close an arrangement with DCL 1. ILII licenses its Local Auction technology to DCI on an exclusive city-by- city basis throughout the world, except in the Province of Ontario, Canada. The technology configuration will be agreed upon by the parties as soon as possible. DCI shall provide ILII with its technical specifications on or before February 25, 1997 and ILTI shall provide DCI with its cost information on or before March 5, 1997. 2. Licenses will have a term of two years with annual renewals. A mechanism will be designed to require either party to provide the other with appropriate advance notice of a planned termination of the relationship, and to permit DCI to transition to an alternative technology. 3. DCI will pay ILII an annual license and annual maintenance fee on a per city basis as mutually agreed upon. A formula to compute these fees will be designed to enable ILII to recover its incremental costs (over the costs incurred in connection with the AOL-ILII transaction ) over a reasonable time period giving effect to the number of cities planned to be launched by DCI. For example, the license and maintenance fees specified in the draft letter dated February 7, 1997 addressed to Jeff Lymburner arc based upon a rollout of 80 cities by DCI over approximately an 18 month period. Additionally, the parties will in good faith consider the revenue potential from the sale of advertising by ILII and the sale of goods sourced by ILII when agreeing on license and maintenance pricing. 4. ILII will host the Local Auction Service for DCI, and will develop a DCI- branded user interface which is customized by each local Digital City. 5. ILII will grant DCI most favored customer status. 6. Closing date for the proposed transaction shall be no later than April 12, 1997. 7. Transaction shall be subject to completion of due diligence by ILII, which has been substantially completed. ILII has not at this time discovered any information which would cause it not to proceed with the transaction as outlined in this letter. This letter is not intended to create a binding or enforceable agreement, but the parties are bound to proceed on the terms outlined above in the event they otherwise elect to proceed with this transaction. This letter is subject to the terms of the Nondisclosure Agreement between AOL and ILII dated August 8, 1996, which is intended to apply to DCI, and may not be distributed without the consent of the non -distributing party. We look forward to a mutually beneficial business relationship. Very truly yours Paul Godin President & CEO 2 SCHEDULE "K" Shareholders Agreement Agreement has been terminated. Schedule "L" Form of Registration Rights Agreement REGISTRATION RIGHTS AGREEMENT THIS AGREEMENT is made the ____ day of February, 1997 (the "Effective Date") by and between INTERNET LIQUIDATORS INTERNATIONAL INC., a corporation having a principal place of business at 5915 Airport Rd, Suite 330, Mississauga, Ontario L4V 1T1 ("Issuer") and AMERICA ONLINE, INC., a corporation having a principal place of business at 22000 AOL Way, Dulles, Virginia ("Subscriber"). BACKGROUND: 1. Issuer is a reporting issuer under the Securities Act (Ontario). 2. Pursuant to a subscription agreement between Subscriber and the Issuer dated the date hereof (the "Subscription Agreement"), Subscriber is acquiring an interest in Issuer by subscribing for previously unissued common shares in the capital of Issuer and by obtaining a warrant to acquire additional common shares in the capital of Issuer. 3. It is a condition of closing the subscription that the Subscriber and Issuer enter into this registration rights agreement. NOW THEREFORE in consideration of the premises, the mutual covenants contained in this Agreement, and other good and valuable consideration (the receipt and sufficiency of which are hereby acknowledged), the parties agree as follows: ARTICLE ONE INTERPRETATION -------------- 1.1 Definitions. In this Agreement, unless otherwise defined herein, each ----------- capitalized term shall have the meaning attributed thereto in the Subscription Agreement. "Canadian Securities Acts" means the Securities Act (Ontario) and the applicable securities legislation in all other Canadian provinces, as amended, and the rules, policies, rulings, orders and regulations of all Canadian Commissions promulgated thereunder, all as the same shall be in effect from time to time. "Canadian Commissions" means the securities regulatory authorities in each of the provinces of Canada. "Commission" means the applicable Canadian Commission or the SEC with whom the Issuer shall use its best efforts to effect the Registration of any Registrable Shares pursuant to Section 2.4.1 of this Agreement. "Demand Registrations" shall have the meaning set out in Section 2.1.2 of this Agreement. "Long-Form Registration" means with respect to a Registration effected in Canada, a Registration effected by way of a long-form prospectus prepared pursuant to the applicable form prescribed under applicable securities regulations and, with respect to a Registration effected in the United States, a Registration effected by way of a registration document on Form F-1 or any similar long-form registration. "Other Shares" means at any time those common shares of the Issuer that do not constitute Primary Shares or Registrable Shares. "Person" means an individual, partnership, unincorporated association, unincorporated syndicate, or a corporation. "Primary Shares" means at any time the authorized but unissued common shares of the Issuer. "Registration" means the qualification and registration of Registrable Shares under the Securities Act (or any of them) by way of Long-Form Registration or, if available, Short Form Registration. ["Registrable Shares" means at any time, the common shares of the Issuer held (or to be held upon conversion of any Restricted Shares) by Subscriber that constitute Restricted Shares.] "Registration Document" means a prospectus, registration document or other document pursuant to which Registration may be effected. "Registration Expenses" shall have the meaning set out in Section 2.4.2 of this Agreement. "Registration Period" means each year commencing on the date hereof or the anniversary of the date hereof and ending one year later; ["Restricted Shares" means at any time, with respect to Subscriber, the common shares of the Issuer held by it on the date hereof or issuable upon exercise, exchange or conversion of the Warrant, and any shares or other securities received in respect thereof, which are held by Subscriber and which have not previously been sold to the public pursuant to a Long-Form Registration or a Short-Form Registration.] "Rule 144" means Rule 144 promulgated under the U.S. Securities Act or any successor rule thereto or any complementary rule thereto. "SEC" means the Securities and Exchange Commission or any other federal agency at the time administering the U.S. Securities Act. "Securities Act" means the applicable Canadian Securities Act or the U.S. Securities Act. 2 "Short-Form Registration" means, with respect to a Registration effected in Canada, a Registration effected by way of a short form prospectus prepared pursuant to the POP system under National Policy No. 47 or equivalent system established from time to time by the Canadian Commissions and, with respect to a Registration effected in the United States, a Registration effected by way of a registration document on Form F-2 or F-3 or any similar Short-Form registration. "U.S Securities Act" means the U.S. Securities Act of 1933, as amended, and the rules and regulations of the SEC thereunder, all as the same shall be in effect from time to time. 1.2 Headings. The headings in this Agreement are for convenience of -------- reference only and shall not affect the construction or interpretation hereof. 1.3 Extended Meanings. Words in the singular include the plural and vice- ----------------- versa and words in one gender include all genders. 1.4 Entire Agreement. This Agreement constitutes the entire agreement ---------------- between the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, oral or written, between such parties. 1.5 Invalidity. If any of the provisions contained in this Agreement is ---------- found by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein shall not be in any way affected or impaired thereby. 1.6 Governing Law. This Agreement shall be governed by and construed in ------------- accordance with the laws of Ontario and the federal laws of Canada applicable therein (excluding any provision that would result in the application of the law of another jurisdiction) and shall be treated, in all respects, as an Ontario contract. Issuer submits to the non-exclusive jurisdiction of the Courts of Virginia and the U.S. Federal Court and Subscriber submits to the non-exclusive jurisdiction of the Courts of Ontario. ARTICLE TWO REGISTRATION RIGHTS ------------------- 2.1.1 Registration Rights. If the Issuer makes a public offering of its ------------------- securities in the Unites States, it shall register the common shares held by Subscriber under the U.S. Securities Act. In addition, Subscriber shall have two demand registration rights after a U.S. public offering. Subscriber shall receive two similar demand registration rights with respect to a Registration in Canada, which may be exercised at any time after - months after the purchase of the common shares. Additionally, Subscriber shall have the piggyback registration rights set out herein. 2.1.2 Demand Registration Rights: Subscriber may request the Issuer to -------------------------- effect a Registration of their common shares. Subscriber when requesting such a Registration shall be entitled to choose the jurisdictions where such Registration shall be effected, [provided that the Issuer 3 shall not be required to effect any Registration in any jurisdiction where it has not completed a public offering.] Each request for a Registration shall be in writing and shall specify the approximate number of Registrable Shares requested to be qualified, the anticipated per share price range for such offering, the intended method of disposition of such Registrable Shares and the jurisdictions where Registration is to be effected. All Registrations requested pursuant to this Section 2.1.2 are referred to herein as "Demand Registrations". Notwithstanding anything contained herein to the contrary, and regardless of the number of Registrable Shares held by Subscriber, so long as Subscriber holds Registrable Shares it shall be entitled to request two Demand Registrations (regardless of the number of Registrable Shares held by Subscriber) under the applicable Canadian Securities Act, and two Demand Registrations under the U.S. Securities Act, of the Registrable Shares which the Issuer has been so requested to register, provided that to the extent that Registration Shares are included in a Registration, the number of Demand Registrations it shall be entitled to request shall be reduced by one. The Issuer shall be obligated to effect only two Demand Registrations hereunder in each of Canada and the United States in each Registration Period. A Registration will not count as one of the permitted Demand Registrations for Subscriber until it has become effective or until a receipt has been issued for the final prospectus or registration document, as the case may be (unless such Registration has not become effective or a receipt has not been issued due solely to the fault of Subscriber). The Issuer shall pay the Registration Expenses in connection with each Demand Registration to the extent permitted by applicable law, [except that Subscriber shall pay all fees and expenses of Subscriber's counsel and the underwriting discounts, commissions and similar fees, and transfer taxes applicable to the shares of Subscriber included in such Registration.] 2.1.3 Short-Form Registrations. [unlimited number but no more than once ------------------------ every six months] Demand Registrations will be Short-Form Registrations whenever the Issuer is permitted to use any such applicable Registrations. The Issuer undertakes to use its best efforts to the extent practicable to make the necessary regulatory filings to maintain its eligibility to use a Short-Form Registration from the time it initially becomes eligible to use such Registrations. 2.1.4 Priority on Demand Registrations. The Issuer will not include in any -------------------------------- Registration pursuant to a Demand Registration any securities which are not Registrable Shares without the prior written consent of Subscriber. If a Registration pursuant to a Demand Registration is an underwritten offering and the managing underwriters advise the Issuer in writing that in their opinion the number of Registrable Shares and, if permitted hereunder in accordance with the preceding sentence, the Primary Shares and the Other Shares requested to be included in such offering exceeds the number of shares of the Issuer which can be sold in an orderly manner in such offering within a price range acceptable to the Subscriber, the Issuer will include the number of Registrable Shares,- Primary Shares and Other Shares in such Registration in the following order: a) first, the Registrable Shares owned by the Subscriber at the time of such Registration; b) second, the Primary Shares; and c) third, the Other Shares. 4 2.1.5 Restrictions on Registrations. The Issuer shall not be obligated to ----------------------------- effect any registration under a Securities Act except in accordance with the following provisions: 1. the Issuer shall not be obligated to effect any Demand Registration until the later of six months after: (i) the date on which Registrable Shares are sold by Subscriber pursuant to a previous Demand Registration; and (ii) the date on which Registrable Shares are sold by Subscriber pursuant to Section 2.2.1. 2. the Issuer may postpone, for up to 180 days, the filing or effectiveness of, or issuance of a receipt for, a Registration for a Demand Registration made by Subscriber pursuant to Sections 2.1.1 or 2.1.2 if the Issuer in the good faith judgement of its Board of Directors with advice from counsel reasonably believes that such Registration would reasonably be expected to have an adverse effect on any proposal or plan by the Issuer to engage in any acquisition of assets or any merger, consolidation, takeover bid or similar transaction and subject to applicable Securities Act. In the event the Issuer postpones the filing of such registration statement or prospectus, the Issuer shall pay all Registration Expenses in connection with such Registration up to the date of postponement and such Registration shall not ______ it as a Demand Registration for purposes of Section 2.1.1. above. 3. If the filing of a Registration Document would require the disclosure of material information which the Issuer has a bona fide business purpose for preserving as confidential and for which the Issuer has filed a material change report or other like document with any of the Commissions on a confidential basis and which has not been publicly disclosed, the Issuer shall not be required to effect a Registration pursuant to a Demand Registration until the earlier of (i) the date upon which such material information is disclosed to the public or ceases to be material; and (ii) 90 days after the Issuer makes such good faith determination. In the event the Issuer postpones the filing of such registration statement or prospectus, the Issuer shall pay all Registration Expenses in connection with such Registration up to the date of postponement and such Registration shall not count as a Demand Registration for purposes of Section 2.1.1. above. 4. If the Issuer has been advised in writing (with a copy to Subscriber) by an independent investment dealer selected by the Issuer that, in such dealer's opinion, the Registration at that time and on the terms requested would adversely affect any proposed financing by the Issuer, the Issuer shall not be required to effect a Registration pursuant to a Demand Registration until the later of: (i) 90 days after completion or abandonment of such financing; and (ii) termination of any "blackout" period required by the underwriters in connection with such financing; provided such blackout period shall not be longer than 180 days. In the event the Issuer postpones the filing of such registration statement or prospectus, the Issuer shall pay all Registration Expenses in connection with such Registration up to the date of postponement and such Registration shall not count as a Demand Registration for purposes of Section 2.1.1. above. Notwithstanding anything contained herein to the contrary, in no event shall the periods during which the Issuer is not required to effect a Registration pursuant to a Demand 5 Registration as described above extend for more than 180 days. [The Subscriber shall be bound by the restrictions of this Section only if, and to the extent that, the executive officers of the Issuer owning Common Stock shall be bound by such provisions.] 2.1.6 Selection of Underwriters. The Subscriber shall have the right to ------------------------- select the investment banker(s) and manager(s) to administer the Registration, subject to the Issuer's consent, which shall not be unreasonably withheld or unduly delayed. 2.1.7 Other Registration Rights. Except as provided in this Agreement, the ------------------------- Issuer shall not grant to any Person the right to request the Issuer to qualify or register any equity shares of the Issuer or any shares convertible or exchangeable into or exercisable for such shares without the prior written consent of Subscriber. 2.2.1 Piggyback Registrations Rights. Whenever the Issuer proposes to ------------------------------ qualify or register any of its securities under any of the Securities Acts (other than pursuant to a Demand Registration) in a form and manner which would permit qualification and registration of one or more Registrable Shares (a "Piggyback Registration"), the Issuer will give prompt written notice to Subscriber of its intention to do so and will include in such qualification and registration all Registrable Shares with respect to which the Issuer has received written request for inclusion therein within 15 days after the receipt by Subscriber of the Issuer's notice. 2.2.2 Piggyback Expenses. The Registration Expenses of the Piggyback ------------------ Registration will be paid by the Issuer to the extent permitted by applicable law, except that Subscriber shall pay all fees and expenses of its counsel and the underwriting discounts, commissions and similar fees, and transfer taxes applicable to the Registrable Shares included in such Registration. 2.3.1 Priority on Piggyback Registrations. If a Piggyback Registration is ----------------------------------- an underwritten distribution or registration on behalf of the Issuer, and the managing underwriters advise the Issuer in writing that in their opinion the number of shares requested to be included in such Registration exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the Issuer, the Issuer shall include in such Registration: (i) first, the Primary Shares the Issuer proposes to sell, (ii) second, the Registrable Shares requested to be included in such distribution or registration, pro rata based upon the number of Restricted Shares owned by Subscriber at the time of such Registration, and (iii) third, Other Shares requested to be included in such Registration. 2.3.2 Priority on Secondary Registration. If a Piggyback Registration is an ---------------------------------- underwritten secondary distribution or registration on behalf of the holders of the Issuer's shares, other than the Subscriber, and the managing underwriters advise the Issuer in writing that in their opinion the number of shares requested to be included in such Registration pursuant to Paragraph 2.2.1. exceeds the number which can be sold in an orderly manner in such offering within a price range acceptable to the holders initially requesting such distribution or registration, then the Issuer's shares will be included in such registration as follows (i) first, the shares of the holders initially requesting such distribution or registration, (ii) second, the Registrable Shares requested to be included in such distribution or registration, pro rata based upon the number of Restricted Shares 6 owned by the Subscriber at the time of such registration, and (iii) third, Other Shares requested to be included in such distribution or registration. 2.3.3 Selection of Underwriters. [If any Piggyback Registration is an ------------------------- underwritten offering the Subscriber if included in such Piggyback Registration must be consulted concerning the selection of investment banker(s) and manager(s) for the offering.] 2.3.4 Other Registrations. If the Issuer has previously filed a ------------------- Registration Document with respect to Registrable Shares pursuant hereto, and if such previous Registration Document has not been withdrawn or abandoned, subject to the applicable Securities Act, the Issuer shall not file or cause to be effected any other qualification or registration of any of its equity shares or shares convertible or exchangeable into or exercisable for equity shares under any of the Securities Acts (except on Forms S-4, F-4, F-8, F-80 or S-8 or any successor forms for purposes of registration in the United States), on its own behalf, until a period of at least ninety days has elapsed from the date of closing of the sale of the Registrable Shares. 2.3.5 Holdback Agreements By Holders of Registrable Shares. Subscriber ---------------------------------------------------- agrees not to effect any public sale or distribution (including sales pursuant to any prospectus exemption under any of the Securities Acts or Rule 144 under the U.S. Act) of equity shares of the Issuer, or any shares convertible into or exchangeable or exercisable for such shares, during the seven days prior to and the 90-day period beginning on the effective date of the Registration Document, provided that Subscriber has received prior notice of such dates, in respect of any underwritten Demand Registration or any underwritten Piggyback Registration (except as part of such underwritten Registration), unless the underwriters managing the underwritten Demand Registration or Piggyback Registration, as the case may be, otherwise agree. 2.3.6 Holdback Agreements By Issuer. The Issuer agrees not to effect any ----------------------------- public sale or distribution of its equity shares, or any shares convertible into or exchangeable or exercisable for such shares, during the seven days prior to and during the 90-day period beginning on the effective date of the Registration Document in respect of any [underwritten] Demand Registration or any -------------- [underwritten] Piggyback Registration (except as part of such underwritten - ------------- Registration pursuant to registrations on Forms S-4, F-4, F-8, F-80 or S-8 or any successor forms or as required under employee stock incentive plans), [unless the underwriters managing the registered public offering otherwise agree]. In addition, the Issuer will use its best efforts to obtain lock-up agreements for a period of 90 days following the date of the receipt for the final prospectus or the effective date of the Registration Document, as applicable, from holders of five percent or more of the Issuer's equity shares. 2.4.1 Preparation and Filing. If and whenever the Issuer is obligated ---------------------- pursuant to the provisions of this Agreement to use its best efforts to effect the Registration of any Registrable Shares, the Issuer shall, as expeditiously as practicable: 1. use its best efforts to cause a Registration Document to become and remain effective for the lesser of (i) a period of 180 days; (ii) until all of such Registrable Shares have been disposed of or; (iii) the maximum period permitted under the Securities Act; 7 2. furnish, at least five business days before filing a Registration Document that registers such Registrable Shares, or any amendments or supplements relating thereto, to counsel selected by Subscriber (the "Subscriber's Counsel"), copies of all such documents proposed to be filed (it being understood that such five-business-day period need not apply to successive drafts of the same document proposed to be filed so long as such successive drafts are supplied to such counsel in advance of the proposed filing by a period of time that is customary and reasonable under the circumstances); 3. prepare and file with the Commission such amendments and supplements to such Registration Document used in connection therewith as may be necessary to keep such Registration Document effective for the period contemplated in paragraph 2.4.1(1) above and to comply with the provisions of the Securities Acts with respect to the sale or other disposition of such Registrable Shares; 4. notify in writing the Subscribers' Counsel promptly (i) of the receipt by the Issuer of any notification with respect to any comments by the Commission with respect to such Registration Document or any amendment or supplement thereto or any request by the Commission for the amending or supplementing thereof or for additional information with respect thereto, (ii) of the receipt by the Issuer of any notification with respect to the issuance by the Commission of any stop order suspending the effectiveness of such Registration Document or any amendment or supplement thereto or the initiation or threatening of any proceeding for that purpose and (iii) of the receipt by the Issuer of any notification with respect to the suspension of the qualification of such Registrable Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purposes; 5. use its best efforts to register or qualify such Registrable Shares under such other securities or blue sky laws of such jurisdictions as Subscriber reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable Subscriber to consummate the disposition in such jurisdictions of the Registrable Shares; provided, however, that the Issuer will not be required to qualify generally to do business, subject itself to general taxation or consent to general service of process in any jurisdiction where it would not otherwise be required so to do but for this paragraph 2.4.1(5); 6. furnish to Subscriber such number of copies of the Registration Document including a preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents as Subscriber may reasonably request in order to facilitate the public sale or other disposition of such Registrable Shares; 7. use its best efforts to cause such Registrable Shares to be registered or qualified with or approved by such other governmental agencies or authorities as may be necessary by virtue of the business and operations of the Issuer to enable Subscriber to consummate the disposition of such Registrable Shares; 8 8. notify on a timely basis Subscriber at any time when a Registration Document relating to such Registrable Shares is required to be delivered under the Securities Act within the appropriate period mentioned in paragraph 2.4.1(1) of this Section, of the happening of any event as a result of which the Registration Document or the prospectus included in such Registration Document, as then in effect, does not constitute full, true or plain disclosure of all material facts of the Issuer and the shares being qualified thereunder or includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing and, at the request of Subscriber, prepare and furnish to Subscriber a reasonable number of copies of a supplement to or an amendment of such Registration Document as may be necessary so that, as thereafter delivered to the offerees of such shares, such Registration Document constitutes full, true and plain disclosure of all material facts of the Issuer and the securities being qualified thereunder and shall not include an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances then existing; 9. make available for inspection by Subscriber or any underwriter participating in any disposition pursuant to such Registration Document and any attorney, accountant or other agent retained by any such seller or such underwriter (collectively, the "Inspectors"), all pertinent financial and other records, pertinent corporate documents and properties of the Issuer (collectively, the "Records"), as shall be reasonably necessary to enable them to exercise their due diligence responsibility, and cause the Issuer's officers, directors and employees to supply all information (together with the Records, the "Information") reasonably requested by any such Inspector in connection with such Registration Document. Any of the Information which the Issuer determines in good faith to be confidential, and of which determination the Inspectors are so notified, shall not be disclosed by the Inspectors unless (i) the disclosure of such Information is necessary to avoid or correct a misstatement or omission in the Registration Document, (ii) the release of such Information is ordered pursuant to a subpoena or other order from a court of competent jurisdiction or (iii) such Information has been made generally available to the public. Subscriber agrees that it will, upon learning that disclosure of such Information is sought in a court of competent jurisdiction, give notice to the Issuer and allow the Issuer, at the Issuer's expense, to undertake appropriate action to prevent disclosure of the Information deemed confidential; 10. use its best efforts to obtain from its independent certified public accountants "comfort" letters in customary form and at customary times and covering matters of the type customarily covered by comfort letters; 11. use its best efforts to obtain from its counsel an opinion or opinions in customary form addressed and delivered to Subscriber; 12. provide a transfer agent and registrar (which may be the same entity and which may be the Issuer) for such Registrable Shares; 9 13. issue to any underwriter to which Subscriber may sell shares in such offering certificates evidencing such Registrable Shares; 14. list Registrable Shares on any Canadian or U.S. national securities exchange on which any common shares of Issuer are listed or, if the common shares are not listed on such a national securities exchange, use its best efforts to qualify such Registrable Shares for inclusion on the automated quotation system of the National Association of Securities Dealers, Inc. (the "NASD") or such Canadian or U.S. national securities exchange as Subscriber shall request; 15. otherwise use its best efforts to comply with all applicable rules and regulations of the Securities Act and the Commission and make available to Subscriber, as soon as reasonably practicable, earnings statements (which need not be audited) covering a period of 12 months beginning within three months after the effective date of the Registration Document, which earnings statements shall satisfy the provisions of the Securities Act; and 16. use its best efforts to take all other steps necessary to effect the Registration of such Registrable Shares contemplated hereby. 2.4.2 Registration Expenses. Subject to applicable laws, all expenses --------------------- incurred by the Issuer in complying with Article Two, including, without limitation, all Registration and filing fees (including all expenses incident to filing with the NASD or a national securities exchange), fees and expenses of complying with securities and blue sky laws, printing expenses, and fees and expenses of the Issuer's counsel and accountants, and the fees and expenses of Subscriber's Counsel shall be paid by the Issuer; provided, however, that all underwriting discounts and selling commissions applicable to the Registrable Shares, and all fees and expenses of any special or interim audit for any Registration initiated by Subscriber pursuant hereto that is not otherwise required under the Securities Act in connection with such Registration, shall be borne by Subscriber, in proportion to the number of Registrable Shares. ARTICLE 3 REPRESENTATION AND INDEMNIFICATION 3.1 No Conflict of Rights. The Issuer represents and warrants to --------------------- Subscriber that the registration rights granted to Subscriber hereby do not conflict with any other registration rights granted by the Issuer. The Issuer shall not, after the date hereof, grant any registration rights which conflict with or impair the registration rights granted hereby. 3.2 Indemnification. In connection with any registration of any --------------- Registrable Shares under the Securities Act pursuant to this Agreement, the Issuer shall indemnify and hold harmless Subscriber, its officers and directors, each underwriter, broker or any other person acting on behalf of Subscriber and each other person, if any, who controls any of the foregoing persons within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint 10 or several, (or actions in respect thereof) to which any of the foregoing persons may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon an untrue statement or alleged untrue statement of a material fact contained in the Registration Document, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading or, with respect to any prospectus, necessary to make the statements therein in light of the circumstances under which they were made not misleading, or any violation by the Issuer of the Securities Act or state securities or blue sky laws applicable to the Issuer and relating to action or inaction required of the Issuer in connection with such registration or qualification under such state securities or blue sky laws; and shall reimburse Subscriber, such officer or director, such underwriter, such broker or such other person acting on behalf of Subscriber and each such controlling person for any legal or other expenses reasonably incurred by any of them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Issuer shall not be liable in any such case to the extent that any such loss, claim, damage, liability or action arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in said Registration Document, amendment, supplement or document incident to registration or qualification of any Registrable Shares (as the case may be) in reliance upon and in conformity with written information furnished to the Issuer through an instrument duly executed by Subscriber or an underwriter selected by Subscriber that states that it is specifically for use in the preparation thereof. 3.3 In connection with any Registration of Registrable Shares under the Securities Act pursuant to this Agreement, Subscriber shall indemnify and hold harmless (in the same manner and to the same extent as set forth in the preceding paragraph of this Section) the Issuer, each director of the Issuer, each officer of the Issuer-who shall sign such Registration Document, each underwriter, broker or other person acting on behalf of Subscriber, and each person who controls any of the foregoing persons within the meaning of the Securities Act with respect to any statement or omission from such Registration Document, any amendment or supplement thereto or any document incident to registration or qualification of any Registrable Shares, if such statement or omission was made in reliance upon and in conformity with written information furnished to the Issuer or such underwriter through an instrument duly executed by Subscriber or an underwriter selected by Subscriber that states that it is specifically for use in connection with the preparation of such Registration Document or any amendment, supplement or other document relating thereto. 3.4 The indemnification required by this Article will be made by periodic payments during the course of the investigation or defense, as and when bills are received or expenses incurred, subject to prompt refund in the event any such payments are determined not to have been due and owing hereunder. 3.5 Promptly after receipt by an indemnified party of notice of the commencement of any action involving a claim referred to in the preceding Sections of this Article, such indemnified party will, if a claim in respect thereof is made against an indemnifying party, give written notice 11 to the latter of the commencement of such action. In case any such action is brought against an indemnified party, the indemnifying party will be entitled to participate in and to assume the defense thereof, jointly with any other indemnifying party similarly notified to the extent that it may wish, with counsel reasonably satisfactory to such k indemnified party, and after notice from the indemnifying party to such indemnified party of its election so to assume the defense thereof, the indemnifying party shall not be responsible for any legal or other expenses subsequently incurred by the latter in connection with the defense thereof; provided, however, that if any indemnified party shall have reasonably concluded that there may be one or more legal or equitable defenses available to such indemnified party which are additional to or conflict with those available to the indemnifying party, or that such claim or litigation involves or could have an effect upon matters beyond the scope of the indemnity agreement provided in this Article, the indemnifying party shall not have the right to assume the defense of such action on behalf of such indemnified party and such indemnifying party shall reimburse such indemnified party and any person controlling such indemnified party for that portion of the fees and expenses of any counsel retained by the indemnified party which is reasonably related to the matters covered by the indemnity agreement pursuant hereto. 3.6 The indemnification provided for under this Agreement will remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling person of such indemnified party and will survive the transfer of securities. 3.7 If the indemnification provided for in this Article is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any loss, claim, damage, liability or action referred to herein, then the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall contribute to the amounts paid or payable by such indemnified party as a result of such loss, claim, damage, liability or action in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the statements or omissions which resulted in such loss, claim, damage or liability as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Issuer and the Subscriber agree that it would not be just and equitable if contributions pursuant to this paragraph were determined by pro rata allocation or by any other method of allocation which did not take into account the equitable considerations referred to herein. The amount paid or payable to an indemnified party as a result of the losses, claims, damages, liabilities or expenses referred to above shall be deemed to include, subject to the limitation set forth in Section 3.2, any legal or other expenses reasonably incurred in connection with investigating or defending the same. Notwithstanding the foregoing, in no event shall the amount contributed by a Subscriber exceed the aggregate net offering proceeds received by Subscriber from the sale of Subscriber's Registrable Shares. 12 ARTICLE 4 TERMINATION 4.1 Termination. This Agreement shall terminate and be of no further ----------- force or effect when there shall not be any Restricted Shares held by Subscriber. ARTICLE 5 GENERAL 5.1 Time. Time is of the essence of this Agreement and each of its ---- provisions. 5.2 Notice. Any notice or other communication (in this Section a "Notice") ------ required or permitted to be given or made hereunder shall be in writing and shall be well and sufficiently given or made if: (a) delivered in person during normal business hours on a Business Day and left with a receptionist or other responsible employee of the relevant party at the applicable address set forth below: (b) sent by prepaid first class mail; or (c) sent by any electronic means of sending messages, including facsimile transmission, which produces a paper record (an "Electronic Transmission"), charges prepaid and confirmed by prepaid first class mail; in the case of a Notice to AOL addressed to it at: America Online, Inc. 72000 AOL Way Dulles, Virginia 20166 Attention: Fred Singer, Vice-President Fax No.: (703) 265-2409 with a copy to: America Online, Inc. 22000 AOL Way Dulles, Virginia 20166 Attention: General Counsel Fax No.: (703) 265-2208 and in the case of a Notice to Issuer, addressed to it at: 5915 Airport Road, Suite 330 Mississauga, ON 13 L4V 1T1 Attention: Paul Godin, President and Chief Executive Officer Fax No.: (905) 672-5705 and cc: David Pamenter Gowling, Strathy & Henderson Barristers and Solicitors Commerce Court West Suite 4900 Toronto, Ontario Any Notice given or made in accordance with this Section 5.3 shall be deemed to have been given or made and to have been received: (a) on the day it was delivered, if delivered as aforesaid; (b) on the fifth Business Day (excluding each day during which there exists any general interruption of postal services due to strike, lockout or other cause) after it was mailed, if mailed as aforesaid; and (c) on the day of sending if sent by Electronic Transmission during normal business hours of the addressee on a Business Day and, if not, then on the first Business Day after the sending thereof. Any Party may from time to time change its address for notice by giving Notice to the other Party in accordance with the provisions of this Section 5.3. 5.3 Public Announcements. Neither of the parties hereto shall make any -------------------- public statement or issue any press release concerning the transactions contemplated by this Agreement except as may be necessary, in the opinion of counsel to the party making such disclosure, to comply with the requirements of all Applicable Law. If any such public statement or release is so required, the party making such disclosure shall consult with the other party prior to making such statement or release, and the parties shall use all reasonable efforts, acting in good faith, to agree upon a text for such statement or release which is satisfactory to both parties. 5.4 Assignment. None of this Agreement nor any right or obligation ---------- hereunder is assignable in whole or in part by either party without the prior written consent of the other party. [Notwithstanding the foregoing, Subscriber may, without the consent of Issuer, assign this Agreement and its rights hereunder to any whollyowned subsidiary on condition that Subscriber remains liable to observe and perform all of its covenants and obligations hereunder-] Subject thereto, this Agreement shall inure to the benefit of and be binding upon the parties and their respective successors (including any successor by reason of amalgamation or statutory arrangement of either party) and permitted assigns. 14 5.5 Further Assurances. Each party shall do such acts and shall execute ------------------ and deliver such further agreements, documents, conveyances, deeds, assignments, transfers and the like, and shall cause the doing of such acts and the execution and delivery of such further items as are within its power and as the other party may in writing at any time and from time to time reasonably request, in order to give full effect to the provisions of this Agreement. IN WITNESS WHEREOF the parties have duly executed this Agreement. INTERNET LIQUIDATORS INTERNATIONAL INC. By:___________________________________ c/s Name: Title: By:___________________________________ c/s Name: Title: AMERICA ONLINE, INC. By:___________________________________ c/s Name: Title: 15 SCHEDULE "M" MATERIAL CONTRACTS Product Suppliers: List of Suppliers (as of January 30, 1997) Draft Supplier Agreements (Four Versions) Draft Marked-up Version of Agreement with W3 Edge Inc. Service Supplier Agreements (as of January 30, 1997): Agreement between RV Storage & Assembly Co. Ltd. and Internet Liquidators Inc. dated February 2, 1996. Automated Shipping System Letter of Agreement between United Parcel Service and Internet Liquidators Inc. dated April 2, 1996. Courier Service Agreement between Purolator Courier Ltd. and Internet Liquidators Inc. dated February 21, 1996. Premium Finance Agreement between AIG Credit Corp. of Canada and Internet Liquidators International Inc. dated October 8, 1996. Visa Agreement between the Bank of Nova Scotia and Internet Liquidators Inc. dated February 21,1996. Mastercard Agreement between the Bank of Montreal and Internet Liquidators Inc. dated March 13 1996. Credit Card Processing Agreement between First USA Merchant Services, Inc. and Internet Liquidators USA, Inc. dated July 17, 1996. American Express Agreement between Amex Bank of Canada and Internet Liquidators Inc. dated July 20, 1996. Employment Contractor Agreements: Employment Agreement between Paul Godin and Internet Liquidators Inc. dated January 1, 1996 Employment Agreement between Jeffrey Lymburner and Internet Liquidators Inc. dated January 1, 1996. Designated Insured Persons and Company Reimbursement Policy between Aetna and Internet Liquidators International, Inc. dated October 10, 1996. Indemnity Agreement between Frank Clegg and Internet Liquidators International Inc. dated September 16, 1996. Engagement Letter between HDL Capital Corporation Agreement and Internet Liquidators International Inc. dated August 22, 1996. Toronto Star Newspapers Limited Agreements Subscription Agreement dated February 12, 1997 between Toronto Star Newspapers Limited ("Torstar") and Internet Liquidators International Inc. ("IL"). Warrant certificate dated February 12, 1997 executed by IL evidencing the Warrant. Shareholders' Agreement dated February 12, 1997 between Torstar, IL, 1184041 Ontario Inc. ("184041 ") and the Smythe Group Company ("Smythe"). E-Commerce Services Agreement dated February 12, 1997 between Torstar and IL. Master Preferred Escrow Agreement dated February 12, 1997 between Torstar, IL and Data Securities International, Inc. IP Rights and Non-Competition Agreement dated February 12, 1997 between Torstar, IL, 118404 1, Smythe, Paul Godin and Jeff Lymburner. CP-29729-1 February 17 1997 2 SCHEDULE "N" FORM OF WARRANT THIS WARRANT WILL BE VOID AND OF NO VALUE OR EFFECT UNLESS EXERCISED PRIOR TO THE EXPIRY TIME. COMMON SHARE PURCHASE WARRANT INTERNET LIQUIDATORS INTERNATIONAL INC. (the "Company") (Incorporated under the laws of ONTARIO) No. W-1 Right to Purchase Common Shares THIS IS TO CERTIFY that for value received, AMERICA ONLINE, INC. ("AOL"), the registered holder hereof, is entitled to exercise its rights under this Warrant, in whole or in part, at any time, and from time to time, from 9:00 a.m. (Toronto time) February 18, 1997 (the "Effective Date") to 4:00 p.m. (Toronto time) September 1, 1999 (the "Expiry Time"), to purchase up to the number of fully paid and non-assessable common shares without par value in the capital of the Company as provided below (the "Common Shares"), as such Common Shares are presently constituted, upon and subject to the terms and conditions hereinafter referred to and at a subscription price as provided below (the "Exercise Price"): 1. Pursuant to this Warrant, AOL may purchase such number of Common Shares as will result at the time of exercise in AOL owning, on a fully diluted basis, 51% of the Common Shares. For the purposes hereof, "fully diluted basis" shall be calculated at the time of the applicable exercise of the Warrant, and refers to the percentage interest that AOL would have in the capital of the Company if all options, rights, warrants or subscription privileges issued or granted by the Company (whether or not currently exercisable or exercisable on conditions) to purchase Common Shares had been exercised and all securities of the Company convertible into, or exchangeable for, Common Shares had been converted or exchanged. 2. The Exercise Price and the exercise period for each Common Share shall be: (a) until October 15. 1997, US$1.50 per Common Share for the number of Common Shares necessary to bring AOL's ownership interest at the time of exercise, on a fully diluted basis, to 13%; (b) from October 16. 1997 up to and including February 15. 1998, LTS$2.00 per Common Share for the number of Common Shares necessary to bring AOL's ownership interest at the time of exercise, on a fully diluted basis, to 13%; (c) provided that either option (i) or (ii) above has been fully exercised, until July 1, 1998, US$3.00 per Common Share for the number of Common Shares necessary to bring AOL's ownership interest at the time of exercise, on a fully diluted basis, to 23%; (d) provided that option (iii) above has been fully exercised, until February 15, 1999, US$3.00 per Common Share for the number of Common Shares necessary to bring AOL's ownership interest at the time of exercise, on a fully diluted basis, to 33%; and (e) provided that option (iii) above has been fully exercised until September 1, 1999, or provided that option (iv) above has been fully exercised, until February 15, 2000, the greater of 75% of Fair Market Value or US$3.00 per Common Share for the number of Common Shares necessary to bring AOL's ownership interest at the time of exercise, on a fully diluted basis, to 51%. "Fair Market Value" means the weighted average closing price per Common Share on the largest exchange or public market on which such Common Shares are listed or quoted for the 30 trading days preceding the third trading day prior to the date the Warrant is exercised. 3. The cash or, at AOL's option, Exercise Price to be paid by AOL to the Company under this Warrant will be paid in (a) up to the entire Exercise Price under Section 2(i) above may be paid with an irrevocable voucher evidencing an advertising credit for advertisements on AOL's online service at AOL's then current rate card rates (being, an "Advertising Credit"); and (b) up to 50% of the Exercise Price under Sections 2(ii) and (iii) above may be paid with an Advertising Credit on the same basis. Where an Advertising Credit is provided, the Company shall use its best efforts to utilize such Advertising Credit within twelve (12) months of its issuance. In addition, where a portion of the Exercise Price may be paid with an Advertising Credit, AOL may elect to pay cash in lieu of all, or part, of the amount of the Advertising Credit provided that in such instance the Company shall contemporaneously agree to spend no less than 50% of its advertising budget on purchasing advertisements on AOL's online service until such time as the amount spent on such advertising on AOL is equal to the amount contributed by AOL that otherwise would have been paid with an Advertising Credit. 4. Transfer taxes and other taxes related to the issuance of Common Shares pursuant to the exercise of this Warrant, if any, and other ancillary expenses related to the issuance of such Common Shares shall be paid by the Company. -2- 5. This Warrant also provides that Common Shares shall not be subdivided, consolidated, reclassified or otherwise changed unless contemporaneously therewith the right of the holder of the Warrant to obtain Common Shares Is similarly subdivided, consolidated, reclassified or otherwise changed in the same proportion and the same manner. The Company will not adopt any poison pill or similar provision that would take effect upon AOL's exercise of the Warrant or otherwise limit AOL's ability to exercise the Warrant. 6. The right to purchase Common Shares in the capital of the Company may only be exercised by AOL within the time hereinbefore set out by: (a) duly completing in the manner indicated and executing the subscription form annexed hereto, and (b) surrendering this Warrant to the Company, at its registered office in the City of Toronto, together with a certified check payable to the order of the Company at par for the subscription price of the Common Shares subscribed for and/or presentation of an Advertising Credit executed by an officer of AOL. 7. Subject to the terms and conditions of this Warrant, upon such surrender and payment, AOL shall be deemed for all purposes the holder of record of such Common Shares and the Company covenants that it will (subject to the provisions of this Warrant) cause a certificate or certificates representing such Common Shares to be personally delivered to AOL at the address specified in such subscription form or if no specification is made then to the address of AOL hereof appearing in the register of warrants maintained by the Company pursuant to this Warrant. 8. AOL may subscribe for and purchase any lesser number of whole Common Shares than the number of Common Shares purchasable under this Warrant and in such event shall be entitled to receive a new Warrant in respect of the balance of the Common Shares purchasable under this Warrant not then subscribed for and purchased. To the extent that this Warrant confers the right to purchase a fraction of a Common Share, the Company shall not issue such fractional Common Shares. 9. The holding of this Warrant shall not constitute AOL a shareholder of the Company or entitle AOL to any right or interest in respect thereof except as herein expressly provided. 10. AOL may transfer this Warrant to any person to whom AOL has assigned its Common Shares. Following any such transfer, (1) references herein to AOL shall be read as references to the transferee; (2) Section 3 hereof shall be amended to delete all references to payment other than by cash; and (3) the amount of any then outstanding Advertising Credits shall be paid in cash to the Company. Subject to this condition, the transferee of this Warrant shall, subject to the requirements of this Warrant, be entitled to have such Warrant transferred to its name at the registered office of the Company in the City of Toronto under such reasonable regulations as the Company may prescribe. The person in whose name this Warrant shall be registered shall be deemed and regarded as the absolute owner hereof for all purposes and the Company shall not be affected by any notice or -3- knowledge to the contrary. The register shall at all reasonable times be open for inspection by the holder of any Warrant. 11. In case this Warrant shall become mutilated or be lost, destroyed or stolen, the Company, in the reasonable exercise of its discretion, may issue a new Warrant of like date and tenor as the one mutilated, lost, destroyed or stolen in exchange for and in place of, and upon surrender and cancellation of such mutilated Warrant or in lieu of and in substitution for such lost, destroyed or stolen Warrant, and the substituted Warrant shall be in like form and shall be entitled to like benefits herewith. 12. The applicant for the issue of a new Warrant pursuant to the above paragraph shall bear the cost of the issue thereof and in case of loss, destruction or theft shall, as a condition precedent to the issue thereof, furnish to the Company such evidence of ownership and of the loss, destruction or theft of the Warrant so lost, destroyed or stolen as shall be satisfactory to the Company in the reasonable exercise of its discretion and such applicant may also be required to furnish an indemnity in amount and form satisfactory to the Company in the reasonable exercise of its discretion, and shall pay the reasonable charges of the Company in connection therewith. 13. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada (excluding any provisions that would result in the application of the laws of another jurisdiction). IN WITNESS WHEREOF the Company has caused this Warrant to be signed by its duly authorized officers as of the 21st day of February, 1997. INTERNET LIQUIDATORS INTERNATIONAL INC. By:______________________________________ Name: Title: By:______________________________________ Name: Title: -4- SCHEDULE "O" INTELLECTUAL PROPERTY RIGHTS . see attached copy of letter from MacBeth & Johnson, Barristers & Solicitors, to Brent Bowes of Internet Liquidators Inc. dated August 29, 1996. . IP Rights and Non-Competition Agreement between Toronto Star Newspapers Limited, Paul Godin, 1184041 Ontario Inc., Jeff Lymburner, Smythe Group Company and Internet Liquidators International Inc. made the 12th day of February, 1997. A copy of the agreement is contained in Schedule "M". [Incorporated by Reference. See Exhibit 3.3] MacBETH & JOHNSON BARRISTERS-AT-LAW & SOLICITORS PATENT AND TRADE MARK AGENTS OUR REF: TB-0-3140/File Overview August 28, 1996 Via Facsimile - ------------- Brent Bowes INTERNET LIQUIDATORS INC. 5915 Airport Road Unit 330 Mississauga, Ontario L4V 1T1 Dear Brent: Re: Internet Liquidators Inc. File Overview --------------------------------------- This is further to your telephone request yesterday. The following is our updated report to you regarding the current status of the patent, trade marks and copyright applications relating to Internet Liquidators Inc. Re: Patents - ----------- With regard to patent protection, an application was filed in Canada July 11, 1996, and in the U.S. on about August 26, 1996. Your contact on this matter is Warren Hall of our associated patent firm, Dennison Associates. Re: Trade Marks - --------------- With regard to trade marks, before the company was incorporated. an application was filed by Paul Godin in Canada as of February 17, 1995 for the trade mark "INTERNET LIQUIDATORS & Design." It was registered February 23, 1996. It was assigned to Internet Liquidators Inc. effective March 28,1996. An application for the word mark "INTERNET LIQUIDATORS" has been, or is just being, filed in Canada. As of September 27, 1995, an application was filed for the word mark "INTERNET LIQUIDATORS" in the U.S., namely SN 74/734948. As of about January 26, 1996, an application was also filed on behalf of Internet Liquidators Inc. for the trade mark "ONLINE AUCTION" in Canada, SN 802,840 and the corresponding application for the same trade mark in the U.S. was filed on March 18, 1996. On March 13, 1996 with the Canadian Trade Marks Office was an application for the trade mark "ONLINE OUTLET MALL." On March 13, 1996 an application was filed with the Canadian Trade Marks Office for the trade mark "CLUB RADD" and we filed a corresponding application for "CLUB R.A.D.D." in the U.S. on March 27, 1996. Preliminary searches for all these marks were conducted and we located no prior filings. Re: Copyrights - -------------- With regard to copyrights, we have been advised by the company that the entire computer program including any audiovisual material regarding their proposed service was authored by Paul Godin, Jeff Lymburner and Christopher J.A. Beaune as works for hire. The end product of course has not yet been finalized, but copyright attaches immediately upon creation rather than registration. Moreover, Canadian copyright registrations have already been obtained for the audiovisual and artistic elements as they appeared on the proposed display screens, A United States copyright application was filed February 9, 1996 for the "INTERNET LIQUIDATORS" collection of sample display screens. Trade Secrets - ------------- Lastly, with respect to trade secrets and confidential information, it is our understanding that no one else has adopted the idea of a reverse auction over the Internet. Thus, in addition to the protection discussed above, the idea is currently protected under the law of confidence. We trust this information meets your current deadline and we look forward to hearing from you. Yours very truly, MACBETH & JOHNSON Tony Bortolin TB:keh/ -2- SCHEDULE "P" MAJOR SHAREHOLDER INTERESTS The following is a list of shareholders owning greater than 10% of the issued and outstanding shares in the capital of Internet Liquidators International Inc.: Smythe Group Company - 1,850,000 shares 1184041ntario Inc. - 1,812,500 shares SCHEDULE "Q" ENCUMBRANCES Standard Mercantile Bancorp Limited Partnership re: Loan Agreement with Internet Liquidators International Inc. dated October 18, 1996 General Security Agreement between Internet Liquidators International Inc. and Standard Mercantile Bancorp, Limited Partnership dated October 18, 1996. Indenture of Guarantee between Internet Liquidators International Inc. and Standard Mercantile Bancorp, Limited Partnership dated October 18, 1996. SCHEDULE "R" YANKEE AUCTION FUNCTIONAL SPECIFICATIONS Overview The proposed enhancements will allow the current ILI Auction System to incorporate a Regular Type Auction format, in addition to the Dutch Auction and Mall Systems. The new applications will allow for MI control of all pages by ILI and serve, where possible, information from dynamically generated and cached.HTML pages. Template edit functions will also be included to allow global changes to be made to all pages. All items preceded with a "." and noted in italics are areas which we believe could be incorporated into the system to further enhance the functionality. The functional elements of these options are based upon the requested popular auction format currently found on the Internet. - ------------------------------------------------------------------------------- Home Page - --------- [Confidential Information filed separately with the SEC] Functional elements available from this page include: Section A Display counter with the number of bids taken to date Section B Customer service icon and link Section C About the Auction icon and link Section D How it Works icon and link Section E Auction Formats icon and link Section F - -------------------------------------------------------------------------------- Page 1 Customer Testimonials icon and link Section G E-mail request to be added to the Hot Product for Action batch mailing list Section H Bid Status Check icon and link Section J Product Categories Listing with appropriate links Section K Listing of products flagged as Hot Deals - -------------------------------------------------------------------------------- Section A - Total Bids Counter - ------------------------------ At the time of each bid, a system counter will be updated to keep track of the total number of bids received to date. The total bid counter will be available on the home page. It will be extracted and incorporated into the home page at the time of refresh of the page. - -------------------------------------------------------------------------------- Section B - Customer Service - ---------------------------- The customer service section will contain all elements as they relate to customer inquiries which can be made from the website. This section includes the following sub-elements: Section B1 - Order Status and Account Inquiry Provide an information page with an explanation of what a client can expect to see on the resulting pages. Provide capture fields for the clients user id and password plus the clients postal code for additional verification. Section BIA - Order Status and Account Inquiry Application Provide an application that will process the information supplied. In the event of full verification of the user, the following information is to be displayed: Section BIA1 - Open bids of all current auctions - -------------------------------------------------------------------------------- Page 2 To include the auction number, date the bid was placed and amount of the bid. Also to include the current bid range and a link to the specific product page(s). Section BIA2 - Recent winning bids and orders Include a list of all winning bids or orders over the last x days, where x is defined by the client. Contains a list of the products purchased and links to contact information for the specific products - for purposes of shipment verification and tracking. Section BIA3 - Recent unsuccessful bids A list of all bids placed which were not successful. Links to the specific products will be provided as well as the sale price cost range of the specific product. Section B2 - Vendor/Customer Service Contacts Provide a database built .htm. page that lists all the vendors and provides appropriate E-mail contact links. Section B3 - Setup New Account Provide an information page explaining the account setup operation. [Confidential Information filed separately with the SEC] Section B4 - Edit Current Account/Error in Bidding Provide an information page on how to correct the account information and how to change bids. Provide an E-mail link for bid changes. Section B5 - Request Additional Product Specifications Provide an information page with an E-mail link to allow a person to request additional product information. [Confidential Information filed separately with the SEC] Section B6 - Shipping Policies/International Shipping Provide an information page outlining the specific information and an E- mail link to customer support. [Confidential Information filed separately with the SEC] - -------------------------------------------------------------------------------- Page 3 Section B7 - Server and Bidding Problems Provide an information page listing the common problems and the relevant solutions. Include an E-mail link to submit additional problems and/or request other solutions. Section B8 - How to Become a Merchant Provide an information page on how to become a merchant and provide an E- mail link to the relevant contact person. Section B9 - Suggestion Box Provide an information page with instructions and an E-mail link for the submission of suggestions. - -------------------------------------------------------------------------------- Section C - About the Auction/ILI - --------------------------------- Provide an information page in the matching format outlining the auction systems and the site. Could re-use a lot of the existing information and just add new information relevant to the new auction system. - -------------------------------------------------------------------------------- Section D - How it Works - ------------------------ Provide an information page outlining the functionality of the auction system. - -------------------------------------------------------------------------------- Section E - Auction Formats - --------------------------- Provide an information page outlining the different functional elements of the auction. This page could include information about the current Auction and Mail systems, with links to the appropriate sections of the site. - -------------------------------------------------------------------------------- Section F - Customer Testimonials - --------------------------------- - -------------------------------------------------------------------------------- Page 4 Provide a dynamic page, which is updated as new testimonials are entered on the system. The order of display is controlled either automatically, based on receipt of testimonial or prioritized by ILI. - -------------------------------------------------------------------------------- Section G - Request for Hot Products E-mail - ------------------------------------------- Section G1 - Append to Database Application Provide an application to append the provided E-mail address to the database of mail recipients. This will be a common mail database, but these requests will be flagged for this function. Section G2 - Hot Products Batch Mall Application Provide an application which will mail the list of all products set as Hot Products to the persons on the mailing list. The frequency of mail out can be determined by ILI or overridden and sent on instruction by ILI. - -------------------------------------------------------------------------------- Section H - Bid Status Check - ---------------------------- Same application and systems outlined in section B I A, but linked from the Home Page. - -------------------------------------------------------------------------------- Section J - Product Categories - ------------------------------ This section is the core functional element of this section of the site. It allows for the selection of products and the placement of bids. Provide an application, working in conjunction with the Home Page application, to provide a list of all available categories, refreshed at the same frequency as the rest of the site HTML files. All categories listed will be in the form of links which will allow access to the listing of products in the specific category. Section J1 - Product Listing Provide an application which will list all products within a specific category, that are available on the auction. The auction number will be the link to the product and auction detail and the page where a bid can be placed. The application will produce standard .HTML files as output and refresh them at the refresh frequency of the site. Information about each product will be limited to one line of text and include: . The closing date of the auction - -------------------------------------------------------------------------------- Page 5 . The condition of the item ie. New, Used, Refurb, etc. . The name of the item . A brief description of the item, including main specifications . The street price of the item - -------------------------------------------------------------------------------- Section J2 - Product and Auction Status Detail Provide an application that will generate HTML detail pages for each product in the auction. The refresh will occur at the standard site refresh time. [Confidential Information filed separately with the SEC] This page will include: . A description of the item . An image of the item . The minimum acceptable bid amount . The bid increment value . Current quantity available . The auction number . The date and time at which the auction closes . The date and time of the last bid . A list of the current high bids, including the name of the bidder, the state of origin, date and time of bid, quantity and price bid . A free form area to allow the entry of specifications and other pertinent information . Warranty information, including the cost of extended warranties, if available . Sales tax policies . Maximum shipping costs In addition to this available information, this page will have the following options: Section J2A - Bid on Current Product Provide an application to prepare the bid screen for the current product. These screens will be in HTML format, refreshed at half the standard refresh rate of the site OR whenever a bid is placed on a product, whichever occurs first. This page will provide the following: . The description of the product - -------------------------------------------------------------------------------- Page 6 . The auction number . The minimum acceptable bid amount . The bid increment . The maximum US shipping charge . The maximum Canadian shipping charge . The minimum amount required to win the current item . A field to capture the new bid price . A field to capture the quantity required . Provide the user with an option to select if they will not accept a reduced quantity of the item . A field for the client's ILI user id and password If the client has not previously registered, then they will be required to complete the following fields: . First name . Last name . Company . Street address . City . County . Province/state . Postal/zip code . Country . E-mail address . Daytime phone number . Evening phone number . Fax number . Payment method (Visa, Amex, Mastercard) . Card Number . Expiry date The client will also have the option of specifying an alternate ship to address. If this is required, the following information will be captured: . Name . Street address . City . Province/state . Postal/zip code - -------------------------------------------------------------------------------- Page 7 . Country An additional comment field will also be provided so the client can enter comments regarding this bid. These comments will be listed next to the appropriate name on the list of current bids for the product. Section J2A1 - Process Bid Provide an application to place the bid, received from Section J2A, into the bids database. In addition to the placement of the new bid in the database the following functions will be performed: . The client will be e-mailed with the appropriate information regarding the bid that has been placed . If this new bid is higher than any previous bids, all the clients who have previously bid on the item will be e-mailed, informing them that they have been outbid on the specific item" Section J3 - View Next Product for Bidding Provide an application to determine the next product in sequence for bidding and allow paging to successive products using this application. The output from the application will be passed to the application building the page for Section J2A. This will allow for a link on the page which will allow the client to page through the available products in the specific category. Section J4 - Return to Index Provide an application to "remember" where the client came from and provide this information to the application building the pages for Section J2A. This will allow for the provision of a link to return the category listing page. Section J5 - Return to Home Provide a link to the home page. - ------------------------------------------------------------------------------- Section K - Hot Deals - --------------------- This section displays all products that have been flagged in the product database as Hot Deals. Provide an application to generate a list of all products that fail into this category, to be displayed on the Home Page. The output of the application will be fed to the application generating the Home Page. - -------------------------------------------------------------------------------- Page 8 Each product listing will be the name of the product, a brief description and the street price of the item. Selection of the item on the list will take the client directly to Section J2 where the client may bid on the product. - -------------------------------------------------------------------------------- Section M - Backened Processing - ------------------------------- In order for the auction system to be fully automated the following system functions will be provided. Wherever possible, they will be integrated into the existing Auction and Mall systems. Section M1 - Page Build Application The auction system will be built on the premise that all product information and bidding will be done from HTML pages. As the content of these pages will change with each bid, it is necessary to rebuild the pages at specific intervals. This application will be in the form of a system service which will run continually. It will update all bid pages at an initial 5 minute frequency. This may be lengthened or shortened depending on requirements. In addition, a portion of this application will be in the form of a reusable object which can be called by the bid placement application to allow the page to be rebuilt immediately after a bid has been placed. Section M2 - Auction Processor This application will control the final auction process to determine when the auction has officially closed. Each auction will have a closing date and time associated with it. At this appointed time the auction will close technically, however it will still remain open for a period of 5 minutes. If any bids are received during the 5 minute period, the auction will continue to remain open for another 5 minutes. This cycle will continue until a period of 5 minutes has lapsed, without bid activity, before the auction is fully closed. The full bid process, defined in Section J2A and J2B will be followed in all cases. Section M3 - Billing Processor Once the auction has closed, the Billing Processor will be activated. It will support both US and Canadian funds transactions, using the GPS payment Interface. ------------------------------------------------------------------------------- Page 9 Bids will be processed in the order of the highest bid first and will continue processing until the stock quantity has been depleted or the amount of qualifying bids has been depleted. The sequence of billing will be serialized, thus allowing for declined credit card transactions to be ignored in the quantity process and allowing for the full available quantity of items to be sold. All successful bidders will be notified by appropriate E-mail, as well as the supplier of the goods, where appropriate. Section M4 - Reporting Processor The reporting processor will, at the close of each auction, forward an E- mail based report to ILI outlining the quantity of products sold and the appropriate successful bid numbers. It will also include information such as product remaining. [Confidential Information filed separately with the SEC] Section M5 - Template Manager This application will allow for the remote editing of the structure of the various pages of the auction system. Changes will be limited to the variable content of the pages and the layout of this content section. Section M6 - System Overrides This application will allow ILI staff to override any of the time based functions, ie. the builds of the pages and the processing of the E-mail batch functions, allowing them to be executed on demand. Section M7 - Remote Management Systems All necessary changes will be made to the current Remote Management System to allow the functions of this auction format to be managed from that specific platform. Section N - Performance Optimization - ------------------------------------ In addition to the system aspect of the site which will be so designed to optimize the performance of the site, certain graphic elements will be redesigned to allow for faster downloading. At the same time we will strive to improve the look and feel of the site as well as the functionality. EX-3.23 4 AIM STOCK AGREEMENT Exhibit 3.23 AIM STOCK AGREEMENT THIS AGREEMENT is made as of the 30th day of December, 1998 (the "Effective Date") by and between BID.COM INTERNATIONAL INC., ("BID.COM"), a corporation having a principal place of business at 6725 Airport Road, Suite 201, Mississauga, Ontario, L4V 1V2 and AMERICAN INTERACTIVE MEDIA, INC. ("AIM"), a corporation having a place of business at Suite 308, 611 Broadway, New York, NY, 10012. BACKGROUND: 1. BID.COM has expertise in designing and operating online auctions. 2. AIM retained BID.COM to provide advice on establishing an AIM E-Commerce Service as described below. 3. BID.COM has completed an assessment of AIM's network and infrastructure in order to support the e-commerce technology of Bid.Com and set up a demonstration site, at the request of AIM. ARTICLE I INTERPRETATION 1.1 In this Agreement, unless the context otherwise requires, each capitalized term shall have the meanings indicated below. "Agreement" means this Agreement and all schedules annexed to this Agreement as the same may be amended from time to time in accordance with the provisions hereof or thereof, "hereof'" "hereto" and "hereunder" and similar expressions mean and refer to this Agreement and not to any particular article or section; except where the context specifically requires, "Article" or "Section" means and refers to the specified article or section of this Agreement; "AIM E-Commerce Service" means the service which will permit retail consumers in the Territory including, without limitation, "small office home office" customers ("SOHO") to access an online auction as currently operated by BID.COM or its subsidiaries at the BID.COM Site by using their cable modems or other television based on line enabling devices (or by way of any method of internet access in the case of members of certain affinity groups and in house networks produced and distributed by AIM) to participate in on-line auctions of consumer goods and services, but excluding business to business and liquidation applications; - 2 - "AIM Stock" means that number of common shares in the capital of AIM which has an aggregate value of [Confidential Information filed separately with the SEC] valued at the average trading price of AIM stock on each of the twenty-one (21) trading days prior to December 31,1998; "BID.COM Site" means the Web site at which BID.COM will operate its online auction service provided for the AIM E-Commerce Service as currently found at the URL "www.bid.com"; "Business Day" means any day from Monday to Friday inclusive, except statutory or civic holidays observed in Toronto, Ontario; "Effective Date" has the meaning attributed thereto on the face page of this Agreement; "Joint Venture" means the Delaware company to be established and owned by AIM to provide the AIM E-Commerce Service; "Parties" means BID.COM and AIM collectively and "Party" means either of them; "Person" includes an individual, company, corporation, partnership, government or government agency, authority or entity howsoever designated or constituted; "Reasonable Best Efforts" means that a party shall comply with the obligation to which the covenant to use Reasonable Best Efforts applies in all cases where such party has the ultimate discretion, control and ability to do so, and that such party shall use commercially reasonable efforts to comply with such obligation in cases where such party does not have such ultimate discretion, control and ability; "Registration Rights Agreement" means the agreement to be entered into between the Parties providing for registration of the AIM stock; "Territory" means the United States of America as presently constituted. 1.2 Headings. The use of headings in this Agreement is for convenience of reference only and shall not affect its interpretation. 1.3 Extended Meanings. Words expressed in the singular include the plural and vice-versa and words in one gender include all genders. - 3 - 1.4 Entire Agreement. This Agreement, and any agreements and other documents to be delivered pursuant to it (including without limitation the Registration Rights Agreement), constitutes the entire agreement between the Parties pertaining to the subject matter hereof and supersedes all prior agreements, understandings, negotiations and discussions, oral or written between the Parties. The execution of this Agreement has not been induced by, nor do either of the Parties rely upon or regard as material, any representations, warranties, conditions, other agreements or acknowledgments not expressly made in this Agreement or in the agreements and other documents to be delivered pursuant hereto. 1.5 Currency. Unless otherwise indicated, all dollar amounts referred to in this Agreement are in Canadian funds. 1.6 Invalidity. If in any jurisdiction a provision contained in this Agreement is found by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, the validity, legality or enforceability of the remaining provisions contained herein, or of such provision in any other jurisdiction affected or impaired thereby. 1.7 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and shall be treated, in all respects, as an Ontario contract. The Parties hereby irrevocably submit to the exclusive jurisdiction of the courts of Ontario in respect of the subject matter hereof. 1.8 Consent. Wherever any Party is required to obtain consent from another Party, such consent shall not be unreasonably withheld or delayed. ARTICLE II 1.9 Acknowledgment. - 4 - AIM acknowledges that BID.COM has completed the initial consulting feasibility assessment and set up a demonstration site for the AIM E- Commerce Service in accordance with its agreement in respect thereof and to the satisfaction of AIM in all respects. 1.10 Aim Stock. In consideration therefor, AIM shall forthwith issue to BID.COM the AIM Stock and shall use its Reasonable Best Efforts to settle and execute the Registration Rights Agreement by January 29, 1999, in default of which any outstanding issues shall be submitted to and resolved by binding arbitration in accordance with the process provided in Article 3 hereof. ARTICLE III 1.11 Option to Purchase. Until the AIM Stock becomes freely trading on a United States Stock Exchange (satisfactory to BID.COM) in the hands of BID.COM or its assigns and maintains an aggregate market value of not less than [Confidential Information filed separately with the SEC] for a minimum of 30 consecutive trading days on such exchange (as measured by the average trading price of stock traded on each trading day) BID.COM shall have an option to acquire [Confidential Information filed separately with the SEC] of the issued stock of the Joint Venture for [Confidential Information filed separately with the SEC]. Notwithstanding the foregoing, if BID.COM elects to exercise the option, AIM shall have the ability to pay BID.COM [Confidential Information filed separately with the SEC] in which event the option of BID.COM under this Section shall be at an end and BID.COM shall forthwith surrender the AIM Stock for cancellation. ARTICLE IV 1.12 Confidentiality. Each Party (hereinafter in this Section, the "Receiving Party") covenants with the other Party (hereinafter in this Section, the "Disclosing Party") that it shall keep confidential the Confidential Information of the Disclosing Party to which the Receiving Party obtains access as a consequence of entering into this Agreement and that it will take all reasonable precautions to protect such Confidential Information from any use, disclosure or copying except as expressly authorized by this Agreement. The Receiving Party shall implement such procedures as the Disclosing Party may reasonably require from time to time to improve the security of the Confidential Information of the Disclosing Party in its possession. This Section shall survive the termination of the Agreement. Upon termination of this Agreement, the Receiving Party shall, at the choice of the Disclosing Party, either return to the Disclosing Party or destroy all copies or partial copies of Confidential Information of the Disclosing Party in any form which is in the possession - 5 - of the Receiving Party or under its control, and certify that all such Confidential Information has been returned or otherwise destroyed. ARTICLE V ARBITRATION 1.13 Dispute Resolution Process. If any dispute, disagreement, controversy or claim arising out of or relating to this Agreement including, without limitation, its application, interpretation, performance, breach, termination, enforcement or damages, or remedies arising out of the breach of or non-compliance therewith, shall be finally determined by arbitration before a single arbitrator to be commenced and conducted in the English language in Toronto in accordance with the Arbitration Act (Ontario). The Parties hereto agree that: (a) subject to mutual agreement between the Parties to the contrary, the arbitrator shall be a person who is legally trained and trained as a professional arbitrator and who has a minimum of five (5) years experience in the licensing of computer software; (b) the Parties shall agree on the identity of the arbitrator within 10 days of notice of reference to arbitration and in default thereof, either Party may apply to a Judge of the Supreme Court of Ontario, General Division, to appoint an arbitrator with the foregoing qualifications; (c) the Parties shall be required to make written submissions to the arbitrator within 7 days of appointment and shall not be entitled to make verbal representations or further submissions unless so requested by the arbitrator. Any Party who does not comply with the foregoing time period shall not be entitled to make any submissions without the written approval of the other Party; (d) the arbitrator shall be required to render his decision in writing within 10 days of the period mentioned in Subsection 5.1(c); (e) neither of the Parties shall apply to the Courts of Ontario or any other jurisdiction to attempt to enjoin, delay, impede or otherwise interfere with - 6 - or limit the scope of the arbitration or the powers of the arbitrator provided for in the Arbitration Act (Ontario) (f) the award of the arbitrator shall be a final and conclusive award and judgment with respect to all matters properly before the arbitral tribunal in accordance with the Arbitration Act (Ontario) and neither Party shall appeal such award in any manner whatever to any court, tribunal or other authority; and (g) the award of the arbitral tribunal may be entered and enforced by any court in any jurisdiction having jurisdiction over the Parties hereto or the subject matter of the award or the properties or assets of either of the Parties hereto. ARTICLE VI GENERAL 1.14 Notice. Any notice or other communication (a "Notice") required or permitted to be given or made hereunder shall be in writing and shall be well and sufficiently given or made if: (a) delivered in person during normal business hours on a Business Day and left with a receptionist or other responsible employee of the relevant Party at the applicable address set forth below; (b) sent by prepaid first class mail; or (c) sent by any electronic means of sending messages, including facsimile transmission, which produces a paper record (an "Electronic Transmission"), charges prepaid and confirmed by prepaid first class mail; in the case of a Notice to AIM addressed to it at: American Interactive Media, Inc. Suite 308, 611 Broadway New York, New York 10012 Attention: Mark Graff Fax No.: (212) 358-0189 with a copy to: - 7 - Curtis, Mallet-Prevost,Colt & Mosle 101 Park Avenue, New York, New York, 101780061 Attention: Jeffrey N. Ostrager Fax No.: (212) 697-1559 and in the case of a Notice to BID.COM addressed to it at: BID.COM International Inc. 201 - 6725 Airport Road Mississauga, Ontario L4V 1V2 Attention: Paul Godin Fax No.: (905) 672-7514 with a copy to: Gowling, Strathy & Henderson Barristers & Solicitors Commerce Court West Suite 4900 Toronto, Ontario M5L 1J3 Attention: David Pamenter Fax No.: (416) 862-7661 Any Notice given or made in accordance with this Section 6.1 shall be deemed to have been given or made and to have been received: (a) on the day it was delivered, if delivered as aforesaid; (b) on the fifth Business Day (excluding each day during which there exists any general interruption of postal services due to strike, lockout or other cause) after it was mailed, if mailed as aforesaid; and - 8 - (c) on the day of sending if sent by Electronic Transmission during normal business hours of the addressee on a Business Day and, if not, then on the first Business Day after the sending thereof. Either Party may from time to time change its address for notice by giving Notice to other Party in accordance with the provisions of this Section 6.1. 1.15 Assignment. Neither Party may assign its rights and obligations under this Agreement, in whole or in part, without the prior consent in writing of the other and any purported assignment made without that consent is void and of no effect (save and except for an assignment as an incident of security taken in a normal course financing transaction). No assignment of this Agreement shall relieve either party from any obligation under this Agreement. 1.16 Binding on Successors. This Agreement shall enure to the benefit of and be binding upon the Parties and their respective successors and permitted assigns. 1.17 Further Assurances. Each Party agrees that upon the written request of the other Party, it will do all such acts and execute all such further documents, conveyances, deeds, assignments, transfers and the like, and will cause the doing of all such acts and will cause the execution of all such further documents as are within its power to cause the doing or execution of, as any other Party hereto may from time to time reasonably request be done and/or executed as may be necessary or desirable to give effect to this Agreement. 1.18 Independent Contractors. It is understood and agreed that in giving effect to this Agreement, no Party shall be or be deemed a partner, agent or employee of another Party for any purpose and that their relationship to each other shall be that of independent contractors. Nothing in this Agreement shall constitute a partnership or a joint venture between the Parties. No Party shall have the right to enter into contracts or pledge the credit of or incur expenses of liabilities on behalf of the other Party. 1.19 Waiver. A waiver by a Party hereto of any of its rights hereunder or of the performance by the other Party of any of its obligations hereunder shall be without prejudice to all of the - 9 - other rights hereunder of the Party so waiving and shall not constitute a waiver of any such other rights or, in any other instance, of the rights so waived, or a waiver of the performance by the other Party of any of its other obligations hereunder or of the performance, in any other instance, of the obligations so waived. No waiver shall be effective or binding upon a Party unless the same shall be expressed in writing and executed by the Party to be bound. 1.20 Compliance With Law. Each party shall, in the performance of this Agreement, fully comply with, and abide by, all laws, regulations, regulatory rulings or directives, court orders, and decisions of administrative tribunals of competent jurisdiction, that may, in any manner or extent, concern, govern, or affect either party's respective performance of, and obligations under, this Agreement. 1.21 Interpretation. This Agreement has been negotiated by the parties hereto and their respective counsel and shall be fairly interpreted in accordance with its terms and without any rules of construction relating to which party drafted the Agreement being applied in favour or against either party. 1.22 Effective Date. This Agreement shall not become a valid and binding contract unless and until each party has duly executed and delivered this Agreement. For greater certainty, there shall be no agreement, whether oral, written, express, implied or otherwise notwithstanding any performance between the parties concerning the subject matter of this document, including, without limitation, by course of conduct, doctrine of part performance, or otherwise. 1.23 Amendment. No amendment of any provision of this Agreement shall be effective unless such amendment is embodied in a written agreement which is: (i) expressly stated to be intended to amend this Agreement; and (ii) executed by two authorized signing officers of AIM and an authorized officer of BID.COM. For greater certainty, the parties acknowledge and agree that no representations, warranties, conditions, covenants or other statements or commitments, whether made orally, in writing, by course of conduct or - 10 - otherwise, and whether made prior to the Effective Date of this Agreement or thereafter, shall be binding on either of the parties. 1.24 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and shall be treated, in all respects, as an Ontario contract. The parties hereby: (i) irrevocably submit to the exclusive jurisdiction of the courts of Ontario in respect of the subject matter hereof; (ii) consent to service of process being effected upon the other party by registered mail sent to the address set forth in section 6.1 hereof; (iii) agree not to seek, request, claim or pursue trial by jury; and (iv) agree not to seek, request, claim or pursue any right, claim, or entitlement to any punitive or exemplary damages whatsoever. IN WITNESS WHEREOF this Agreement is executed by the Parties as of the date first written, above. BID.COM INTERNATIONAL INC. By: --------------------------------- (Duly Authorized Officer) By: --------------------------------- (Duly Authorized Officer) AMERICAN INTERACTIVE MEDIA, INC. By: --------------------------------- (Duly Authorized Officer) By: --------------------------------- (Duly Authorized Officer) CP Doc #: 124790-1 -----END PRIVACY-ENHANCED MESSAGE-----